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The BAN Report: Consumer Spending Rebounds / Goldman's Marcus Lands 46B / GSE Reform Gains Momentum / OPEC v. Shale-4/18/2019


Consumer Spending Rebounds

After a sluggish start for the year, retail sales rebounded strongly in March.

Retail sales, a gauge of spending at restaurants, brick-and-mortar establishments, and online stores, increased a seasonally adjusted 1.6% in March from a month earlier to $514.1 billion, the Commerce Department said Thursday. This was the largest monthly gain since September 2017. Economists surveyed by The Wall Street Journal expected a 1.0% jump in sales.

Outlays on cars and car parts, along with spending at gas stations, boosted overall spending in March, with auto sales clocking the heftiest monthly gain since September 2017. In addition, gas prices have risen recently, which boosted the amount consumers spend at gas stations.

But even when removing auto-related spending from the mix, consumer spending still grew a solid 0.9% in March, higher than the 0.7% gain economists expected for this underlying measure.

“Overall, the retail sales figures add to the slightly more positive tone of the recent data and provide some comfort that the economy isn’t falling off a cliff,” Andrew Hunter, senior U.S. economist at Capital Economics, said in a note to clients.

Last month’s consumer spending gain was broad-based with sales growing for every major type of store except the sporting goods and book store category. Outlays at furniture shops and clothing stores grew at the fastest pace in almost a year.

Consumer outlays dropped in February, after a jump in retail sales in January didn’t make up for a sharp drop in spending in December. Thursday’s report shows that outlays at the end of the first quarter more than made up for losses in February, a sign that economic growth was likely stronger than analysts had been predicting.

Of course, continued good news about the economy could result in higher interest rates, but this data does suggest that the American consumer isn’t necessarily running out of gas.

Goldman’s Marcus Lands 46B

On its conference call this week announcing its Q1 earnings, Goldman Sachs updated investors on the success of Marcus, its online banking and lending platform.

To facilitate this, we will continue to tap into the large addressable market of consumer deposits. We estimate there are over $4 trillion of consumer deposited in the U.S. that are potential customers for online savings account like those offered by Marcus. Today, across both the U.S. and UK, we have $46 billion of online retail deposits, leaving a tremendous opportunity for growth and we will design our deposit platforms to capture our share.

As we have said before, we are building Marcus as a fully integrated digital business. As a broad multiproduct platform, wealth management will be a key component. This is a very large market with $9 trillion in mass affluent customer assets across more than 20 million U.S. households.

It’s interesting to see what Goldman is doing with Marcus, as it represents what a bank would look like if you started it today without expensive legacy branch networks.    The website is clean, focusing on online savings accounts and consumer loans.  


Presumably, they will then leverage these customers to offer more products to the mass affluent customer, which is defined generally by consumers with $100K to $1MM in liquid financial assets and annual income of at least $75K.

GSE Reform Gains Momentum

Mark Calabria started this week as director of the Federal Housing Finance Agency, which oversees Fannie and Freddie.    Mr. Calabria has been outspoken in pushing for an end to the conservatorships of Fannie and Freddie.

Calabria expressed his support for the recent call from Trump to end the conservatorship of Fannie and Freddie and reform the country’s housing finance system.

“The recently signed Presidential Memo lays out a constructive path for mortgage finance reform,” Calabria said. “I look forward to working with the Administration on this issue.”

Last month, the White House issued said memo, which directed the Secretary of Treasury to construct a plan to reform the GSEs, seeking to achieve a number of objectives:

(i) Preserving access for qualified homebuyers to 30 year fixed-rate mortgages and other mortgage options that best serve the financial needs of potential homebuyers;

(ii) Maintaining equal access to the Federal housing finance system for lenders of all sizes, charter types, and geographic locations, including the maintenance of a cash window for loan sales;

(iii) Establishing appropriate capital and liquidity requirements for the GSEs;

(iv) Increasing competition and participation of the private sector in the mortgage market, including by authorizing the Federal Housing Finance Agency (FHFA) to approve guarantors of conventional mortgage loans in the secondary market;

(v) Mitigating the risks undertaken by the GSEs, including by altering, if necessary, their respective policies on loan limits, program and product offerings, credit underwriting parameters, and the use of private capital to transfer credit risk;

It also mentioned multi-family lending twice:

(vii) Defining the role of the GSEs in multifamily mortgage finance;

(iii) Defining the appropriate role of the FHA in multifamily mortgage finance;

It sounds like the 30-year fixed rate mortgage is sacrosanct, but is the federal government considering whether the GSEs should be the dominant lender in multi-family lending? We have questioned for years why the GSEs provide low-interest loans for wealthy landlords, when there are adequate other sources of debt financing. Time will tell, but it does seem like GSE reform has some serious bipartisan momentum, especially if the availability of a the 30-year fixed rate mortgage is maintained.

OPEC v. Shale

While OPEC is slashing oil input, US shale production increases, thus creating a tug of war on the direction of oil prices.  Before the US shale industry boom, OPEC could basically determine the worldwide price of oil on a whim.

Oil prices are near 2019 highs, which could give the impression that OPEC, with its production cuts, is the current dominant force. But output from U.S. shale oil producers has doubled from its level five years ago, and more supply coming later in the year could flood markets yet again.

Gordon Gray, head of oil and gas research at HSBC, calls the OPEC vs. American producers a “tug of war.”

OPEC’s aim is to prevent inventory buildup and keep prices at a higher level to balance its members’ government budgets. OPEC and its allies, including Russia, agreed to cut output by a collective 1.2 million barrels a day for six months starting in January, helping prices to rise by a third this year to above $70 a barrel. It isn’t clear whether the group will agree to extend the deal at their next meeting in June.

But don’t count shale out. With three new U.S. pipelines set to open this year that will connect oil wells with the Gulf Coast coast, U.S. oil shipments should surge in the second half of the year. Shale taps can be turned on and off faster than other producers, which has made it more difficult for OPEC to influence the oil market.

For instance, this year Saudi Arabia needs oil prices to average above $73 a barrel to balance its budget, according to the International Monetary Fund. For now, prices remain below this level.

“The U.S. oil price needed for shale oil to be profitable is around $53 a barrel or above,” said Roy Martin, an analyst at consulting firm Wood Mackenzie. According to Barclays , a price of $60 is needed to sustain growth in excess of 0.5 million barrels a day.

“OPEC countries have shown that they have a lower survival rate than U.S. producers at very low prices,” said Olivier Jakob, managing director of consulting firm Petromatrix, referring to the ability of national governments to balance their budgets when oil prices drop.

Even though it is much cheaper for a country like Saudi Arabia to produce oil, its entire budget is based directly on its price of oil, so it’s true break-even is substantially higher. Some have said the price is in the 80s. If OPEC continues to curb output while US shale production surges, it will have little impact and the price of oil could tumble, thus blowing massive holes in the budgets of middle eastern countries.

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