“A Republic, if you can keep it”

Politicians sure do love Charles Ponzi

Evergrande to be removed from Hang Seng China Enterprises Index

HONG KONG, Nov 19 (Reuters) - Embattled developer China Evergrande Group (3333.HK) will be removed from Hong Kong's Hang Seng China Enterprises Index, the benchmark provider said on Friday following its regular quarterly review.

The Hang Seng Indexes Company does not typically give reasons for changes to its indexes, and did not in Friday's statement.

The Hang Seng China Enterprises Index is designed to reflect the performance of mainland Chinese companies listed in Hong Kong, and includes the top 50 eligible stocks by a measure of their market value.

Evergrande's shares have fallen over 80% year to date. [Reuters-2021.11.19]

Evergrande's possible liquidation and what happens next

HONG KONG, Jan 26 (Reuters) - A key offshore bondholder group of China Evergrande plans to join a petition to liquidate the developer at a hearing in a Hong Kong court on Monday.

The bondholder group owns more than $2 billion in offshore notes guaranteed by Evergrande and its support to a winding-up petition against the world's most indebted developer increases the chances of an immediate liquidation order from the court, lawyers in the industry said. [Reuters-2024.01.25]

An Emperor comes face-to-face with Capitalism

The Meiji Restoration of 1868 brought the era of feudal shogunates of Japan to an end and ushered in the rise of commerce and the imperial state. But the Law of Diminishing Marginal Returns inexorably takes hold, and by 1941, Japan’s autocrats knew that they would need to take wealth from other lands to continue prospering.

In 1978, Deng Xiaoping had a dream: China can have capitalism without giving up power. But under capitalism, you must give something of value to get something of value. So, the Chinese needed to build factories to produce export goods and housing for the workers. The Production Function has three variables: capital, labor, and technology. China needed to attract labor, so the government gave apartments to anyone who would leave the farm and come to a city to work in a factory. This policy continued until 1998. In 1990, one-third of Chinese lived in cities; today, more Chinese live in cities than in the countryside.

In 1997, Evergrande joined hundreds of other property developers to build apartments for the millions of migrants to the cities. Evergrande was the most successful at getting the cheap credit that was sloshing about, but Evergrande “now stands on the brink of collapse” (see documentary from the Financial Times). From Evergrande’s beginning to now, Chinese developers have built enough “ghost cities” to house 90 million people. Has productivity reached its zenith? [Tacking]

Evergrande is to China what the Transportation Index is to Dow Theory.

(Practically-) Free Mortgages led to the Great Recession

The subprime mortgage crisis of 2007–10 stemmed from an earlier expansion of mortgage credit, including to borrowers who previously would have had difficulty getting mortgages, which both contributed to and was facilitated by rapidly rising home prices. Historically, potential homebuyers found it difficult to obtain mortgages if they had below average credit histories, provided small down payments or sought high-payment loans. Unless protected by government insurance, lenders often denied such mortgage requests.

In the early and mid-2000s, high-risk mortgages became available from lenders who funded mortgages by repackaging them into pools that were sold to investors. New financial products were used to apportion these risks, with private-label mortgage-backed securities (PMBS) providing most of the funding of subprime mortgages. The less vulnerable of these securities were viewed as having low risk either because they were insured with new financial instruments or because other securities would first absorb any losses on the underlying mortgages. This enabled more first-time homebuyers to obtain mortgages, and homeownership rose.

The resulting demand bid up house prices, more so in areas where housing was in tight supply. This induced expectations of still more house price gains, further increasing housing demand and prices. Investors purchasing PMBS profited at first because rising house prices protected them from losses. When high-risk mortgage borrowers could not make loan payments, they either sold their homes at a gain and paid off their mortgages, or borrowed more against higher market prices. Because such periods of rising home prices and expanded mortgage availability were relatively unprecedented, and new mortgage products’ longer-run sustainability was untested, the riskiness of PMBS may not have been well-understood. On a practical level, risk was “off the radar screen” because many gauges of mortgage loan quality available at the time were based on prime, rather than new, mortgage products.

When house prices peaked, mortgage refinancing and selling homes became less viable means of settling mortgage debt and mortgage loss rates began rising for lenders and investors. In April 2007, New Century Financial Corp., a leading subprime mortgage lender, filed for bankruptcy. Shortly thereafter, large numbers of PMBS and PMBS-backed securities were downgraded to high risk, and several subprime lenders closed. Because the bond funding of subprime mortgages collapsed, lenders stopped making subprime and other nonprime risky mortgages. This lowered the demand for housing, leading to sliding house prices that fueled expectations of still more declines, further reducing the demand for homes. Prices fell so much that it became hard for troubled borrowers to sell their homes to fully pay off their mortgages, even if they had provided a sizable down payment.

As a result, two government-sponsored enterprises, Fannie Mae and Freddie Mac, suffered large losses and were seized by the federal government in the summer of 2008. Earlier, in order to meet federally mandated goals to increase home-ownership, Fannie Mae and Freddie Mac had issued debt to fund purchases of subprime mortgage-backed securities, which later fell in value. In addition, the two government enterprises suffered losses on failing prime mortgages, which they had earlier bought, insured, and then bundled into prime mortgage-backed securities that were sold to investors.

In response to these developments, lenders subsequently made qualifying even more difficult for high-risk and even relatively low-risk mortgage applicants, depressing housing demand further. As foreclosures increased, repossessions multiplied, boosting the number of homes being sold into a weakened housing market. This was compounded by attempts by delinquent borrowers to try to sell their homes to avoid foreclosure, sometimes in “short sales,” in which lenders accept limited losses if homes were sold for less than the mortgage owed.

In these ways, the collapse of subprime lending fueled a downward spiral in house prices that unwound much of the increases seen in the subprime boom.

The housing crisis provided a major impetus for the recession of 2007-09 by hurting the overall economy in four major ways. It lowered construction, reduced wealth and thereby consumer spending, decreased the ability of financial firms to lend, and reduced the ability of firms to raise funds from securities markets. [FederalReserveHistory]

Fannie Mae and Freddie Mac: Two More Plantations gone bust

Fannie Mae and Freddie Mac were created by Federal Politicians to provide mortgages to people who had a grievance: they could not qualify, otherwise. Just two more examples of Politicians aping capitalism to enhance their incumbency.

Never Let a Crisis Go to Waste

The Knowledge Problem

An armada of cargo ships lies offshore around U.S. ports. What’s the problem? Just unload the bleepin’ things! That’s President Biden’s attitude, anyway. “If the private sector doesn’t step up, we’re going to call them out and ask them to act” (ABC News, Oct. 15, 2021).

The time for calling them out has come and gone. When it became obvious that Big Media was intent on hyping the number of cases and ignoring the lethality of the virus, we should have known the fix was in. The Never-Let-a-Crisis-Go-to-Waste mob was intent on turning a flu-like virus into a cudgel.

The time to have acted to avoid the problem was upon us by May 2020, when New York City Health had reported that the risk of dying from COVID-19 with no pre-existing conditions was 0.9%. According to Worldometer (Oct. 17, 2021), deaths due to confirmed Coronavirus cases worldwide was 2.0%.

What did the Never-Let-a-Crisis-Go-to-Waste mob do to reduce cases? They shut down businesses, decided which workers were necessary, and ignored the instances of natural immunity. The result was to cripple the supply chain. [TheKnowledgeProblem]

Had the Powers that Be not interfered in Financial Markets, we would not be facing a Real Estate crisis (again). Capitalists need time for Prices of Labor, Capital, and Technology to bring awareness of changing attitudes and to make the necessary adjustments. Politicians don’t need that time because the concerns of Capitalists are not Top of Mind; rather, it is the Emperor’s New Clothes.

Is A Commercial Real Estate Crash Coming?

Recent events have strained the U.S. commercial real estate (CRE) market, from the pandemic’s effects to the Federal Reserve’s battle with inflation. As financing costs soar and commercial vacancies rise, echoes of past crises, like those in the 1980s, 2000 and 2008, resonate.

Broad market shifts often arrive in three distinct phases: denial, migration, then panic. Denial is self-evident. Migration occurs when increasing numbers navigate to the opposite polarity, and panic is where everyone runs for the exit at once.

We have seen denial, and we are seeing migration, as evidenced by transaction volume having plummeted and spreads between what buyers will pay and sellers will accept having widened. Panic can be averted temporarily, but such capitulation actually serves viable economic purposes. Once it occurs, the real work can begin.

The US CRE Market

As of Q2 2021, estimates put the U.S. CRE market’s aggregate value at a staggering $20.7 trillion. For context, this approximates the nation’s GDP in 2022, which was $25.46 trillion, as stated by the Bureau of Economic Analysis.

Though liquid markets fluctuate swiftly, more cumbersome assets, like commercial properties, change hands more slowly. In turbulent times, these slow-moving, leveraged giants can spell both massive losses and unprecedented opportunities.

Changing Needs

Here’s what’s different today: A profound shift in the use of mostly office, but also retail spaces dominates today’s CRE landscape. The pandemic, with its resulting lockdowns, served as an epiphany for many.

Many office-goers realized the feasibility of working remotely without the accompanying daily expenses; expenses, they discovered, that only accrued to them, not employers. Given Americans’ propensity for luxury and quality as underlying drivers, I think we are unlikely to see a shift back to less remote and more office work. Some estimates expect remote work to be embraced by nearly a quarter of workers by 2025, suggesting even less office space will be needed going forward.

And retail spaces faced lower demand as homebound consumers relied more upon e-commerce for their daily needs, prompting new business creativity in responses.

Bargaining Power Shifts For Employees

Concurrently, the boomer generation’s entering mass retirement combined with a healthy entrepreneurial climate and structural worker shortages tilted the bargaining scales, allowing employees to negotiate better working parameters, often from the comfort of their homes.

This new normal, however, left vast office spaces underutilized or unused, yet still accruing costs and foreshadowing the erosion of value.

Office Buildings As The Linchpin

These commercial structures aren’t merely concrete and glass: They signify value for property owners and their lenders; value, that is, if they are utilized as intended.

Should they become redundant, a significant portion of the economy stands at risk. Given Nareit’s 2021 estimate that the office market hovers around $3.2 trillion in value, even if half of it falters, the ripple effects could be monumental. And office buildings today are only about half occupied, on average, according to Kastle Systems.

A domino effect could ensue: Foreclosures, strategic defaults, selloffs, layoffs, bankruptcies, and regional weaknesses could be magnified. Cities—reliant on property taxes—could face economic stagnation or even bankruptcy, requiring bailouts.

Increased federal spending on items without economic return could crowd out better expenditures. All these are likely in some measure. It paints a potentially grim picture, but is it the likeliest outcome?

America’s Silver Lining

Amid the looming shadows, several factors position the U.S. uniquely for ultimate recovery:

• Demography: The U.S. has a robust millennial population of about 72 million, ensconced on either side by slightly smaller generations.

• Economic influence: As the anchor of the global economic order, the U.S.’s command over the world-reserve U.S. dollar and dollar-denominated assets is unrivaled. Contrary to semi-popular belief, there is no actual rival to the U.S. dollar’s function in the world.

• Inherent strength: Millennials, about two times more likely to possess a college degree than their boomer counterparts, are the torchbearers of the new era. The freedom and optionality of remote work, combined with the potential of intercity high-speed rail, promise a lifestyle revolution akin to the suburban migration facilitated by the Interstate Highway System for the boomers. [Forbes-2023.11.29]

Will Demography Save Us?

Prior to the current ethos, the prevailing philosophy on immigration was to welcome those who aspired to assimilate the American Dream. Among the millions who have crossed the Southern Border, How many have that dream in their hearts? Not all, I fear; I hope it is a majority, though. Yet, it will be a miracle if even some of those of entrepreneurial spirit do not succumb to the beguiling songs of the Welfare Sirens. Afterall, Is it not the Biden purpose to gather residents for the Diversity Plantation?

Will the U.S. Dollar Save Us?

Historically, human beings have evaluated the worthiness of a good or service by how much they are willing to give up to acquire it. Before money was invented, people would barter to arrive at a “price” that both agreed was equitable. For example, a farmer may have exchanged forty bushels of corn for a plow, establishing a price for each side of the trade.

People are in some respects miserly: the most common speech sound in the English language is the Schwa, or the “uh” sound in “duh”. The Schwa is loved because it requires only a puff of air to produce. Likewise, it is understandable that people also love carrying around money as a store of value. However, the store-of-value function of money is not inevitable.

One of the most contentious issues between Thomas Jefferson and Alexander Hamilton—Washington’s Secretary of State and Secretary of the Treasury, respectively—was the creation of a national bank. It took Hamilton more than a century to win, as the Federal Reserve was created in 1913. But even that was not enough to debase the dollar. There remained two more events to render the store-of-value function of the dollar moot. The first was the product of a carnival barker named John Maynard Keynes, who posited that politicians could spend willy-nilly without tanking the economy. The second, and perhaps more damaging, was Nixon’s closure of the gold window in 1971, ending the convertibility of the dollar into gold. [Why the Dollar doesn’t measure value anymore]

The USD in terms of Gold

De-dollarization: Is the US dollar losing its dominance?

The U.S. dollar is the world’s primary reserve currency, and it is also the most widely used currency for trade and other international transactions. However, its hegemony is in question, especially in light of the ongoing Russia-Ukraine crisis. “The risk of de-dollarization, which is a periodically recurrent theme throughout post-war history, has returned into focus due to geopolitical and geostrategic shifts,” said Alexander Wise, who covers Strategic Research at J.P. Morgan.

In particular, the U.S. sanctions on Russia have made some countries wary about being too dependent on the greenback. In addition, against a backdrop of rising interest rates, a strong U.S. dollar is becoming more expensive for emerging nations, leading some to trade in other currencies. In July 2023, Bolivia became the latest South American country — after Brazil and Argentina — to pay for imports and exports using the Chinese renminbi. [J.P. Morgan]

The U.S. dollar conquered the world. Is it at risk of losing its top spot?

It was a carefully engineered plan that unfolded in the mountains of New Hampshire nearly 80 years ago. At the time the British Pound Sterling was the international currency. A title it had held for decades.

The dollar's rise happened pretty suddenly at the Bretton Woods International Monetary Conference in 1944. Bretton Woods was a gathering of world leaders at the end of World War II. They came together to try and establish an international system for trade and finance, to help bind the world together and increase prosperity for all.

Everyone agreed that in order to ease international trade, there needed to be a common currency, a standard everyone could use.

At the time of the conference, the British economy was in shambles. The costs of fighting a war on its own soil had been enormous. It was clear that the British Pound Sterling could not be the currency everyone counted on.

So the British pushed for a new currency that would solely be used for inter-country trades: Economist John Maynard Keynes, who was at Bretton Woods on behalf of the British, proposed the "Bancor" (a mix of the French word for bank, 'banc' and the French word for gold 'or) but also suggested "Orb" and even ... "Unicorn."

But the U.S. dollar left the Bancor, the Orb and the Unicorn in its dust. The U.S. was economically quite strong. It also had lots of gold in its vaults, which made people feel like its wealth was backed up.

But as the Bretton Woods conference demonstrated, that top spot can slip away pretty fast

"We have an important advantage, which may whittle away slowly if we're not careful," says economist Michael Boskin, a former White House advisor.

The challenges to the dollar

There are a couple of reasons why the dollar's status is suddenly being talked about as at risk.

Earlier this year, China, Russia, Saudi Arabia, the United Arab Emirates and even Brazil started making trades in other currencies: The Chinese Yuan and the Russian ruble. This was a very direct challenge to the U.S. dollar's central position.

Using the dollar as an economic weapon

The dollar is so powerful, if you can't use it, you are essentially iced out of being able to do most business anywhere in the world.

The U.S. has used this as a nonviolent way to put pressure on countries: North Korea, Iran and most recently Russia. After the invasion of Ukraine, the U.S. said, 'No dollar for you!'

[Benn Steil, an economist with the Council on Foreign relations] says the economic impacts of those sanctions have been massive and other countries have noticed. [NPR]

Will Our Inherent Strength Save Us?

One need look no further than the chaos in our universities to answer that question.

“A Republic, if you can keep it”

Benjamin Franklin's response to Elizabeth Willing Powel's question: "Well, Doctor, what have we got, a republic or a monarchy?"

James Madison and the Power of the Purse

The House of Representatives cannot only refuse, but they alone can propose the supplies requisite for the support of government. They, in a word, hold the purse—that powerful instrument by which we behold, in the history of the British Constitution, an infant and humble representation of the people gradually enlarging the sphere of its activity and importance, and finally reducing, as far as it seems to have wished, all the overgrown prerogatives of the other branches of the government. The power over the purse may, in fact, be regarded as the most complete and effectual weapon with which any constitution can arm the immediate representative of the people, for obtaining a redress of every grievance, and for carrying into effect every just and salutary measure. [Tacking]

Advice for House Republicans

“The superior man thinks always of virtue; the common man thinks of comfort”. [CONFUCIUS: Analects, IV, c. 500 B.C.]