Businessman and investor Kevin O’Leary warned of the “real chaos” heading to the U.S. economy.
The “Shark Tank” star took a hard look at reality during an appearance on “Kudlow” where Fox Business host Larry Kudlow noted that the latest happening in the American housing market “doesn’t sound good.”
(Video: Fox Business)
“This was inevitable,” O’Leary remarked.
“We talked about it six weeks ago, and now you’re just starting to see the chips start to fall. The layering is as follows: The regional [banks] don’t know yet what their capital requirements are going to be. So, their loan books have closed like a turtle in a shell,” he explained.
“But at the same time, 40% of their balance sheets, majority of them are in commercial real estate as you suggested. Those turn in 24 to 36 months. They were financed at 5 to 6%. They will now be eight, nine, 10, 11%, depending on the risk of the building,” the Canadian businessman continued.
“That is going to cause a real run again on these banks because if you have a payroll account in a regional bank right now, Larry, you’re quietly moving it to Citi or JPMorgan or Morgan Stanley. You don’t, you can’t take the risk so that run is going to continue,” he added, pointing to the inevitable bad news coming.
“This gets worse before it gets better and what is it doing to small business? Killing them right now,” he said.
According to Fox Business:
The Federal Reserve’s aggressive interest-rate hike campaign sent mortgage rates soaring above 7% for the first time in nearly two decades, cooling the post-COVID, red-hot housing market.
Rates have been slow to retreat, hitting a fresh two-decade high last week. Freddie Mac reported that rates on the popular 30-year fixed mortgage are hovering around 7.09%, well above the 5.13% rate recorded one year ago and the pre-pandemic average of 3.9%.
This was followed by yet another rate hike last month.
“Who is lending to small business right now?” Kudlow asked. “Are these small banks lending? Are these regional banks lending or are these big banks lending?”
“Nobody’s lending, Larry. If you’re doing less than 500 million in sales it’s very difficult to go to the banking market. You’re going to the shadow market now,” O’Leary responded, warning of what’s to come.
“It is lots of lenders now. But they’re not regional banks. Everything from hedge funds to family offices to private lending doing it. This is causing real chaos in the very short term,” he said.
“What I anticipate is going to happen here, while we still have full employment which is remarkable, and you don’t put any capital into the small business sector, which is 60% of the jobs in America, you’re going to start to see some real chaos come September, October, November. This is an issue for Congress, Larry. It’s very simple,” he continued.
“They gave all their money to S&P 500 in two acts, the Chips and Science Act and the other, Inflation Reduction Act. Not a dime for small business. A trillion for the big boys, nothing for the small guys. And the small guys, they run America, so it has to be rebalanced somewhere, Larry,” O’Leary contended.
The 69-year-old investor also commented on how China’s latest moves and “dovish” economic policy could be “bad” for Big Tech stocks.
“Lots of people, including the Europeans, have started to look elsewhere. And China’s starting to realize if we’ve got to stay north of 4%, we need to be a little nicer to everybody around the world. That’s my guess. They’re not going to be as hawkish. And I think you’ll see the tone die down on invading anywhere else in Asia,” O’Leary predicted.
“It’s bad for tech. If we keep squeezing out tech companies from selling to them, you’re going to see some correction in PE’s,” he said.
“I agree with you, Larry, but this is now the time to force them to the table and squeeze their heads and show them the stick and get a level playing field,” he concluded. “I’d love to see that.”
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