Wealth Chimera

We have a GDP that is largely fraudulent... with as much as half of it directed, controlled or be-muddled by government, rendering it unfit for human consumption.

A Chimera from Greek mythology, with a goat’s head and a serpent’s tail attached to a lion’s body. Source: Getty Images

Tuesday, June 11, 2024 

Bill Bonner, writing today from London 

The subject is nothing. Zero. The thing that isn’t a thing. 

If you have a little of it, you accept it for what it is. Like an empty wallet, you know it won’t take you very far. 

But what if you have a lot of it? Fifty trillion dollars’ worth, for example. Then, you must feel a little like Donald Trump when he was down on his luck in the early ‘90s. 

He was reportedly in the hole by $100 million. But he was proud of it. The banks would never lend so much to a poor guy. Only a very rich man could be that poor.  

America’s great wealth is a source of pride too. But as we discovered, much of its proud tower is rickety, hollow or simply missing. Often, there is nothing where there should be something. And since a third of Americans live ‘hand to mouth,’ we’re going to see what happens when the mouth realizes that the hand is empty. 

We have stocks that are not worth a fraction of their prices. 

We have ‘meme’ and ‘zombie’ companies that are not worth anything at all. They may have negative value, in fact, since they take valuable resources and waste them. 

Money Good Goes Poof

We have a mountain of debt... nearly $100 trillion of it... every penny of which is counted as an “asset” on the creditors’ balance sheets. Probably only about half of it is ‘money good.’ The rest may go ‘poof’ in the credit cycle’s downturn.  

The safest part of this pile is US Treasury bonds. And yet, in gold terms, we’ve seen that they lost 30% of their value in the last four years... and 75% since 1999. 

And we have a GDP that is largely fraudulent... with as much as half of it directed, controlled or be-muddled by government, rendering it unfit for human consumption. 

Today, we’re going to look at more ‘wealth’ that isn’t there — including $3 trillion of ‘ghost money,’ the strangest kind of nothing.  

But we’ll begin with something simpler...  

It’s not just Treasury bonds that pretend to have value they don’t actually have. All across the fixed-return world, there are unrecognized losses and make-believe wealth. 

Here’s the FDIC notice: 

Unrealized losses on available-for-sale and held-to-maturity securities increased by $39 billion to $517 billion in the first quarter. Higher unrealized losses on residential mortgage-backed securities, resulting from higher mortgage rates in the first quarter, drove the overall increase. This is the ninth straight quarter of unusually high unrealized losses since the Federal Reserve began to raise interest rates in first quarter 2022.  

Banks were required to hold US Treasury bonds as ‘reserves.’ That, they were told, would make them more antifragile. But it did just the opposite. Treasury bonds proved to be a terrible form of ‘reserve.’ They went down, in nominal terms, by about 20% since 2020. In gold terms, they lost half again as much. 

The banks also had plenty of private debt that went bad. They lent heavily to real estate developers and speculators, for example. But now, commercial real estate is not worth what it was a few years ago. People don’t go to the office as much. Employers need less space. And many speculators in commercial property deals are unable to repay. 

In addition to the loan losses, there are the losses on the collateral itself. Green Street reports that the ‘all-property commercial index’ is down more than 20% since 2021.  

And here’s yet another big category of fake money — crypto. The total market value of crypto is now approaching its all-time high, at about $3 trillion. That is $3 trillion worth of ‘money,’ about the same value as Nvidia.  

But Nvidia makes something... and earns a profit. What does crypto produce? It boasts $3 trillion worth of new purchasing power... but where does it come from? How can you discount a stream of earnings when there are no earnings at all? 

‘It’s hard to wrap your head around,’ say the English. Crypto may be valuable. Or not. In a few years, it could even be more valuable than it is now. 

But where is the ‘there’ that should be there? Or is crypto just a ‘ghost’ of real wealth?  

It is illegal to counterfeit dollars. But not to create your own crypto currency. Nobody knows who really started Bitcoin. But now, the theory and the algorithmic formula are freely available. And as far as we can tell it costs little or nothing to create a billion new units of an entirely new crypto.  

Then, what will you have? Another ‘asset’ with no corresponding real world wealth? Fiction... fraud... or fantasy? 

Who knows? Crypto brought no new real wealth to the party with it. So, every dollar’s worth of it can only be valuable if it can take a dollar’s worth of something away from other assets.  

Or, to put it another way, the more ‘real’ the crypto wealth becomes, the more of an illusion other forms of wealth must be; if there is $3 trillion of crypto wealth, $3 trillion of other wealth must vanish. 

Everywhere we look — stocks, bonds, property, crypto — much of the wealth we see is a chimera.  

Stay tuned...  

Regards, 

Bill Bonner 

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Investment Note, by Tom Dyson 

Bill spoke of private debt going bad above. Below you’ll see the delinquency rate on commercial real estate loans rising to a new high for this cycle.

Last month was notable because we saw the first loss on AAA-tranche of real estate debt since the 2008 banking melt-down. The notes were backed by a mortgage on a Manhattan skyscraper. Note holders took a 25% loss. The five lower-ranking tranches in this loan all got totally wiped out.

And just yesterday, a landlord agreed to sell a 10-story office building in New York City’s Hell’s Kitchen neighborhood for a loss of $103 million, or 67%.