Canadian Consumer Debt Has Never Been This High, Beattie Says

Canadian housing market. This week, Moody's Investors Service downgraded Canada banks for the first time in more than four years. Why expanding levels of private sector debt could weaken asset quality in the future. That's according to David beat, senior vice president in the Financial Institutions Group at Moody's, and he is based in Toronto, and he comes to us now. David,

thank you so much for joining us. Thanks for having so I wanted just to start with, how much the troubles at alternative mortgage lender Home Capital Group weighed in your decision to downgrade other Canadian banks? Uh, not at all. These Um, we do not rate Home Capital as a matter of fact, so I can't comment on the details of their situation. But I would just note that at about sixteen billion dollars in mortgages mortgage assets there you know, a very small part of the one point five trillion

dollar Canadian mortgage market. Uh. The reasons for their current troubles are very idiosyncratic, and they're not anything to do with the assets they have on their books. It's more confidence around funding. UM. So we don't view it as a as a probable source of contagion for the rest of the banks. Uh. And um, it didn't factor into our decision. Okay, So home capital might not be the

problem or even the catalysts. Isn't like the asset back commercial paper market uh circa two thousand seven in Canada collapsing and then you know, singling and petting doom for everybody else. But it could potentially, just on a broader level, the housing market in Canada, particularly in Toronto, has been

under quite a bit of scrutiny for getting quite inflated. Um. And you think that this could be a potential concern for the banks in Canada, Well, yes, indeed, and that elevated housing prices, particularly in the g t A, the Greater Toronto Area and the Greater Vancouver area have been on our radar for a number of years and have figured UH quite prominently in the research that we've published

over that time. But the first the first stage of of our credit analysis for bank starts with what we call the macro profile, which is our assessment of the operating environment in which the banks operate and UH. In our view UM, the degree of leverage in the in the system overall has is at a very high level and continues to rise, and that gives us concern about

the future knock on negative effects on asset quality. When you see the amount of leverage in this system, are you're talking about the dwindling down payments that consumers are making on houses relative to the amount of debt that they're taking on. Are you talking about hedge funds and other investors borrowing short term to lend long term? What

exactly where are you seeing the biggest build up of leverage? Well, our primary metric when we look at this, and this the metric we use globally for assessment of our preating environments is private debt to GDP and the rate of growth of that metric. So we get our data from Statistics Canada and we review that on a regular basis. That includes consumer debt, both mortgage and non mortgage, as well as corporate and commercial debt UM. The corporate component

is largely not held on the bank's balance sheets. We have a robust debt capital markets here in Canada and it's largely institutional investors that have the corporate book. But the consumer mortgages and non real estate security the lending is where we have been more focused. And not even really the mortgages. There are obviously concerns with the inflated housing prices um and what that might do under stress um, but there would still be significant collateral back in those mortgages.

It's the credit cards and the indirect auto finance and those types of less well secured exposures that would have you know, loss given default in the area of a hundred percent, which would be probably the driver of larger losses. When was the last time that you saw the levels of leverage by the metric metric that you just laid out that are as high as they are today. I don't believe they've ever been as high as they are today, and certainly the component of it which relates to household

debt has never been as high. Which banks are most exposed. UM, there's relative degrees depending on how you cut the data of exposure to the Canadian consumer across the banking system. UM. UH suffice it to say that that we feel the that are baseline credit assessments, which is sort of our starting point for rating the banks. UH is the best UH,

you know, indicator of of relative exposure. In that case, uh TD would be the highest rated of the Canadian banks and National Bank of Canada would be the lowest of those six. David Beattie, thank you so much for joining us. This is a really important topic and we look forward to hearing from you again. David Beatty is senior vice president in the Financial Institutions Group at Moody's

Investors Service. Moody's did downgrade UH a number of Canadian banks for the first time in more than four years this week in part because of UH. Frankly, this incredible expansion of consumer debt relative to g d P that we have seen, and David just said that he has not seen a level that has been this high UH

in recent memory. Right now, I want to dig a little bit further into a political development that does not have to do with James Comey, the fired FBI director that has gained so much attention in Washington, d C. But in fact, President Trump issued a commission ordered a commission on Fraudulent Voting in elections, which caught my attention because this could potentially rerange the landscape for how votes are broken up across the country and could potentially have

longer term effects. To understand a little bit more about what the stakes are here, I want to bring in Ken Doyle, senior editor of Bloomberg Bona's Money and Politics Reporter report, coming to us from Arlington, Virginia. Ken, thank you so much for joining us. Can you can you first just give me a sense of what this Commission on Fraudulent Voting in Elections actually is? Well, it's it's

not it's not clearer exactly yet. What they haven't met, they haven't actually started up that it was announced in an executive order at the White House yesterday exactly. It's supposed to be a fifteen member commission. They only announced about five or six members. It's headed by uh, well, it is headed by Advice President Pence, but it's the

vice chairman is going to be Chris Koback. Who's the Secretary of State for Kansas, who's been a very outspoken, UH person on immigration and voter fraud issues, somebody who has really staked out a position on these issues. And UH, it seems like what they want to do with this is UM uh, you know, emphasize the claims that that Trump and other President Trump and others have made about

voter fraud being a major problem. This, of course, is not a view that's shared by UM everybody and and many Democrats view this is a basically a partisan effort to UM to pass more voter I d UH legislation would basically, you know, has the potential to suppress turnout, especially among minorities and people that might support Democrats. So

it's a very controversial UM topic. It was something that was emphasized by Trump after the election in which he lost the popular vote by about three million votes, and and it hasn't been talked about for the last really for a couple of months. UM. But they decided to

make this announcement yesterday. And I think the suspicion from Trump's critics you said at the beginning that this is something other than the Russia comy issue, but the suspicion from Trump's critics is that, um they wanted to talk about something else, and that's why it was brought up this week. Well, okay, so let's put this in a perspective. I mean, should we care about this or is this window dressing from President Trump trying to appease his his

core supporters. I think that that's the question is whether this would be a legitimate investigation. There have been similar investigations in the past of problems with the voting system. They generally have been more sort of on a bipartisan basis, where we look at all the issues. This is, you know, a commission that was out to look at just one issue, the voter fraud issue that the Republicans have emphasized and

that I say has been you know, very controversial. There were a couple of Democrats that were named yesterday, um uh to who who were going to participate in the commission? Bill Gardner, the Secretary of State of New Hampshire, and I think it's Matt Dunlap, who's the Secretary of State

of Maine. But both of those people have actually you know, pushed back against the Trump claims that there was widespread voter fraud, and it's you know, it's difficult to find any Democrats, and really many Republicans, you know, also feel that there was not um that this is just not a major issue. It's not an issue that affects um

election results in any kind of um significant way. Well, let's let's zoom back a little bit and get a sense of how quickly official can move to change these standards by which people have to adhere in order to vote, or potentially even rearranged districts. I mean, can people move quickly without say, legislative action to rearrange the voting parameters? No, I mean that's the thing. That's The laws on this are set state by state. Um. There there have been

significant changes in the laws in some states. They they the states that have taken up this issue are generally those states that have Republican majority legislatures and have have moved ahead on this. There have been some significant Supreme Court decisions that have allowed more of that activity and

some of the states to move ahead. But this commission, the only thing that it's actually charged to do is to write a report to the President that says, you know, what what ought to be done, presumably about this Uh, they say that the report won't come out until some time next year. UM, and then at that point, presumably they might pass along recommendations either to the states or

possibly to Congress. I mean, there's some suspicion that, um, the the Republicans might try to use this to roll back what's called the Motor Voter Act and National Voter Registration Act, which was the national law that was put in place to ease voter registration requirements that there would be, you know, basically you could fill out a postcard and send it into state officials to register more easily, and also requiring states to allow registration through you know, um,

driver license and other other state facilities. So the Republicans might try to use it for something like that, but not not immediately, you know. Can I have to wonder if this is window dressing or if this is basically plead or diversion to give core supporters of President Trump something to think about other than the hurrah around James come and his uh and his is getting fired. Is it is this emblematic of Washington spinning its wheels and getting admired and stuff that is is not going to

go anywhere and is a waste of time. Well, I mean, I think that there's a lot of interest in sort of controlling the narrative, right, I mean, whether and especially at the White House, that they may feel like they've lost some control of what's going on and they're trying to get it back and have Trump be more you know, on the offense rather than the defense. This was something that he was pushing, he was talking about a lot

earlier in the year. And actually, I mean it's interesting because a lot of people said, you know, that he shouldn't be talking about this because there was there wasn't a lot of evidence to back it up, and it was kind of problematic. But it does I think it does show the point that we're at that they've brought this up as as you know, an alternative, um, you know, thing to talk about as opposed to the Russia coomy thing. And clearly they're they're very people in the White House

are very preoccupied by this at this point. This is such a huge story this week that um, you know that it's hard for them to to talk about something else, but they like to. Obviously, is there anything else that we can expect them to try to divert the attention to I mean something even worthwhile like health care, taxes. Well, I think that that's what they would certainly, that's what the Republicans on the Hill would like to talk about. They'd like to be able to get back to that.

I think that that's certainly what um, you know, what the White House would like to They want to find a way back to talking about other things, including those issues. But that's gonna be hard for everybody. It's gonna be hard for people in Congress. I think that to talk about those issues as well when they're going to be

asked questions about you know, this latest controversy. Yeah. Well the other is, I guess, Ron Meat, it's probably easier for people to care about and get excited about rather than very tricky things with lots of sides, like healthcare and taxes. Ken do thank you so much for joining us. Ken Doyle is senior editor for Bloomberg Bonna's Money and Politics Report. Coming to us from Arlington, Virginia. Talking about the latest President Trump executive order ordering a commission on

fraudulent voting in elections? Is it just a diversion tactic to move some IV halls away from the James comey drama. Perhaps we want to take a moment to let you know about something new from Bloomberg. Starting right now, you can use our i O s app or our new Google Chrome extension to scan any news story on any website, instantly revealing relevant news and market data from Bloomberg and other sources related to the companies and people you're reading about.

So no matter where you're reading the news, you can bring the power of Bloomberg's news and data with you. It's pretty amazing. Download our io s app or search for the Bloomberg extension on the Chrome Store to try it out. Learn more at Bloomberg dot com slash lens. We got some retail sales numbers today, and we've got a whole host of results from department stores over the past twenty four hour and they kind of paint a

conflicting picture. To get a better sense of what it all means, I want to bring in Sema Show, consumer discretionary analyst for Bloomberg Intelligence, as well as Bert Flickinger, Managing director at Strategic Resource Group H and seem I want to start with you to set the stage with respect to these US retail sales numbers that we got for April that seemed to be okay. They weren't terrible, thank you Lisa. They were okay compared to last month,

but they still missed expectations. And I think part of the benefit was from the easter shift from March to April. Um but I think if you step back and you think about and also you look at what the components were of retail sales, the a lot of the growth was coming from categories where we've seen growth before, building materials, non store retails, so basically online um so. And you saw positive sales from autos, though they've declined since last year.

So I think going forward that's going to be a risk for retail sales. And Bert certainly we saw nothing Rosie out the numbers out of most of the department stores, calls, UH, Nordstrom's, Macy's really some devastatingly disappointing numbers. What do you make of all this? It's it's part of the day to them, all of many going down. So you see Bondon in a in a tune of Trouble Sears Holdings, which still sells a lot of apparel and accessories in trouble J

J Crew and trouble, Barney's in trouble. Even nice is Uh, You're the worldwide star of bonds and fixed income Lisa and Nemon Marcus market bonds are are trading way down, and there's some silver lining in Penny. Penny's gross margins if you stacked over a three year period or up about a thousand percent, gross margins are still trading up. SMP just upgraded the bonds to B plus, while Nordstrom and the others are triple C. And with Penny, you've

got more margin expansion. Uh, solid or flat same store sales projected for the rest of the year. But four cornerstones are really doing well. So for them find Jewelry uh doing well, Boys and girls fashion doing well, at home doing well. So Penny shifting a lot of sales from Sears, which is you, and SIMA said reporting next week ton of trouble on shifting sales from just about

everybody else in sector two. Well, Uh, Seema, I want to get to back to what one the thing that you were saying before we drill into the likely success or failure of some of these companies. I want to dig into something that you were talking about with respect to the drivers of some of the gain in retail sales. You talked about autos for example, where we have seen

the sales slowing, we've seen building materials. I mean, do these numbers suggest to you that there is kind of more weakness that was going to play out in retail sales that could sort of speak to something broader. Yeah. So I think I've probably been a little bit more on the bare side versus some of my colleagues because I'm concerned about how strong autos were last year, and if you step back, twee did this with each other. I'm very concerned about the rising auto loans, the delinquencies.

I'm very concerned about the synchronies and the alliance data systems of the world raising their charge off rates, which is, by the way, credit income is a huge component of many department doors and other retailers operating income, and it's a huge driver of sales. So credit. If people are using credit to buy and then they're not paying it back, I think that it paints the more negative picture of the consumer. If you step back and you think about

the macro indicators. The economists talk about a lot of that wage increase, and it's on the low end, and it might be that those people are shifting the money either to their homes or just too basic necessities like healthcare, which could go up if we have the American health

Care Act pass, or just housing costs, you know. So I'm more concerned about the actual state and health of the consumer, and then what it means for the retailers who are facing this potentially weaker consumer, and then the secular pressure of the Amazons and rising competition in their space, right and burn, just to sort of what you were talking about with the winners and the losers of me

you talk to Sephora. This has been a longstanding trend that people spend more on makeup because you know, because of possibly Instagram, because people want to look good in their selfies. Right, They're getting more manicure. But Bert, I mean like project out over the next two years, I mean you said that Danue mo Are, We're going to actually see some of these companies, these department stores really truly closed. I mean, this has been going on for

a long time. Yeah, Lisa's is your referenced so presently in some of our earlier broadcasts. When the retail bonds go to triple C minus and trade sixty five or below. Uh, they're really they're really in trouble. And that's also often a leading bankruptcy indicator. So are there ones that are ye so uh Sears Hole Holdings, km arts there, UH

Jay crew hasn't gotten there, but easily easily could. The Barney's that's in a ton of trouble and mgen Neman, Marcus Group, dash Burg dorses there and then a lot of the teen retailers that have already gone over Niagara falls in a barrel with without any padding, so route route route one. There might be some bright, bright blue skies ahead. We've got a Memorial Day coming up. The last quarter reported with some of the worst weather between

cold rain, UH, floods, etcetera. Now there's some lighthouse lighthouses in terms of economic activity between energy all levels from renew renewable to carbons. Agricultures back on its feet, manufacturing is back on its feet. There'll be some more UH spending and with the tax refunds because of the problems in Washington coming out late. UH second quarters should be

good and it's is un Sima presently pointed out. Auto sales of UM hit the hit the wall at Darlington and bouncing off and limping to the finish line what that usually means. And with Apple in between product cycles, as people will go out to department stores, Spend or Disney, the other theaters have a strong studio release schedule, So there are potentially more people going to the malls this summer.

And when I talked to surviving retailers, they're seeing a lot of shoppers shift over in the same malls from the declining retailers are going going down swinging, trying to liquidate their inventory for their vendors and unsecured creditors. You know, as you talk, I mean when you talk about some of the bonds that are trading down and sort of uh indicating that there could be an imminent bankruptcy of companies like Sears and Kmart and potentially Jay Crew in

a little bit, I have to wonder. I mean, they've been signaling this for a long time, and you know, Eddie Lampert, for example, with Sears, has really kept that company afloat. But yeah, I was just go ahead, yeah, no, please go. But I was just gonna say that retail tends to die a slow death. Can look at radio shock, right because a lot of the individual stores are profitable,

so they just basically milk them for cash. And like, he's that's basically what he's done, right, He's not spending any and so, yeah, Sears should have died ten years ago, but he's able to keep it alive. And you see that with many of the retailers. It's only that just kind of limp along and then. But is this part of the problem, right, Is this part of the reason why the retail sector has been unable to sort of revive itself, apart from Amazon coming in and just completely

changing the landscape. Is it partly that you know, they won't let a bad thing die. There's there's an insidious, unreported story too, is that the greedy bankruptcy firms are gouging these poor retailers, whether it's FTC M and a UH in the case of a few firms, or some of the notable bankruptcy firms gouging these poor firms and the securits and the under secureds UH for over a hundred million in professional feast. They don't know what the

devil they're doing. They haven't done any work in retail. They bring in financial advisors, I don't know what the devil they're doing, and it almost seems that their goal is boomerang bankruptcy, is to do a Chapter eleven bankruptcy followed by a Chapter seven so they could do a

hundred and professional fees twice while pairing the company. And that's the scandal that the bond holders and the secured creditors, the unsecured largely the vendors and the landlords really have to get get after these bankruptcy firms that really have load and no retail experience in the space and have often failed in in in prior ones as U and

Seim are so describing so well. Having these companies link limp along and the only ones who are getting rich are the bankruptcy lawyers their firms and the professionals they bring in again with with close close to no relevant retail experience. I mean, then I guess this makes sense. Right then you still have these people selling things that chieper prices and it hurts the whole industry. You're not getting that shake out that you need. So see what happens.

In my perspective, legacy retailers all need to rethink the whole competitive landscape and how big they are. They grew all too much and too fast, and the two thousands and the ones that exist probably have to be significantly smaller to be profitable and to have upside, right because online now is a growing part of their business. So I think they're just it's it's a huge They have to really step back and say what kind of business should I be now? It's not the business it used to.

And underpinning that question goes to something that you were saying before, Sema, which is the idea that healthcare is getting more expensive and housing costs are getting more expensive, and a greater proportion of people's income is going to those expenses. In other words, the amount that could potentially go to discretionary spending to these retailers is going down.

I mean, aside from the Amazon albatross, you know, are we seeing some kind of reduction in spending that we can even see in the us A retail sales numbers. I think that you are. Some of it is probably due to spending shifting to other areas necessities, but it's also I think people have to step back and think about human behavior. Since oh eight, everybody has been used to deals. I don't care how much money you are, how wealthy. If you do not have a sale, you're

not going to buy. It's so true. I used to come home doesn't matter. I used to come home from the store and I would say to my husband. I'd be like, I got this on sale, and he's like, how it's off? He said, how much did you spend? That's a fifty dollars you would roll as absolute amount. So I think that that mindset is killing retail across the board because people want a deal. How can you pull back from promotions to boost your gross margin where

you're going to kill your sales. So on top of all of this, it's really so the fact that these retailers limp along that just sort of exacerbates. I think the problem that hey, you know, I'm not going to buy that black shirt because I'm gonna get it next week from Macy's with the twelve coupons they send me every day in the mail. And the fresh vendors are causing some of the problem too unwittingly. So in our field work, we're seeing them under resourcing UH prestige and

luxury fashion shoes. Two retailers like Nordstrom because they think they can sell full price to their own stores, whether it's Gooch or or others. And then what they ultimately do is they don't they don't give enough luxury goods leading department stores who made them, and then then they wind up closing off on the internet or give it to Carol Myerwitz and Ernie Herman to close out at t j X and the rest of the off price places across American and worldwide. Vendor community share shares in

the blame and pain. But there's going to be a retail renaissance coming after this retail ice age, but it's going to take about a thousand days for us to go through the deep freeze and bounce back. Well, thank you so much for joining me. Really a fascinating conversation. I am sure it will be ongoing. SEMA shows consumers espressional analysts for Bloomberg Intelligence and Bert Flickinger, Managing director at Strategic Resource Group. Right now, I want to look

in to a new type of lending. Oh, it's not that new. I guess this business is more than a decade old, but it's certainly been ramping up. Jim Richard Talia is co chief executive officer of Unison home Ownership Investors, which is based in San Francisco, and Jim, we were just talking a little bit offline about sort of the objective of getting money to consumers who want to buy houses to help pay for their down payments. Can you explain a little bit about what this is? Sure, thanks

for having me on. Uh. Unison has introduced a new financial product category to the world. Is what we call it home ownership investment. It's long term funding. Uh, it's not alone. Unison invests in the home alongside you. There are no interest payments, no interest charges when you sell the home. As partners, we share the outcome. We share the change in value of the home. So if the home value rises, we will share the appreciation. If the

home value falls, will also share in the loss. One of the purposes of the funding that we provide is to use it as part of the down payment on a home purchase. So, uh, this this seems like it has somewhat of a pretty big risk attached to it, just because you don't get paid out until you know, thirty years down the line when somebody sells the house, or unless it's gets prepaid earlier, and you know who's investing and uh, what's what's the value proposition for them?

So we raise money from institutional investors like pension funds and endowments. Residential real estate is a very attractive asset class for these investors because it closely tracks inflation and it's a very large component of the economy. They've never had any way to get exposure to it until now. And one of the things that's very extraordinary about what we do is that, for the first time ever, Unison is making residential real estate, which is the world's largest

asset class, an investable asset class for institutional investors. So you opened the business in two thousand and five, what has the one of the turn has been like, Uh, they've actually been very good. We have some of the investors that invested with us way back have invested again. We've managed a pool of these assets that were generated before the crisis through the crisis. They perform well. Um, you know, it's a it's a it's a good program. It's a it's a it's a good deal. We strike

between the investor and the consumer. The consumer gets the benefit of long term finance without payments, and the investor gets the benefit of the new asset class. These investors don't need payments. They're long term investors. They need exposure to the asset class. And the consumer likes the idea of not having to make payments on long term finance. So it's a there's a natural alignment between the two

and that's the genesis for the business. How how what sort of the total volume of loans that have been originated like this or not loans? They're not loans, they're not to take that back financing excuse me. We are growing very very quickly right now. We started the business, as you mentioned, back before the crisis, we had about fourteen thousand consumers on our pipeline when we were forced to basically you know, hunkered down for the crisis for a while, so we had done you know, our first

several hundred transactions at that point. After the crisis, we relaunched our original program, the home buyer I'm sorry, the homeowner program, and added the home buyer program, and now

that program is ramping up very very quickly. We've got very large amounts of capital committed, and as I said, we're growing like ercent a month over month in terms of our our origination pipeline, Do you have certain parameters as far as how much money the homeowners have to put down or sort of any of the loan to

value ratio or anything like that. In most cases, the homeowner puts down half of the down payment and we put down half that you know, by most cases they're getting a loan on the property, so we share the

down payment fifty. Right, But as far as the parameters for the consumer and what you know, kinds of leverage are, you know, just to make sure that people aren't being irresponsible or unable paypafter loaner, you know, because possibly they're gonna have to get a mortgage in addition to the down payments, to make sure that it's not going to be uh, something that's gonna end up in foreclosure, which could potentially become a problem. Right Sure, in general, the

LTV on the property is eighty percent or less. Remember this is a way for you to get to a d l TV because you can buy a home with ten percent down in the with an agency loan. You can do that today, but you're going to wind up borrowing and paying mortgage insurance. So you have that high leverage. The monthly payment on that loan with mortgage insurance is going to be about fifteen to pent higher than the monthly payment would be if you got an eighty percent

loan and didn't pay mortgage insurance. So what we do is we enable the consumer to get the benefit of making a full twenty percent down payment with only putting ten percent of their cash in. And that benefit is huge. It's additional purchasing power, it's a lower monthly payment, things like that. What regions of the country are you targeting. We're currently in thirteen states, uh the entire West coast and the northeast order from Virginia up through Massachusetts. We're

also in Illinois and Arizona. The states that were in as you, I'm sure you'll recognize a comprise a lot of the largest metro areas in the country. So we're already in areas that that account for of the US real estate. Do you think that the target demographic is really build millennial? That's certainly one of the people that we help, but our programs actually help people across the

entire their entire life. As a homeowner. We can help you buy your first home, and that definitely helps a millennial, but we can help you with your last home, and we can help you finance your life needs in between with our homeowner program that allows you to tap into your existing home equity without borrowing. Jim RICHTELI thank you so much for joining us. Really an interesting new type

of financing. Jim Richitelli as co chief executive officer of Unison home Ownership Investors, which is based in San Francisco, and he joins us here in a bloombrook eleven three oh studios in New York. Thanks for listening to the Bloomberg p n L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox.

I'm on Twitter at Lisa abramoids one. Before the podcast, you can always catch us worldwide on Bloomberg Radio