Never attribute to malice what can be ascribed to incompetence
Credit Crunch, China facts, AI search engines, and more
Get this right: the looming crash in the commercial real estate industry will be the catalyst to usher in the next credit crisis. You have less than 9 months to position for it.
The commercial real estate industry (office space, retail space, and multi-family complexes) is facing an insurmountable debt problem. There are about $1.5 trillion in loans set to roll over before the end of 2025. Another $3.5 trillion comes due over the following 5 years. Most of this debt carries historically low interest rates (from 2.3% to 4.5%). As it comes due, it will have to be refinanced at the then current interest rate (7-9%) which will mean the doubling or tripling of mortgage payments. This would be a red letter day for banks … if they wanted the debt at all, which they don’t.
See, the commercial real estate industry has taken a beating since the pandemic, as more people have chosen to work from home, and employers have sought to create office environments that require less full time presence, and therefore less square footage. Consequently, demand for office space has dwindled, and vacancies have surged, with some estimates suggesting that around 18% of office space around the country sat empty by late 2022, even more in large cities like San Francisco (50%), New York (52%), and Chicago (48%).
Get it? Almost half of the usable office space is sitting empty until the leases run out … and it won’t be renewed. No one wants the space and they aren’t willing to pay to keep it, even at current prices. The prices have to go down to attract tenants to the space, and meanwhile the cost of owning the space is about to go up … way up.
As in 2008, small regional banks signed on to debt syndicates in order to place their deposits into working loans. A bank in my home town of Valdosta, Georgia could never finance an office tower in Chicago for $790m, but it can join Goldman Sachs and others who make the loans then tranche out pieces of it to regional banks. When the values of the real estate undergirding those loans plummet by 40%, the value of the loans will implode and go to zero because no other bank will be willing to step in and take the next hit.
This is called a credit crunch.
It isn’t that the money isn’t there. It’s that the money isn’t there where it’s needed the most, because the disincentive for making the loans far outweigh the return for doing so.
Enter the Federal Government. I fully expect the Fed to devise some extra-constitutional scheme to blunt the trauma coming our way. Ideally, it would announce the vehicle well in advance of the problem’s arrival, but that’s not how the Fed works now. It will allow the first phase of the credit crisis to really hurt the economy, tank a few regional banks which will be absorbed by others of similar size. It will allow the stock market to freak out and take a 10-20% correction, denting the savings of millions of retirement-age seniors. These things will affect consumer spending and cause the loss of jobs so that unemployment numbers go up, wage inflation stops and reverses, and interest rates can be reduced to save the Federal Government from bankruptcy.
For you and I, it means stockpiling cash, investing in cash-flowing businesses, and being patient when that cash is burning a hole in your bank account. The fallout is coming, and this is where fortunes are made.
"The difference between successful people and really successful people is that really successful people say no to almost everything."
- Warren Buffett
China facts from Weibo
In China, it’s commonplace for the local policeman to show up to your door and “politely suggest” that you take down a social media post.
In China, medical treatment must be paid for in cash, despite being a socialized system of healthcare. There are thousands of cases of people who are only getting half chemotherapy treatments so that they can afford a full course of treatment.
Parents can legally sue their children for not providing for them in their old age. There are cases of sons estranged from their families who still send ~$2k per month back home for their parents’ care.
If you are a wealthy family with a kid who’s a bit of a dunce in high school, you can send him to school in the US where he gets better grades and can then apply to colleges in the US and in China with a better chance of being admitted.
Chinese education authorities were concerned about the devaluation of university degrees as the population of students mushroomed. Their simple fix was to decree that only 50% of middle schoolers would proceed to high school, and only 50% of high school students would graduate to be college eligible.
"Everything under heaven is in utter chaos; the situation is excellent."
- Mao Tse Tung
AI is remaking search. Rather than just googling a question and then sifting through what you hope to be the best results, new search engines are combining LLM-based AI with search results for a better quality resource.
Try perplexity.ai which I’ve mentioned before, and GPTGo.ai which may even be better.
"Better to perish in the struggle for freedom than live to see defeat. There ARE things worth dying for."
- Thomas A Becket
From my friend and reader, Scott Magnes, one of the most networked men on earth, an article showing what CEOs actually do with their time.
The study found that CEOs work an average of 62.5 hours per week and spend most of their time in meetings and networking events. Additionally, CEOs are often involved in tasks related to strategy and decision-making, and they prioritize tasks that involve financial performance and revenue growth.
How does that stack up to your weekly workload? I work an average of 5-10 hours in my primary business, delegating decision-making to the person closest to the problem, and using my time invested in the company to encourage, direct, and provide accountability against assigned tasks.