Having admitted many times to an absence of any original thinking and to sourcing all my ideas as an autodidact, I feel comfortable in exposing one main source of my personal Idiots’ Guide to Economics, the Wall Street Journal. My daily habit is to read the Business and Finance section first. Not to obtain insight or hard guidance into actions needed in personal finance, but to try to understand what may be between the lines for our national and global economy. Today’s issue (August 6, 2024) suggests a spreading of a new Communist China contagion, our own inept furthering of that infection, and how the West might be “mirror-imaging” China’s attempt at solving its, and our, current fundamental economic fragility.
Our stock market has been buoyed by speculation of presumed easing of interest rates (and thus a new frenzy of monetary creation via credit) even as the Fed tightens credit and reserve standards for banks. But those banks may gradually become dinosaurs as the new species of private equity displaces their functions in a more opaque and less regulated fashion. Stocks’ prior speculative run-up (most stock market action appears due to algorithmic influence rather than fundamental analysis) now collapses on news of cooling of the economy as previously intended by the Fed’s raising of interest rates. In the background, our commercial real estate capital and loan “value” continues to mimic China’s residential real estate implosion. There, governmentally induced credit oversupply is a main cause; here governmental restriction of demand (through preventing worker attendance and rewarding worker absentia with pandemic abolitions of freedoms) is a cause. There, central government inducements of extensions of “ghost” credit by local governments may dwarf the indebtedness of multiple rapidly failing real estate conglomerates and their diworsification subsidiaries. Here local and regional banks may be sunk by the weight of non-performing, non-renewable interest-only loans to overleveraged “owners” of deflating commercial real estate.
Our stock markets, spooked by expected statistical evidences of a desired and planned economic slowdown, have also begun to recognize a certain absence of asset value similar to that being realized in real estate. Meanwhile Japan’s rising interest rates removed a cheap source of credit internationally, with a flight from that leveraged source of value not only to cash and more secure dollar-denominated (or, in increasing amounts gold-denominated) assets but also a very immediate and necessary retirement of some of that unsustainable indebtedness mentioned above. The Fed, besides gaslighting about reversing quantitative easing through selling more of their bankrupt fiat assets, is requiring banks to raise their reserves even as the values of many of those assets deflate. Now the two real lenders of last resort in real estate (which is, as in China, the main asset value in the U.S. upon which all others are based), Fannie and Freddie Mac, are imposing stricter rules on commercial property lenders and brokers. This is another try at avoiding a repeat of 2008 wherein the value of sold/resold/resold/resold residential mortgage-backed securities was found to be illusory. Here the bubble of commercial real estate has been found due not only to market mismatch, but in large part to fraudulent representations of the financial status of the borrower and the true market value of the property. This will predictably quench the prior firestorm of lending, increase costs for acquisition of credit to borrowers, and unmask many more zombie properties. Witness the bankruptcy of CGI Merchant Group’s lease of the old Federal Post Office property converted to a previously profitable Waldorf-Astoria. A going concern whose value may be going, going, gone.
As may more banks. Four years ago, before the lending/acquisition runup of zero effective interest rates began, bank lenders had to change from an “incurred loss” model of recognizing asset failures on their books to an “expected” loss model. The former allowed banks to pretend that a failing asset (loan) was still fully liquid at intended (mature) value until it was judged more than 70% likely to be fully underwater. That status estimate could take place from time to time, whenever the bank found it financially convenient. The new system ostensibly requires the bank lender to value the credit instrument (loan) on a continuous basis, perhaps essentially daily. This is a variation on valuing bonds, for example, as “marked to market”, what the market says they are worth that day, which may be very different from what they are worth if held to maturity. Yet the Fed itself hides its own bankruptcy by not valuing its assets (U.S. debt instruments, e.g.) as marked to market but as if they will be held to maturity, even as they have engaged in a rapid controlled self-off of those assets at those market rates. Despite those rule changes, many banks have loaded up on commercial real estate loans beyond foreseeable market disposability. Many of those buildings remain partially empty, deserted by remote workers. As interest rates decline, cost of obtaining credit systemically rise, employment remains at/near the practical maximum, and innovation/remote work continue to reduce needed on site employees, fewer new businesses can acquire these distressed properties. One large financial institution warns that over $1.5 Trillion of commercial real estate “interest only” loans will mature in the next two years. NYCB, the bank selected to rescue earlier regional bank failures, progresses in its financial illnesses with losses on commercial real-estate loans that are surging and were not, despite the new rules, previously recognized. Who knows what other such institutions are teetering on a pyramid of false valuations? This problem is spreading to that new species of non-bank credit sources. As noted in the WSJ, Blackstone Mortgage Trust is posting historically high credit losses that extinguish its net interest income. The Wizards of Wall Street are still behind a curtain, but reality is giving all of us Ozians a peak.
That same curtain may be parting internationally as well. France’s third-largest bank is rapidly divesting itself of various international subsidiaries, both their assets and liabilities. They want to “re-focus its private-banking activities on high-net-worth clients” in the small kernel of extreme European wealth that is not Switzerland. Societe’-Generale so much wants to focus just on people with “real” money that they sold some of that high-net-worth business to the Swiss. The Swiss should certainly know what they are buying, given their recent banking history. One major reason Union Bancaire Privee is purchasing that business is to “reaffirm its commitment to the U.K. market, which will become its new growth engine”. The U.K., a smoldering economy for years with barely an ember left, whose recently deposed Tory government was told on ascension to power that “the coffers are empty” and has now turned over empty coffers riddled with leaky holes to a Labor government that will go on an even more spectacular spending spree than that of Sunak’s profligates. The only “high-net-worth” individuals in the U.K. may be Russian and Ukrainian oligarchs, most of whose monies are already serviced in Switzerland. Seems a set-up for failure, especially since the real, marked to market asset values sold in the transfer are not known.
The play within this play has no discernible denouement to us lay persons other than a domino-like collapse internationally. But those interlocking international non-nation state interests may intend to rescue themselves by mirroring the methods and actions of the Chinese Communist government. The CCP economy has morphed into a capitalistic version of Stalinesque state control. Although not directly state-owned, over 99% of their corporations have direct influence from or partial ownership by the CCP. They have realized Marx’s dictatorship of the proletariat not in the industrial or economic (or in the socio-cultural venue being tried here in the U.S.) arenas but through a whole of government method. Every and all aspects of governmental actions domestically and internationally are directed at controlling all outcomes, whether social, cultural, economic, political, or military. The mirror image of this governmentally centric holistic approach is International Corporatism. A kind of reverse fascism wherein corporations influence and finally capture governments to follow corporate policies that benefit their own interests and provide adequately for the restive masses of the governed. We see this clearly portrayed in the World Health Organization’s concept of “One Health” wherein all human activity is judged on its risks and benefits to our planet and only secondarily to its peoples. WHO’s fellow traveler, the World Economic Forum, broadens this concept fully in The Great Reset. This new version of society is built by directed evolution for the general welfare by a cooperative matrix of international corporate interests. Should these two vanguards fail to draft all into the new globalist utopia, several other similar organizations, populated by many of the same Orwellians, are brewing below popular view. A final conflict may not be capitalism vs. communism, but global corporatism vs. CCP-style fascism. Avoidance, for now, of the beginning of that battle requires an innovative, yet unseen, method of “re-casting” various sectors of our economy as they sequentially melt down. Given our financial and governmental institutions’ demonstrated abilities to ensure their own survival at any costs (remember the Great Depression), a more Chernobyl-like event, spreading fatal detritus across the planet, seems unlikely.
Sovereign wealth funds and central banks may be hinting at the way out. As they quietly and rapidly increase their gold reserves, they may be considering a return to the Yellow Brick Road. The smallest minority on Earth is the individual. That minority is the majority. And that majority can survive almost any challenge when it clearly sees, and then persistently acts, for its own personal benefit. That is the sole basis of all human concourse. Get to it.