Ready to Rumble

Cage-fighting ultra-billionaires, smug complacency, the debt time bomb and plenty more...

(Source: Getty Images)

Bill Bonner, reckoning today from Poitou, France...

What an exciting weekend…with the fight of the century!

On Saturday, the Wagnerians were on the road to Moscow to confront Putin. By Sunday, a ‘deal’ had been worked out.

But we’re talking about something much more amusing, the upcoming battle between Elon Musk and Mark Zuckerberg. The two ultra-billionaires, both serious martial art enthusiasts, were set to square off after Musk – supposedly prompted by Zuckerberg’s move to compete with Twitter – issued a challenge.

It was probably a joke; Musk proposed a “cage match.”

The Zuck shot back “send me location.”  

So, the fight is on…maybe. We hope so. It would be entertaining. And extremely lucrative for everyone involved – ringside seats, hotel bookings, broadcast rights, T-shirts and memorabilia…it would probably be the single most profitable event in history. Vegas odds-makers are going 3-2 for Musk.  

Gentlemanly Combat

Settling rivalries with a battle of champions is a venerable way to spare the money and lives that would be lost in a real battle. It’s also much more honorable. In the Bible, David and Goliath faced each other single handedly. So did Achilles and Hector in Homer’s Iliad. 

Typically, the cost of war is borne by those who are least responsible for it – taxpayers and draftees. Instead, why not just let the deciders settle it on live TV…and make a profit on it? Zelenskyy and Putin, for example, are fighting over who controls the eastern section of the Ukraine, traditionally a “borderlands” area. How about a cage match?

While disputes between nations are often resolved by force, elections are usually a matter of fraud. “He’ll keep us out of war,” promised supporters of Woodrow Wilson. “He’ll create a Great Society,” they pledged for Lyndon Johnson. “He’ll make America great again,” they vouchsafed on Donald Trump’s behalf. Once elected, the president then undertakes to reward his campaign donors. Voters are often forgotten or stabbed in the back.

Think about how much expense, corruption and bombast could be avoided by replacing national elections with cage matches. Hillary vs. Donald…Donald vs. Joe. Who knows which way these rumbles would go…but they could hardly be worse than the verdict of the voters.

Back on the Beat

But let’s move on…the Fed has paused. Stocks are still high. Unemployment is still low. And the credit catastrophe, if there is one, is still ahead.

As to the coming catastrophe…David Rosenberg, former head economist at Merrill Lynch, is on the case. DNyuz:

He… cautioned that investors appear overly optimistic today, just as they were nearly 25 years ago. For example, they’ve roughly tripled Nvidia’s stock price this year, lifting its market capitalization to north of $1 trillion. They’ve also more than doubled the stock prices of Tesla, Meta, and other popular tech names too.

“The smug complacency in 2000 looks eerily similar to what we have on our hands today,” Rosenberg said, adding that a recession is “coming sooner than you think.”

He noted the inverted yield curve is signaling a 99% chance of a recession, and based on past economic cycles, that may mean the downturn arrives before the end of this year.

Speculators so loved US commercial real estate …and were so sure that the lowest interest rates in 5,000 years would stick around for years more…that they looked to make easy money buying property in the heart of America’s most dynamic cities. For an entire generation, they were in-the-money. Interest rates went down. The players could refinance…and refinance…even ‘taking out equity’ as the price of the buildings went up while interest rates went lower. Then, in 2009, the Fed began a “zero interest rate” policy…holding its key lending rate below the rate of inflation for most of the next 14 years. It was a dream come true for leveraged real estate speculators.

‘Extend and Pretend’

But now, they face a ‘whole new ballgame.’ Bloomberg reports:

The World’s Empty Office Buildings Have Become a Debt Time Bomb

In New York and London, owners of gleaming office towers are walking away from their debt rather than pouring good money after bad. The landlords of downtown San Francisco’s largest mall have abandoned it. A new Hong Kong skyscraper is only a quarter leased.

… the trouble in property is set to play out for years.

Bloomberg continued:

The ‘Extend and Pretend’ Real Estate Strategy Is Running Out of Time

It’s not that the market participants had forgotten the lessons of the global financial crisis that followed the 2000s boom. It’s that they remembered them. Faced with delinquent loan payments, lenders decided to be patient: Instead of foreclosing on properties whose value was plummeting, they lengthened loan terms and ignored short-term valuations. They called it “extend and pretend” …

In the commercial property slump of 1992, for example, Donald Trump was nearly ruined. He was as much as $900 million in the hole. But extending and pretending worked for him as it did for others. The Fed was committed to low interest rates…and the bull market in bonds (with lower and lower yields) that began in 1982 was only about half over. As rates went down, the value of properties went up – especially in New York. By 2016, when he ran for president, Mr. Trump said he was worth $10 billion. So, it was no accident that he told the Fed to cut rates when he got into the White House. He was a “low interest rate guy,” he said.  

As long as the bear market in yields (falling interest rates/rising bond prices) continued, you could survive a tight real estate market just by maintaining your cool. You refinanced…and waited for the buyers/renters to come back.

But what about now? Stay tuned…

Regards,

Bill Bonner

Joel’s Note: “Commercial property may be facing an even more treacherous correction.”

That was from Bill… looking around the corner back in April. And now, the rest of the mainstream news is catching on, too…

A “debt time bomb” screamed Bloomberg on Friday… A “financial storm” chorused yesterday’s Financial Times. “‘Zombie’ buildings abandoned during commercial real estate ‘apocalypse’” added the New York Post over the weekend.

And here’s Fortune, piling on…

The office real estate crash will be so sharp and deep that Capital Economics thinks office values are unlikely to recover by 2040

According to Morgan Stanley, almost $3 trillion in commercial mortgages will be up for refinancing in the next couple of years. That’s a lot of debt to roll over at higher rates. (For perspective, $3 trillion is larger than the entire GDP of the United Kingdom – $2.7 trillion.)

And now, stress is mounting…

Commercial Real Estate (CRE) mortgage delinquencies rose to 3% in the first three months of 2023, according to the Mortgage Bankers Association. A report from MSCI Real Assets reckons “troubled CRE assets” (that is, properties that are forced to be sold as owners can't afford to pay their mortgages), jumped by 10% in the first quarter, to about $64 billion. Another $155 billion it labeled as “at risk.”

Who will bear the brunt of the impact, should a full-blown crisis emerge? Smaller, regional banks finance around 60% of all commercial real-estate debt in the country…

“We are very focused on commercial real estate situation,” Jerome Powell told the House Committee on Financial Services last week.

Hmm… just like the Fed was focused on “transitory” inflation?

What if the failures of Signature Bank, Silicon Valley Bank and First Republic were not the end of the crisis, but just the tip of the proverbial iceberg?

Dan and Tom have the BPR portfolio set to Maximum Safety Mode for a reason. Learn how to position yourself accordingly, here…