Commercial Loans and Fun Blog

Those of you who live in California may want to leave the state.  The following few paragraphs come from a blog article that I wrote this year entitled, The Coming War With China:  Time to Start Building a Bomb Shelter?   I have written 100+ blog articles.  This one was the most liked by far.  I received comments from as far away as China.

World War I started in 1914, but as early as 1910, it had become clear that Germany and Britain would soon be going to war.  Each had embarked on a crash program to build dreadnoughts.  Dreadnoughts were massive battleships that could throw huge shells accurately for miles.  The entire class of ships was named after the H.M.S. Dreadnought, Britain’s first battleship (see image above).

China and the United States are on a similar path.  The Chinese are constructing warships at a much faster pace.  Already China has 350 modern warships, compared to just 293 for the United States.  China is hard at work building its third aircraft carrier.  Their cruisers are already tougher than our ancient ones.  They are building new warships at a pace three times faster than the United States.

People still think of China as a communist country, but since President Xi had himself appointed President-For-Life, China is really now a dictatorship.  Just one guy is the total, uncontested ruler of 1.4 billion people.  A ton of these guys are scientists and engineers.

If the Chinese economy ever started to slow down, and the Chinese people started to get restless for a new government, President Xi might order the invasion of Taiwan.  This would rally the people behind the Chinese flag, distracting the populace from any political challenge.

The outcome of the war would likely be determined by the accuracy of their missiles. Folks, modern missiles are so accurate that they can hit targets dead-on from over 1,000+ miles away.  India, arguably not the world's leading technological military power, in November fired a test from a missile ship that hit an aging, steaming Indian frigate dead center from 130 miles away.

Now imagine the accuracy of Chinese missiles.  The crews of our aircraft carriers are toast.  True story: In 1996, Ted Turner sold Turner Broadcasting to Time-Warner for $7.5 billion.  He announced the secret sale of the company to his family across the supper table.  One of his sons, a highly-paid executive with Turner Broadcasting, asked, "What happens to me?"  Turner reportedly replied, "You're toast."  Ouch.  Haha!

Would the U.S. then back off and let the Chinese take Taiwan, Guam, and Okinawa? nI don’t think we could.  The war against China needs to be fought in the “second island chain” in the South China Sea, rather than off the coasts of Hawaii and California.

We are mustering allies, as President Xi keeps angering and alarming the entire world.  Heaven only knows why Xi picked a fight with the Indians over some frozen rocks on their mutual border; but the result has been the addition of Australia to the Quad “Alliance" of India, Japan, and the U.S.  Recently, even the pacifist governments of France and Germany have started to push back against the Chinese.  The French and the Germans have now sent subs and destroyers to the Indian Ocean.

Who will win the coming war?  China.  The Chinese will strike first and without warning.  They will knock out much of our fleet and all of our airfields on Guam, before the centipede can even finish tying his shoes (old joke about the football game between the big animals and the little ones).

Then China would likely start island-hopping on its way to California.  When their missile bases and missile ships got close enough, imagine powerful conventional missiles flying through the windows of Google, Microsoft, Intel, Lockheed-Martin, General Dynamics, Northrop Grumman, Raytheon, and Boeing.  A missile ship 1,000 miles from California would be close enough.  Yikes!

What can we do?  We need new shipyards on the East Coast, new oil processing plants scattered all across our coasts, and dozens of underground missile manufacturing plants scattered throughout the Heartland.  We need to buy up forty old container ships and convert them to missile ships, at about 1/50th of the cost of building new aircraft carriers.

What can you do?  A nice home in the Boonies would be smart.  What if you simply must live in California?  How about a combination wine cellar / bomb shelter in your partial-basement?

Remember, these incoming missiles will be both highly-accurate and conventionally-tipped.  The whole city is not going to be flattened - just the seaports, the airports, the power plants, the dams, the reservoirs, the California Aqueduct, the water treatment plants, the freeway overpasses, the railway stations, and the major food distribution warehouses.  As the Church Lady used to say on Saturday Night Live, “Isn’t that special?”

The moment Elon Musk takes The Boring Company public, I intend to buy some shares.  It’s not hard to imagine a missile war that could drag on for a decade, forcing a lot of American companies to move their manufacturing facilities underground.

How soon before the war starts?  Well, when is China's next recession?  No economy ever goes straight up, not even that of the Chinese.  I wouldn’t fall off my chair in surprise if the coming war with China started in the next three years.  Watch the news from the South China Sea very closely.  "Only the dead have seen the end of war." -- George Santayana, 1886 - 1952

End of the Scary Stuff:

I retired at the end of last year, so Angela and George IV now run my old company.  By the time I found out that we were moving our office, after 25 years in the same location, they had already signed the new lease and had the new landlord start on the tenant improvements.  I was just shocked that they didn’t even consult me.  I guess now I’m just a pretty face.

But the Company simply had to move.  Homeless people were sleeping right outside our doors and windows, and they were leaving used needles and syringes laying right on our sidewalks.  Yuck.

George IV and Jonny finally got engaged!  Hooray!  We love Jonny.  They have an April wedding planned, a simple barbeque in their backyard.  Jonny’s mother takes care of her own aging mother every day, so in order to limit exposure, only Jonny’s and George’s immediate families will attend.

Alex - Tom’s fit, slender, and lovely bride who looks just like Gisselle - gave birth to a beautiful baby girl, Salem Rose Blackburne, in December of last year.  Salem is named after a road trip that Tom and Alex took to Salem, Massachusetts while they were dating.  It was a long, three-day drive from Indy to Salem, and normally drives that long will kill a relationship.  Instead, those six days in the car ended up being the most romantic road trip of their lives.  The two grinning and joyous lovers got engaged shortly thereafter… and hence Salem’s name – a reminder of the love that they discovered on that trip.

But Salem, at the age of just 11-months, is a drinker.  Really.  Whenever Alex and Tom bring Salem and Reagan to Grammy’s house to watch a football game, Salem staggers around like she’s had a few too many.  Yes, she can walk, but she’ll never pass a sobriety test.

Poor Jordan.  She is one of the hardest-working college athletes you will ever see.  She is slender and extremely fit - rock solid too from lifting weights.  She is a superstar, All-Conference college goalie at Earlham; but she may never play another game of lacrosse.  Unless this COVID vaccine gets distributed super-quickly, her season may be cancelled.  It would break her heart.  She loves the sport so much that she intends to find a college coaching job when she graduates in May.

My cute-as-a-button granddaughter, Reagan Paige, has finally found the sport she loves – horseback riding.  Every Saturday morning, Grammy (Cisca) and I go to the barn to watch her ride.  She hasn’t been thrown yet, so as they always say, “If you ain’t been thrown, you ain’t ridden very much.”

My darling wife, Cisca, is in excellent health; but she is bored out of her mind.  Three times a week we used to go together to the Senior Center.  Cisca would take a Zumba dancing class (my love is a wonderful dancer), and I would lift weights.  No more.  The Senior Center is now closed.  [Sob]

My health isn’t the greatest – afib and congestive heart failure.  There are days when I can’t climb stairs without getting horribly out of beath.  Two ablations.  Both failed.  But I walk our two large dogs every day for 3.25 miles.  They never let me forget.  One wears a watch and points to it.

What did I learn this year?  Life marches on, and a lot of it is good.  You meet a girl, you pull your head out of your tailpipe and realize that you love her madly, you get married, you overcome infertility, you make some babies, you go to their games and make a complete fool of yourself in the stands, they go to college, they fall in love, and the wonderful Circle of Life continues.  Not so bad.  Not so bad at all.  Merry Christmas and Happy Holidays everyone!

My friends at George Smith Partners, the old-time commercial mortgage banking firm that services loans for life companies, recently posted the following tombstone:

"George Smith Partners successfully arranged $7,600,000 in permanent financing for a non-traditional anchored shopping center in Northern California.  The Big Lots and Dollar Tree anchors had short terms remaining on their primary leases, (but) they both had exceptional health ratios."

What on earth is a (tenant) health ratio? 

The Tenant Health Ratio is computed by taking the cost of occupying a space and dividing it by the tenant's total sales at that location.  In other words:

Tenant Health Ratio  = Occupancy Cost / Total Sales x 100%

Obviously the higher the ratio, the better the tenant is doing at that particular location. The better the tenant is doing at that particular location, the more likely it is that the tenant is going to negotiate an extension of his current lease.

They sure look like baby dinosaurs to me.  What are they???
But then I'm drinking right now.  Haha!

In the above case, Big Lots and Dollar Tree must have been selling goods like crazy.  The health ratio must have been so high that the bank financing this particular shopping center must have felt quite confident that these two tenants would want to renew, when their current short-term leases expired.

What is a high tenant health ratio and what is a low one?  I have no idea.  If anyone out there knows, kindly write to me at george@blackburne.com, and I will update this blog post.

Craig Cooper traded 20 loan officers for a
Find Your Own Private Investors course this week.

Watch the Price of Gold:

It's always wise to keep an eye on the price of gold.  There are a lot of very savvy investors out there, many with a whole network of contacts scattered throughout the world.  The price of gold can tell you a lot of things.

First of all, gold will warn you about any disturbing world events.  This is particularly important today, with China and the U.S. rushing to build ships and missiles in preparation for the First Taiwanese War.  

If you work for a major U.S. missile manufacturer, like Raytheon or General Dynamics, and you discover that gold has just soared $500 per ounce overnight in Asia, you may want to work from home that day.  A Chinese submarine, just 1,000 miles off the coast of California, could easily fly a conventional missile right through a particular window of your manufacturing plant.  If I were the Chinese, that's how I would open the First Taiwanese War.  Take out the U.S. missile manufacturing capability and the brains behind it.

Think 'ole George has gone off the deep end about this coming war with China?  My friends and my investors rolled their eyes when I first published my book (available still on Amazon) warning of a deflationary crash in 2007.  Deflation?  You can't have deflation!  That's impossible.  Once money is printed, no one is ever going to burn it, right?  Uh, huh.  Then the Great Recession hit in 2008, and investors leaned what happens when banks stop lending.  Trillions of dollars were destroyed.

The price of gold will also warn you when major corporations are going to start defaulting on their debt.  Do you know when gold outperforms just about every investment on earth?  During hyper-inflation, right?  Nope.

Gold performs the best during periods of deflation, when major corporations start defaulting on their bonds.  Think about the bonds from Enron, Worldcom, and Lehman Brothers.  They're toast.  Gold is one of the few assets that is not the debt of another.

Lastly, gold is also a warning about future inflation.  I want to make clear that gold is only a so-so investment during periods of inflation.  Why?  Because gold generates no income.  Stocks and real estate are far better investments.

But gold can still be the canary in the coal mine.  In the old days, miners would bring canaries into the mines with them.  If the poor canary suddenly died, it was a warning to the miners to get the heck out of the mine shaft.  The oxygen level in the mine was dangerously low.  

Gold is sitting at a lofty level right now - only about 12% off its all-time high. Why so high?   Is it because of the coming war with China?  I suspect that the coming war is just a small part of today's high gold prices.

Do you what CTL financing is?  You would
if you followed our Facebook page.

You can blame today's high gold prices on Andrew Yang.  He was the Asian-American presidential candidate who advocated giving every American a basic income of $1,000 per month.  From where would the income come?  The Treasury would simply issue Treasury bonds, and the Fed would buy them.  Presto-chango, there would be no cost.  Uh, huh.

This week Congressional negotiators came to an agreement on a $900 billion COVID relief bill.  And from where will the money come?  The Treasury will simply issue Treasury bonds, and the Fed will buy them.  There's no cost!  As the hard rock group, Dire Straights, used to sing in 1985, ".. Money for nothin' and your chicks for free."

Gold is not indifferent to inflation... and make no mistake, inflation is definitely coming back.  The passage of this COVID Relief Bill may prove to be a paradigm-changing event - the equivalent of Fed Chairman Paul Volker raising the prime rate to 21.5% in 1981.  This huge prime rate increase broke the back of inflation, and for the next 40 years we enjoyed disinflation.  To you young folks, welcome to 40 years of inflation.

Suppose I am commercial real estate loan officer working for a bank.  In the old days, I would have sat at my desk, in a three-piece suit, in one of the bank branch offices, waiting for borrowers to come visit me or for their phone calls to be transferred to me by the receptionist.  

Each bank branch would have its own loan officer, and he would handle all types of loans - personal loans, credit card loans, home loans, second mortgages, equipment leases, inventory loans, accounts receivable loans, and commercial real estate loans.  Those were the old days.  

Today, bank loan officers specialize.  There will typically be just one guy at the bank devoted exclusively to commercial real estate loans, and he will service six or seven bank branches.

This commercial real estate loan specialist will seldom come into any of the bank branches for more than a few hours per week combined.  When not actually processing commercial loans, he is expected to be out in the field, calling on wealthy investors and commercial brokers (commercial realty sales brokers), in order to hustle up new commercial loan business.

Modernly, anyone calling one of his six or seven bank branches, looking for a commercial real estate loan, will be forwarded to his cell phone by the branch.  A lot of the commercial real estate loan officers will not even have an office or even a desk at the bank.  They will simply float to a vacant desk.  

Moving On:

Suppose I am a bank commercial loan officer, and I get a commercial loan request on a small retail building currently leased to GameStop, a well-known national retailer of video games.  The lease is at a good rental rate, and it is scheduled to last another seven years.  GameStop appears to be making money and is growing.

The lease has an option to extend, but it is far from guaranteed that GameStop will choose to exercise its option.  Both the subject commercial building and the surrounding commercial district are looking pretty tired these days.  All of the new commercial growth is headed to the other side of town.  

So do I make this borrower a commercial loan, knowing that this key tenant will likely move out in seven years?

The folks at Adventures in Commercial Real Estate did a great job explaining the concept of hangout and hangout risk:

The hangout is the expected outstanding loan balance owed to the lender by the borrower at the end of the lease term of a key tenant.

The hangout risk is the risk to the lender associated with the borrower’s ability or inability to repay said loan.  

His "pet shark".

Obviously, if the loan is small and the borrower is very wealthy, there is very little hangout risk.  On the other hand, if the loan is large - saying $7 million - and the borrower barely has a net worth of $7 million, the hangout risk is large.

An especially important consideration in investments with a single tenant, the hangout risk is determined by comparing the hangout to the dark value (value of the vacant real estate) to determine whether the borrower will be able to repay the loan.  

The hangout risk can be quantified by dividing the hangout by the dark value.  

Example:

A borrower secures a $100,000, 20-year loan against a property leased to WalBlues for 15 years.  At the end of year 15, the outstanding loan balance is expected to be $50,000.  The lender projects the value of the vacant property in year 15 to be $50,000.  

Therefore the hangout risk is high, as represented by the expected LTV at the end of the lease term

LTV at the end of Year 15 = $50,000 ÷ $50,000  = 100%

since the borrower will need to re-lease the property before year 20 to be able to refinance the property to repay the lender.

Let's Do Some Horse (Rino?) Trading:

Do you know the commercial real estate loan officer for the Bank of Example?  Do you have his contact information?  C-Loans will trade you ONE of the following goodies for his contact information:

• Commercial Mortgage Marketing Course
• Income Property Underwriting Manual
• Commercial Loan Broker Fee Agreement 
• Regional List of 750 Commercial Lenders

Want all four goodies?  Find me four commercial real estate loan officers working for banks or credit unions.  Sorry, guys, no other lender types.

Get My Famous Nine-Hour Training Course:

Admit it.  You have always lusted in your heart (Jimmy Carter) to own my wonderful, 9-hour training course, How to Broker Commercial Loans.  Unfortunately you just couldn't afford it.  

If you gather for me TWENTY such commercial real estate loan officers, working for banks, I will trade you.  Here are the details of the swap.

Facebook Page.  Yeah-Yeah, Boooooring!

Imagine, three times per week, a commercial real estate finance (CREF) training lesson that is about the size of a Twitter post.  You will learn a ton of advanced CREF terms.  Borrowers, commercial brokers (realtors), and bankers will look at you with great respect.  

Just follow our new facebook page.  

Mr. Musk, here's the problem:  If war were to break out between China and the U.S., the Chinese would likely strike first.  President Xi of China is a virtual dictator, so he doesn't have to ask his Congress to declare war.  

Xi will almost certainly use that freedom to cripple the U.S. Navy in the opening hours of the war.  The war will likely start, without warning, with Chinese DF-21D carrier-killer missiles crashing down onto our carriers, our other capital ships, and our airfields on Guam.  

A lot of our wildly expensive fighter-bombers may never even get off the ground.  A good image would be the burning hulks of those Egyptian and Syrian jets in the opening hours of the Six Day War in 1967.

We may get a few F-35a's off the ground, but when they return after striking Chinese missile sites, they will have nowhere to land and refuel.  The U.S. Navy and Air Force ran a huge war game simulation last year of a conflict between the U.S. and China.  We lost badly.  The Chinese quickly took out our carriers, and they so accurately and repeatedly struck our airfields that no jets could land to refuel and re-arm.

In such a conflict, our massively expensive jets would eventually have to fall out of the sky, as they ran out of fuel, and our pilots are forced to bail out.  Each F-35a costs on the order of $75 million.

Mr. Musk, You Can Save Us:

Space X already uses drones ships to recover its own rockets.  Your engineers already have the expertise.

Please produce for the Navy a fleet of relatively-inexpensive interlocking flight deck drones.  

Each flight deck drone would be largely identical.  Each drone ship would be 1/36th the size of a carrier flight deck.  The Navy might assign 60 of these flight deck drones to a given area, all operated and directed by artificial intelligence.  Think of the wonderful light show put on by Intel every December using a fleet of hundreds of small aerial drones.

Even if Chinese missiles take out 20 of these 60 flight deck drone ships, the AI can "quickly" assemble and lock in the place at least 36 of them to create a flight deck for our returning jets.  

As a jet lands, it can taxi to a drone ship located in one of the corners, which would then separate and carry the expensive jet out of the blast zone range of a missile hitting the assembled flight deck.  A replacement "Lego" then powers into the place of the departed "Lego", locks itself into the flight deck, and the next jet is recovered.

This isn't rocket science, Mr. Musk.  :-)  It would be a great service to the country and a new source of income for Space X - much like Tesla selling home battery packs.

Sent by one of my golf buddies.
 They can be so cruel.  Haha!

Last week, in their latest FinFacts newsletter, George Smith Partners released the following tombstone:

"George Smith Partners successfully placed $14,050,000 in construction financing, which funded 89% of total project cost, for the acquisition and reposition of a 79-unit, mixed-use property in a desirable and historic St. Louis City neighborhood.  GSP was engaged by the Borrower when its original lender, a national REIT, was forced to re-trade the Borrower on loan terms due to the COVID-19 pandemic."

What does it mean to "re-trade the Borrower on loan terms"?

According to Wikipedia, a re-trade is the practice of renegotiating the purchase price of real property by the buyer, after initially agreeing to purchase at a higher price.  Typically this occurs after the buyer gets the property under contract and during the period that it is performing due diligence.  The buyer may raise a due diligence issue and demand a purchase price adjustment to a lower re-trade price.

In a context of commercial real estate finance, to re-trade the borrower means to alter the loan terms negatively, usually due to some serious economic event, such as the Great Recession or the COVID Crisis.

Many conduit loan borrowers, when the Great Recession hit in mid-2008, were caught with their loans still in process.  The conduit lenders went back to their borrowers and told them, "Look, the market for commercial mortgage-backed securities is collapsing.  We can't sell your loan at our originally proposed interest rate.  We are going to have to raise your interest rate by almost 1% and cut you loan-to-value ratio back from 75% to just 62%."  More of these conduit borrowers chose to walk.

The re-trade of the big construction loan that George Smith Partners described above was probably a big cut in the loan-to-cost ratio.  You will recall that the Total Cost of a construction project is the sum of the land cost, the hard costs, the soft costs, and a contingency reserve of around 5% of hard and soft costs.

The Loan-to-Cost Ratio is therefore just the Construction Loan divided by the Total Cost, multiplied by 100%.  The most typical loan-to-cost ratio on construction loans is 80%.

Let's now go back to the big construction loan that George Smith Partners just closed.  Perhaps the REIT initially proposed a construction loan of 80% of cost; but after COVID became a pandemic, this REIT probably cut heir loan-to-cost ratio down to only 70%.  

The developer probably didn't have an extra $1.6 million in equity to contribute to the project.  Fortunately, the good folks at George Smith Partners saved the day.

Can lenders really re-trade a borrower legally?  You will recall that in commercial real estate finance ("CREF"), lenders almost never issue a firm commitment.  They merely issue a term sheet - also known as a loan proposal or conditional commitment letter.

A term sheet is not a firm commitment.  It is just a letter expressing an interest in making a commercial loan and providing a good faith estimate of the eventual terms.

Although the typical term sheet is not binding on a commercial lender, it is the custom and practice in the industry for the lender to honor a term sheet, absent a major change in the bond and/or real estate markets.  

In real life, the vast majority commercial lenders are pretty good at sticking to the terms of a term sheet.

Mini-Lessons this week:
Burn-off's, par passou notes, A/B notes

Have you ever wondered why the English (and in many other countries too) proclaim, "The king is dead.  Long live the king!"  It is the traditional proclamation made following the accession of a new monarch.

This seemingly contradictory phrase simultaneously announces the death of the previous monarch and assures the public of continuity by saluting the new monarch.  There would be no bloody civil war.

Some of the bloodiest wars ever fought by the British were not against the French or the Germans.  They were their own awful civil wars.

The Battle of Towton was fought on 29 March 1461 during the English Wars of the Roses, near the village of Towton in Yorkshire.  It was probably the largest and bloodiest battle ever fought on English soil.  An estimated 50,000 soldiers fought for hours amidst a snowstorm on that day, and 28,000 beloved fathers, sons, and husbands died.  

I have tried hard to explain this to my wonderful wife, who has little patience with the pampered lives of royalty.  The reason why British celebrate their royalty - even though they have no real power other than appear in TV shows, like The Crown, and to be on the covers of rag-mags - is because the British royalty represent continuity.  There will be no civil war as long as the issue of succession is clear.

Okay, So On To Economics:

The United States has enjoyed disinflation since 1980, shortly after Japan’s debt bubble popped.  Since 1980, the U.S. and European inflation rate has been steadily falling.  

Disinflation is different from outright deflation.  Deflation means that prices are actually falling.  Disinflation merely means that rate of the inflation is falling.  For example, if the inflation rate in 2012 was 1.8% and the inflation rate in 2013 was just 1.6%, this is disinflation.  We still have inflation, but the rate of inflation is falling.

The COVID pandemic was the final nail in the coffin.  Absent the PPP Loan Program, which assisted 650,000 American businesses, the United States might have lost 300,000+ otherwise-profitable businesses.  Congress and the President helped these American businesses when they needed it most.  In my opinion, the PPP Loan Program was amazingly successful.

The PPP Loan Program, however, eventually cost the Federal government over $525 billion.  To make matters worse, this huge increase in the deficit followed right after a $1.9 trillion tax cut by President Trump.  Between these two stimulus programs, we broke the budget.  The only solution was to have the Fed buy up our own debt.

Unfortunately the actions of the Fed may have worked too well.  Before COVID, but after the Trump tax cuts, the U.S. economy was roaring.  The unemployment rate had plunged to just 3.5%.  Real average wages started to increase for the first time in several decades. The stock market was soaring.  

Despite COVID, the U.S. unemployment rate today is still less than 6.9%.  

Deficits no longer seem to matter, at least in the eyes of Congress.  Hooray???Thank goodness our politicians have failed to notice this; otherwise, they might be tempted to bestow immense largess on their supporters.  Phew.  :-)

In the words of Alexander Fraser Tytler, Lord Woodhouselee, the famous Scottish jurist and history professor:

"A democracy is always temporary in nature; it simply cannot exist as a permanent form of government.  A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury.  From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship."

This is why you can bet that inflation will soon come roaring back.  Have you noticed that home prices are soaring?  "No Shinola, Sherlock!"  Haha.

A good argument can be made that you should go out and get a huge mortgage at today’s ridiculously low interest rates.  A $500,000 mortgage at less than 4% interest may look like manna from heaven - mere Monopoly money - if inflation and interest rates increase sharply in the next five years.

Did you know that manna actually exists?   It can be found in a small corner of the island of Sicily.  It does not fall from the sky -- it drips from the ash tree.  When exposed to the hot summer sun of Sicily, this Italian variety of maple syrup solidifies into white stalactites of spongy sugar.

A good argument can be made that you should go out and buy the biggest home you can afford.  By keeping interest rates ridiculously low, the Fed is subsidizing home purchases.  

If only you could find a home to buy…  "Aye, there's the rub."  (Hamlet, Act 3, Scene 1 - part of the whole, "To be or not to be", scene).  The big problem is inventory.  Investors are snatching up homes without even seeing them.  They are relying entirely on online videos.  Investors are also paying all cash.

Home prices were held in check for most of the past year by the fact that the homes were not appraising for their purchase price.  Sellers were forced to reduce their asking prices so that their buyers could get mortgage loans, which kept sales comparable's from increasing.

No longer.  Now more and more investors are simply paying all cash for these homes, thereby going around the whole appraisal issue.  Folks, home prices today are an absolute steal.  Buy a big home right away, if you need the extra space.

You have never seen a Facebook page like this.
You will learn soooo much.

Last week I blogged on the problems associated with LIBOR.  It is abundantly clear that something needs to be done to replace the LIBOR index as a measure of market interest rates.

I also pointed out that $350 trillion in financial instruments worldwide are currently tied to LIBOR.  Regardless of which index the authorities end up using to replace LIBOR, the switchover is going to be tricky.  I can see in my mind's eye some greedy attorney affixing a bib and rubbing his hands together in glee.  Yum.

The index that will be replacing LIBOR, at least here in the U.S., is the secured overnight financing rate (SOFR).  The secured overnight financing rate is a benchmark interest rate for dollar-denominated derivatives and loans.  The Federal Reserve Bank of New York began publishing the secured overnight financing rate (SOFR) in April 2018 as part of an effort to replace LIBOR.

The daily secured overnight financing rate (SOFR) is based on actual transactions in the Treasury repurchase market, where investors offer banks overnight loans backed by their bond assets.

Woodpecker storing up for winter.

Benchmark rates, such as the secured overnight financing rate (SOFR), are essential in the trading of derivatives—particularly interest-rate swaps, which corporations and other parties use to manage interest-rate risk and to speculate on changes in borrowing costs.

Interest-rate swaps are agreements in which the parties exchange fixed-rate interest payments for floating-rate interest payments. In a “vanilla” swap, one party agrees to pay a fixed interest rate, and, in exchange, the receiving party agrees to pay a floating interest rate based on the secured overnight financing rate (SOFR)—the rate may be higher or lower than SOFR, based on the party’s credit rating and interest-rate conditions.

In my earlier blog article, I pointed out that LIBOR had become the rate at which banks do not lend to each other because most banks are up to their gills in liquidity.  LIBOR had become nothing more than a guesstimate.  SOFR is therefore preferable to LIBOR since it is based on data from observable transactions.

Unlike LIBOR, there’s extensive trading in the Treasury repo market—roughly 1,500 times that of interbank loans as of 2018—theoretically making it a more accurate indicator of borrowing costs.

Interest rate swaps on more than $80 trillion in notional debt switched to the SOFR in October 2020.  This transition is expected to increase long-term liquidity, but it also may result in substantial short-term trading volatility in derivatives.

While SOFR is becoming the benchmark rate for dollar-denominated derivatives and loans, other countries have sought their own alternative rates, such as SONIA and EONIA.

Time will tell whether SOFR is a suitable replacement for LIBOR.  The difference between the two indices was that LIBOR was based on unsecured loans between banks, whereas SOFR was the rate that banks would loan to each other, but only if such loans were backed by rock-solid collateral.

What is going to happen if a Chinese destroyer trades missiles with an American destroyer?  Talk about "living in a powder keg and giving off sparks."  Such an event could easily trigger World War III.

Suddenly the investment world goes into a risk-off mode.  Corporate bonds and stocks would likely plummet, while Treasuries and gold would likely soar.  Because SOFR is based on well-secured, inter-bank loans, SOFR might not increase that much.

At the same time, the demand for non-US-government debt will almost certainly plummet.  Yields on investment grade bonds could soar to over 20% in a matter of 48 hours.

What damage will be done to the U.S. financial system because SOFR materially understates real interest rates in the system?  Remember, over $80 trillion in financial instruments are already tied to SOFR.  I dunno; but it can't be good.

My own company, Blackburne & Sons, will always be in the market - even during war time - to make commercial real estate loans.  

That being said, the Company is moving more into the syndication business.  We are putting together syndicates to buy income-producing properties for all cash.  In other words, there will be zero debt.  That is where everyone should be if war does break out - trophy properties that are owned free and clear.

If you are an accredited investor, and you like the idea of owning trophy commercial properties free and clear, please contact Angela Vannucci at 916-338-3232 x 302.  If you decide to email her, please write in the Subject line, "Free and Clear Property."

Blackburne & Sons Will Soon Be Moving:

After 25 years in the same location, we have no choice but to make the leap.  Homeless people are sleeping right outside our windows.  We are finding used needles on the ground almost every day.  We move in about a month and a half.

Folks, you REALLY want to follow
our new Facebook page.  No  one does this!

I have used six days because that is all that it took for the Israeli's to smash the Egyptians, the Jordanians, and the Syrians during the Six Day War in 1967.  

After the shocking surprise attack on Pearl Harbor on December 7th, 1941, the Japanese mopped up most of the American Far East Fleet and most of the British Far East Fleet near the Philippines, Wake Island, Indonesia, and Malaysia in less than three weeks.

Folks, modern wars can start and end pretty quickly, especially when one side - China  in this case - has superior weapons.  The United States is far behind the Chinese in hypersonic missiles.  Hypersonic missiles, as of now, are unstoppable.  

Hypersonic missiles don't really even need a warhead.  They travel so fast that their kinetic energy alone destroys any target.  They are so accurate that they can even strike their targets within a matter of meters.  God please protect our brave sailors.

The Chinese will strike first and without warning, probably taking out at least two of our aircraft carriers in the first salvo.  Air-launched hypersonic missiles will almost completely destroy our air bases on Guam.

While we will probably get a few planes and missiles off the ground, when our planes return from pounding Chinese missile sites, they will have no place to land.  The pilots can bail out, but our jets, each costing many tens of millions of dollars, will have to drop out of the sky.  A single F-35A costs $75 million.  

We're done.  It's over.  Yes, our subs will get some licks in, but when a missile is conventionally-tipped, there is only so much damage that any missile can do, no matter how accurate it is.  China will pay an expensive price, but the Taiwanese War will be the end of America as the dominant world power.

Will China then leap-frog islands to bring their missiles within range of California and the rest of the country?  They pretty much have to rain missiles down on us until America has been bombed back to the Stone Age; otherwise we will eventually recover and strike back.

Fortunately, we have plenty of time - perhaps as much as two years.  What?  Just two years?   Yikes.  War is coming, folks.  I doubt there is a force on Earth that could stop it.  It's like dropping a two-ton safe from 10,000 feet in the air.  Nothing is going to stop that safe from hitting the ground.

I have nothing against Joe Biden, but is he the Winston Churchill of our era or the Neville Chamberlain - that British Prime Minister who foolishly cozied up to Hitler before World War II?

So - BAM - much of the U.S. fleet in the South China Sea is suddenly and utterly destroyed.  The humiliation is total.

The U.S. now has to replace its fleet, at a cost of $30 trillion, build a dozen underground missile plants, build hundreds of thousands of complex missiles, and then protect its West Coast population from decimation.

From where is this money going to come?  Obviously we will have to sell $50 to $75 trillion in bonds; and now the world no longer wants them.  They don't even want the U.S. dollar.  

America used to be - because it was protected by vast oceans, because of its stable government, and because of vast military - the safest place on Earth to invest.  No more.  Now it will be the target of 1.2 billion angry Chinese.  They used have a population of 1.4 billion; but the U.S. military was not totally ineffectual.

My silly little blog articles are getting passed around (the world?).  I have been exchanging emails with a new buddy in Hong Kong, who is deeply patriotic towards his country.  "George," he wrote to me recently, "you could kill one billion of us, and we would still outnumber the United States."

So now we have 1.2 billion pissed-off Chinamen (probably a politically-incorrect term,  sorry) coming for us, and the U.S. has to totally rebuild its Navy and Air Force.  From where is all of this money going to come?  The U.S. government will have to print it.

Gold on Day 1:  $1,900 per ounce
Gold on Day 7:  $50,000 per ounce

Think this is crazy?  Here is a five-year chart of Bitcoin:

Bitcoin is $18,555 today; but I think I would rather own physical gold coins when the war actually breaks out.

What can you do?  If you live in California, get the flip out.  A house in the Boonies, where you can use Zoom, might work very well.  Have you been following the prices of homes in the mountains of Montana and Utah?  Through the roof.

I was proud as heck of my son, George IV, when he bought a used SUV this week with a trailer hook.  He may need that trailer hook to pull a light trailer, loaded with gas and emergency food supplies, to Indiana.

What can the U.S. do?  If I was Joe Biden, I would:

1. Sacrifice Taiwan.  With our current technology, we can't hold it, so there is no point in losing our fleet.
   
   
2. Pull our fleet back to the East Coast.  Let's not give the Chinese any chance to take out our carriers and our expensive aircraft on board.
   
   
3. Let's hurry up with the development of unmanned aerial refueling drones.  Our biggest problem right now is that Chinese missiles can outreach us.
   
   
4. We need to grasp the concept of missile warfare and avoid investing more into antiquated aircraft carriers.  "Generals always fight the last war."  Aircraft carriers are sitting ducks.  It's no longer a question of whether Chinese carrier-killer missiles can hit our carriers.  It's become a question of which window on our aircraft carriers will their missiles use.
   
   
5. Instead, we need to covert at least forty old container ships to missiles ships.  Iran - of all countries - just created its first missile ship from a container ship this very week. The Iranians have obviously been studying many of the same military journals as I have.  Converted container ships cost 1/50th of the cost an aircraft carrier.  They are cheap.
   
   
6. Underground-underground-undergound.  Our sharpest missile and computer engineers need to move to where they can be underground in less than two minutes.  Utah?
   
   
7. Folks, I wonder whether we are just rearranging deck chairs on the Titanic.  China is already graduating five times more engineers and computer geeks than the U.S.
   
   
8. Assuming we still have an outside chance, why are we making student loans to graduate more psychology students?   WTFudge?  Want a student loan?  Study missile technology!  STEM subjects only.
   
   
9. Folks, I am an avid student of history.  I greatly worry that this war may already be over.  I find myself hugging and kissing my kids at every chance I get.  I am genuinely scared.

Designer war helmet.

You have never seen a Facebook page like this.  Follow us!!!

A lot of commercial real estate loans are floating rate loans, tied to LIBOR.  Large bridge loans from hedge funds and mini-perms from commercial banks are usually tied to LIBOR

A whopping $350 trillion (with a "T") in financial instruments worldwide reference LIBOR.  Holy moly, I had no idea until I started researching this article.  That's a whole lot of floating rate promissory notes.

Our new Facebook page is unlike any that you have ever seen.

LIBOR stands for the London Inter-Bank Offer Rate.  It's supposed to represent the interest rate at which commercial banks in Europe lend excess funds to each other, on an unsecured basis, for one week to one year, often so that the borrowing bank can satisfy reserve requirements.  

For example, let's suppose Credit Suisse in Zurich has deposits coming out of its wazoo; but HSBC in London just had a huge withdrawal and needs liquidity.  HSBC might borrow $50 million from Credit Suisse, unsecured, for 90 days days at a 3.25% annual rate.

LIBOR today is only around 0.25%, but before the Great Recession, six-month LIBOR often hovered between 3% and 3.5%.  Since the Great Recession, the European Central Bank has flooded the market with liquidity, and interest rates in Europe have plummeted.

After December 31, 2021, LIBOR will no longer be computed.  In a little over one year, the LIBOR index will be kaput.  Why are the authorities doing this?  

The problems with LIBOR first emerged during the Great Recession.  There was a time during the financial panic in 2008 when every major bank in Europe was insolvent.  

These European banks had all just lost billions in subprime mortgage-backed securities.  Many were active players in the subprime mortgage securitization business, so they were caught with billions of dollars in subprime mortgages on their warehouse lines, when the market for subprime mortgages collapsed.  Suddenly a $400,000 subprime mortgage had a market value of just $105,000.  Yikes.

Back in my bachelor days at the bars, I also suddenly got more handsome.

Each of the big European banks was suddenly desperate for cash.  So when a senior vice president of Deutsche Bank called up Barclays Bank for a $600 million loan, the reply was, "Heck, we were about to ask you for a loan!"  

In any case, the point was moot.  The European banks were all insolvent, and every bank knew that the other banks were insolvent too.  They sure as shootin' weren't going to make a huge, unsecured loan - only to watch the other bank go belly-up, like Lehman Brothers.

Since none of the European banks were loaning a dime to each other, how could the Intercontinental Exchange compute LIBOR?  They couldn't!  So they winged it.  They pulled some number out of thin air and published it.  While greedy attorneys later sued them because the number was clearly imaginary, at least the world remained round.

The next problem arose because the banks got greedy.  The way LIBOR is computed is that every day the 18 largest banks in Europe reported to the Intercontinental Exchange the rate at which they are willing to lend unsecured to other banks.   The lowest four and the highest four offers are thrown out, and the remaining ten offer rates are averaged.

The banks started cheating.  They would report an offer rate to the Intercontinental Exchange that was much higher than the rate at which they were actually lending.  The object was to push up LIBOR, so these banks could rake in billions of dollars in extra interest on their loans tied to LIBOR.

The attorneys nailed them again, and this time they deserved it.  Regulators nailed the largest banks in Europe... are you ready for this... with $9 billion in fines!  Oopsie.  These banks probably won't do that again.

Finally, we have the last problem with LIBOR.  In order to prevent a worldwide financial collapse in 2008, the European Central Bank ("ECB") flooded the market with liquidity.  “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.  And believe me, it will be enough,” said Mario Draghi, its Chairman.  Draghi saved both the Euro and all of the big banks in Europe.  Bless him.

With every bank in Europe drowning in so much liquidity that a depositor now has to pay the bank to accept his deposits, no banks are lending to each other because no bank needs liquidity.

LIBOR has become the interest rate at which no banks lend to each other.  Haha!  So how is the LIBOR index now computed?  Probably "PFA" - pulled from air.  Next week I will blog on SOFR, the new replacement for LIBOR.

Have you been tested for COVID yet?

Fun Stuff:

If you have been following my blog, you know I am a HUGE fan of the online network, IMDb.  I have learned recently that IMDb stands for Internet Movie Database. 

Now the thing about IMDb is that you have to watch a few commercials; but they are shorter than normal network TV commercials.  The shows and movies are also about ten years old; but dang, there are some terrific shows and movies.

My bride and I recently watched the entire Hunger Games series for the third time, and the three movies were wonderful!  Cisca and I also also enjoying the TV shows, Unforgettable and Fringe.

Okay, but now the really good stuff.  IMDb is producing its own original shows, and their first series is fantastic!  It's called Alex Rider, and it is soooo smart.  It's like a Daniel Craig 007 movie, but with a star that is still in high school.  Nothing unbelievable.  There is no "jumping of the shark".  His skills are absolutely believable. I promise that once you have watched fifteen minutes of the show, you will be hooked.

Disclosures:  I was paid 1 million Zimbabwean dollars to make this endorsement.  That's about a half-penny.  Haha!

C'mon, guys, I am NOT a Trump-hater.  Heck, I voted for Trump - twice.  I love our President; but I am going to give you Trump-haters some very interesting ammunition today.

Something happened yesterday that no one in the Press - more accurately, the various party propaganda agencies* - has yet to appreciate.  Yesterday President Trump fired the Secretary of Defense, Mark Esper.

*Where have you gone, Walter Cronkite - sung to the tune of Mrs. Robinson?

Yes, all of the press agencies reported the firing.  One more Trump firing.  [Yawn.]  So what?

Secretary Esper tried to tow the Trump line.  He never once fought with the President.  His critics even called him, Mark Yes-per.

But when Trump proposed using the U.S. Army, as opposed to the National Guard of the various states, to put down the rioting in our major cities earlier this year, Secretary of Defense Mark Esper refused.  This is why he was thought by many to be on the chopping block.

Do we really want a President using the U.S. Army to put down internal protests?  To do so would be to violate the Posse Comitatus Act, a Federal statute passed in 1878.

The below Facebook training is different from my blog.

The title of the Act comes from the legal concept of posse comitatus, the authority under which a county sheriff, or other law officer, can conscript any able-bodied person to assist in the keeping of the peace.  "Hey you, you are hereby ordered to join the posse to chase down Jesse James!"

The Posse Comitatus Act is a United States federal law which limits the powers of the federal government in the use of federal military personnel to enforce domestic policies within the United States.

The Act does not prevent the Army National Guard or the Air National Guard, under state authority, from acting in a law enforcement capacity within its home state or, in an adjacent state, if invited by that state's governor.

Can you imagine President Harris (see the funny meme above) using the U.S. Army to enforce a major expansion of Federal power, such as seizing our IRA's and 401k's so we can all share in a universal retirement program?  Yikes.

Using the U.S. Army to enforce such a socialist-leaning policy might have bloody consequences, especially in the red and heavily-armed state of Indiana.  Let's keep the U.S. Army out of law enforcement, okay?  

It is fair to say that there is a lot of bitterness in red states over the treatment of our President over the past four years by the press.  Joseph Goebbels, in his propaganda campaigns for Hitler against the Jews in the late 1930's and during World War II, would have been sooo proud of his American propaganda trainees.

Even those of you with a liberal bent know in your hearts that I am writing the truth.  The press just pounded relentlessly on the President.  "Donald Trump dived in front of a speeding truck today to save a kitten... but only because he wanted to eat the kitten for dinner."  Haha!

Perhaps Joe Biden was sent by God.  Perhaps this well-meaning, "mature gentleman" was sent to restore dignity to the office and to heal the nation's wounds.  Who could hate Joe Biden?  Today's blog post is not a rant against the election, Joe Biden, or Trump's loss.

It is actually a warning about the danger of Donald Trump.

Huh?  What?  I thought you loved Donald Trump, George.

I have funny meme below that is quite instructive, but it needs a little explanation.  Indiana University (the Hoosiers) is famous for its superb basketball program - for many years under the beloved, but uncontrollable, Coach Bobbie Knight.  "Don't mess with me, Bucko.  I'll throw a chair at you."  :-)

But the football program at IU, a perennial cellar-dweller for thirty years, has been steadily improving recently.  In their opening game against Penn State, ranked #10 at the time, Indiana University made an amazing comeback in the last two minutes of regulation to send the game into overtime, where it went on to win the game on an unbelievable two-point conversion now known as "The Reach."

Indiana University has gone on to win two more games, and it has risen to rank #10 in the country in the latest AP poll.  Their last victory was a beat-down of the perennial powerhouse, the University of Michigan Wolverines.  But please pay attention now:  The following meme reflects the conservative view that the Presidential election results in Michigan, Pennsylvania, and several other states may have been reversed by old-style, Tammany Hall corruption.  The meme below is therefore both hilarious... and a little troubling.

You have to admit that the results in the six or seven battleground states were incredibly close.  And corruption in politics is hardly new.  As the Tammany Hall pols in New York City used to tell the new Irish immigrants in the 1860's, "Vote early... and vote often."

Might corruption in the mail-in ballot process have thrown this incredibly close election to Joe Biden?  Perhaps.  Corruption in politics is hardly new.

So the right thing to do right now is to be patient with Trump and other die-hard Republicans, as they recount the vote in several close jurisdictions.  As everyone has been saying, let's count the vote.

Heavens, I just LOVE memes.

The Danger From Trump:

If the recount proves that Donald Trump actually won the election, my conservative friends are going to roast me forever for writing this article.  Haha!  

But what happens if the recount clearly shows that some shady things were going on with the ballot counting, but the final count still remains ever-so-slightly in Biden's favor?

So I ask today, why is Donald Trump bringing in a new Secretary of Defense in his final three months in office?  Why create confusion in our military when the Chinese are threatening to invade Taiwan?  Do we really need a new Secretary of Defense at this exact moment?  

Has President Trump brought in a new Secretary of Defense because this new one is willing to use U.S. Army troops to keep President Trump in office?

Millions of Americans love you, Mr. President.  You truly made America great again; but, for Heavens sake, please don't mess it all up by refusing to step down.