This is a picture of QE and the asset inflation it creates:

Microsoft Corp

EPS down by 1/3 since QE started at the end of 2012 and the stock has almost doubled.  QE is really the only explanation with more money in the system needing a place to go in large size:  Microsoft and large caps that look like it to the rescue!

This is what makes things challenging for TFP.  We have to assume assets are 25-50% overvalued now given fundamentals and using a reasonable discount rate.  That makes lending at much over 60% of LTV a risky proposition. But, of course, it is difficult to close deals at 60% or lower LTVs.  If this asset inflation can be sustained indefinitely, life gets much easier.  That has never happened in the past...though the global monetary authorities have never tried nearly this hard.  

We have commented on both of these before, but it is worth  checking in again on the velocity of money (M2), as reported by the St Louis Fed, and Bloomberg's Financial Conditions Index (FCON) after the first couple of rocky weeks in 2016.

Velocity of M2  Money Stock

No change in the trend here.  Velocity continues to fall off the floor, which has got to be frustrating, and a little terrifying, for the Fed.  It should be noted this is below levels during the 1930s.  

The Financial Conditions Index looks a bit stressed at this point, but is not nearly into red light territory yet, i.e. below -2.

Source:  Bloomberg

This index is composed of ten indicators from the money, bond and stock markets.   Interestingly, at time of writing, the index was -.63 with all bond market indicators still positive, indicative of massive QE.  The money market indicators were trending negative - a  definite cause for concern, because almost all financial train wrecks start in the money markets.  Still, these were only mildly negative overall.  The only sore thumb of the bunch was the S&P 500, which implied substantial distress in equities.  Watching the money market indicators in the coming days will give us a clearer sense of whether markets are stabilizing or whether there is more volatility ahead.  

While the answer to this question is truly impossible to answer if you are looking beyond the individual loan level, we can make a few observations that may offer some insight into where opportunities may still lie.  Specifically, here is recent data from the FDIC showing the asset composition of US Commercial Banks and Savings Institutions:

($Tn)                                               2005                      2008                          2015

Real Estate Loans                            4.00                      4.80                           4.20

C&I Loans                                         1.05                      1.50                           1.75

Loans to Individuals                            .93                      1.08                           1.40 

Other Loans                                       .16                         .26                             .60

Securities                                          1.90                      2.00                           3.30

Cash & due from Depository Inst        .42                       1.00                           2.00

Fed Funds & Reverse Repos             .45                         .73                             .37

Trading Account assets                      .53                         .95                             .66

Totals (not sum of above)                 10.70                    13.50                          15.80

Bank assets were essentially flat from 2008-2012, which was a major problem for policy makers and thus QE4.  While bank assets have increased fairly aggressively, it is interesting to note that the increase is entirely in securities held and an increase in cash - results of QE4.  C&I loans (primarily to larger corporate borrowers), loans to individuals (credit cards, auto loans, etc. - things that can easily be securitized in the ABS market), and the always descriptive 'other loans' category have also been fairly robust.  Conversely, real estate loans, trading assets and loans to other financial institutions, including hedge funds and the like, are basically flat  for the last ten years.  One could conclude these are perhaps the areas where alternative/non-bank capital could be deployed most profitably.  Specifically, Transitional Funding Partners focuses specifically on collateralized real estate loans where we believe good risk-reward opportunities remain if one is diligent in underwriting.  Also, other ASA entities focus on fixed income trading, which is the other area from  which banks have retreated.  It should also be noted that none of our funds use financial leverage (repo-type financing), because banks are not really providing it in a reliable way as they did pre-crisis.  

Presumably the cash on the balance sheets will go away as the Fed unwinds the reserves banks are holding.  However, one can speculate that getting in front of the $1-1.5Tn that is likely to move out of securities when riding the yield curve is no longer so attractive will be profitable if the assets have longer duration or may simply decrease returns if not.  We'll hope their aversion to real estate lending continues for some time.

Here is a graph of NASDAQ Composite earnings since 1995:

Source: Bloomberg

The several trillion dollar question is whether a tripling of these earnings in the last five years is real and sustainable after they were kind of flat/bounced around in the 60-90 range for the previous 15 years?  Did something real and sustainable happen in 2010 that permanently elevated earnings to a much higher plateau or are they artificially inflated by free money?  Even if the current level of earnings is real and sustainable, one could argue that 20x earnings of 170 for the NASDAQ is pretty fully valued, i.e. 3,400 is fair value.  (The market is currently trading at 5,100.)  Interestingly, if earnings are, in fact, artificially inflated and will revert to a more believable 100 as rates (supposedly) rise in the next couple of years, then one would more rationally be looking at a much nastier valuation, i.e. 2,000 or a bit more, which is where the market spent most of its time from after the .com crash until 2010 when the printing presses transitioned into full swing.  The NASDAQ is just the most prominent bellwether for what risk asset valuations look like across many asset classes....

That leads one to ask if all the companies in the NASDAQ really became three times more profitable in the last five years than they were in the previous fifteen OR are those profits artificial, or at least ephemeral, and will they dissipate in coming years if there is a return to some sort of 'normalcy'/sustainability?  Your answer to that question will clearly drive where you want to place your bets for the next few years.  Good luck.  In Janet Yellen We Trust!