Commercial Loans and Fun Blog

Zoom Party Soon:

China will clearly NOT attack Taiwan this April, so I was wrong.  Hooray!  I would gladly be the object of some good-natured ribbing rather than for the U.S. to lose 13,000 high-trained sailors aboard two aircraft carriers and their supporting ships.  That's what most war games project we would lose.

I will let you know soon of the time and date of my Zoom Beer Party entitled, George is Retarded.  Haha.  

Be thinking of a joke, a cool short story, or a juicy piece of gossip to share with the group.  I have no idea how many of us will show up, but I am thinking 20 or so.  My last party had even more, maybe 30 or 35 guys and gals.  It was a blast, but I had a hangover for two days.  Ouch.  

Joke Du Jour:

I asked my son if he could go anywhere in the world, where would he go.  He said, "McDonald's."  I said, "No, I mean a country."  He said, "Oh, okay... McDonald's in Japan."

That was just a joke I read on the internet; but coincidentally, my oldest son, George IV, just came back from his honeymoon in Japan.  McDonalds in Japan apparently has a fried shrimp burger that rocked his world.  Fried shrimp burger - sounds yummy.

Fun Stuff:

My kids are scattered all over the country, so they bought Cisca and me a rotating picture screen that permits them to email pictures to us directly to the picture roll.  If they go to an Easter event with our grandkids - boom - the pictures instantly appear on our picture frame thousands of miles away.  What a thrill.  Why did this invention take so long?  Why did it take people so long to mix peanut butter and chocolate?

Netflix is now showing a great 8-part mini-series filmed in South Africa entitled, Unseen.  Gangsters.  Betrayal.  Suspense.  Gunfights.  The show is absolutely riveting.  It is also quite interesting to see modern life in South Africa.

Some Thoughts on Commercial Real Estate Lending:

I almost fell off my chair when I read an article on the Motley Fool about the securities broker, Charles Schwab:

"At the end of 2022, Schwab had average tangible common equity of $17.4 billion (George:  This is their wealth.)  Meanwhile, the bank had $12.3 billion of unrealized losses in its available-for-sale (AFS) bond portfolio, which the bank intends to sell before they mature. However, these losses are marked-to-market and have already been subtracted from equity." (George:  They have essentially already recognized these losses.)

"The real concern is in Schwab's held-to-maturity (HTM) bond portfolio, where Schwab has unrealized losses of $15.6 billion.  These have not been accounted for, and if Schwab ever had to dip into this portfolio to cover deposit outflows, the company would be in deep trouble."

Let me put this in plain English.  Looking back at Silicon Valley Bank, we have all seen how quickly a bank run can empty an institution of all deposits.  Hundreds of billions of dollars were withdrawn from Silicon Valley Bank in less than ten days.

A similar run on Charles Schwab would force the broker to sell off its long-term bonds.  This would force it to immediately recognize the losses, and the losses would essentially wipe out all of Schwab's capital (wealth).

Poof.  One of the largest institutions in America would suddenly disappear.  They would keep the doors open, but the company would essentially become a zombie, staggering from month to month.  

"But George, the U.S. government would cover the deposits, wouldn't it?"  Yes, probably... unless the country was involved in another pandemic or it was suddenly at war with Russia.  Got money in Schwab?  Hmmm.

My point is that thousands of banks in the U.S. are staggering with unrecognized losses in long-term bonds.  Their capital has been impaired.  To make commercial loans, a bank needs a healthy amount of capital.  Look for commercial real estate lending from banks to slow down dramatically.  

Another Cute Joke:

A good father recently wrote:  I collect all the cell phones and iPads from the kids at night and keep them in my room.  Last night they all set alarms to go off at various times throughout the night.  I'm impressed with their ingenuity and team effort; but they're all still grounded.

The Stock Market May Be Choked to Death:

It is an absolute disaster that commercial banks lack the capital to continue making a plentiful volume of commercial loans and commercial real estate loans.  Business growth on Main Street is likely to be strangled.  Well, poop!

This is also a problem that will not be fixed quickly.  Remember, if a bank sells off its long-term treasury or corporate bonds at a huge discount, it must recognize that loss immediately.  That loss immediately reduces its capital.  Gotta have capital to make commercial loans.  

On the flip side, if the bank holds on to to its malinvestments (Latin for crumby, stupid investment) in low-yielding, long-term bonds, there is always the chance that interest rates will come back down.  Hope springs eternal.

So the bank is stuck with a long-term bond yielding 1.75% while it is paying 2.5% to 4.25% for deposits.  Every month the bank losses more money, slowly eroding its capital.  It is death by slow strangulation.

Did I mention that you gotta have capital to make commercial loans?  Do you really want to hold on to your stocks right now?

This is going to sound self-serving, but 10% to 11% trust deeds from Blackburne & Sons are looking awfully attractive right now.  

Kinda reminds me of when I was a disgusting bachelor hound dog.  I learned to stay late at the night clubs.  I somehow got cuter (and taller) as the night went on.  

Bahahaha.

Joke Du Jour:

A small boy badly wanted a baby brother, so his dad suggested he pray every night for one.  The boy prayed earnestly, night after night, but his prayers seemingly weren't answered.  After a few weeks, he didn't bother to ask anymore.

Some months later, his dad said they were going to see Mom in the hospital, and he was going to get a big surprise.  When they got to the room, the little boy saw his mother holding two babies.  "Well, what do you think about having twin brothers?" his dad asked.  The little boy thought for a moment and replied, "It's a good thing I stopped praying when I did."

Fun Stuff:

One of the funniest movies I've ever seen is, "We're the Millers."  I watched it three times.  I confess I did not hate the Jennifer Anniston strip tease scene.  Oh, my.  This is a very funny movie, and I promise that you will be rolling in the aisle.  You can stream it on Amazon Prime for $3.99.

My news is that they are working on a sequel to be called "We're Still the Millers."

Commercial Loan Lesson:

Commercial banks make about 60% to 70% of all commercial real estate loans (by the number of loans).  As you will discover today, commercial banks are starting to dramatically slow down on their commercial real estate lending.  In a major news publication, one bank loan officer described how his department had submitted thirty commercial real estate loans to Loan Committee in the past month.  The bank turned down every one of them.

For you commercial mortgage brokers, this is fantastic news.  Commercial borrowers now need you badly.  You are reminded that Blackburne & Sons is not a fund.  Instead, we instantly assemble a different syndicate of private investors for each new commercial loan.  This means we are always in the market, even, for example, during the darkest hours of the Great Recession.  Private investors always have money for deals.  Apply to us here.

It's Time to Learn Commercial Real Estate Finance:

Residential mortgage banking is the slowest it has ever been in history.  There just aren't many listings because no one wants to give up their 3% mortgages.  

It's time to learn how to broker commercial real estate loans.  In nine hours - one long day - you can learn the entire profession, including marketing, underwriting, packaging, placement (finding the right lenders), and fee collection.  Just $549.

A HUGE Bank Run At The Speed of Light:

Most of the commercial banks in America have assets of less than $25 billion.  On its final day of normal operations, $100 BILLION was withdrawn from Silicon Valley Bank.  One-hundred billion dollars withdrawn in a single day.  Wow.

There is no way for regulators to get ahead of such a fast-moving loss of bank confidence.  Depositors weren't so much lining up.  Instead, they were pushing computer buttons and making their deposits instantly disappear from the bank.  

JP Morgan Chase, along with a small consortium of large banks assembled by Jamie Dimon, had to deposit $30 billion into a different bank, a regional bank named First Republic, to save the banking system.  

During the Crash of 1907, the elder JP Morgan stepped onto the floor of the stock market, started shouting buy orders, turned back the stock crash, and saved the financial system.  JP Morgan Junior tried to do the same thing in 1929, but it sadly didn't work.  There were just too many sell orders.  But here, once again, JP Morgan (the company) stepped in and was the hero.  Atta-boy, Jamie.

I warned you last year to
get loan servicing income.

The speed at which deposits can disappear certainly must have the banks puckering. "We need to stay liquid.  We don't need to make any more commercial real estate loans for awhile," they must surely be telling their staffs.  Darn.  I just hate it when half of my competition disappears.  :-)

Quick Joke:

I’ve been feeling a bit moody and run down recently, so I googled my symptoms to see what I have.  Kids…  I have kids!  Haha.

Back to the Banking Crisis:

There is a certain inertia in banking.  Unsophisticated depositors build up their bank account balances, and the banks have historically paid them very little interest.  

That has changed in the past two months.  Around $121 billion left the banking system during the week of March 15 alone and flowed into money market funds, which are paying around 2.5%.

The banks are losing their cheap deposits, which is going to make holding the long-term, low-yield residential mortgages already on their books very painful.  The loss of deposits is another reason why commercial real estate lending by banks is puckering.  Banks don't have a lot of excess dough to lend.

Another Quickie:

Q:  How many parrots does it take to screw in a lightbulb?
A:  They say “toucan do it.” 

The Capital of Most Banks is Getting Crushed:

When we talk about the capital of a bank, we are talking about the difference between their assets (loans, bonds, etc.) and their liabilities (deposits).  This is the owner's equity.  It is also the cushion that must absorb any losses.

You can think of bank capital as a way of keeping score.  When banks are winning - when they are making lots of profitable loans - their capital is growing.  When the world is kicking the snot out of the banks - when their loans are going bad and their investments are going sour - their capital will be contracting.

Far too many banks worldwide bought long-term, low-yield Treasuries in a desperate reach for yield.  Imagine having a huge chunk of your bank's investment portfolio invested in 1.5% Treasury bonds, when you're forced to pay 2% or more for deposits. Those investment losses are coming right out of the bank's capital.

These investments losses may continue for years.  The bank doesn't dare sell a $1 million Treasury bond today because it might get only $600,000 for it.  The loss would immediately impair the bank's capital.

'Nuther One:

Not everyone uses or has access to a CVS Pharmacy, but they are known for their very long receipts, which are jam-packed with coupons.

Q:  How far is it from the Earth to the Sun?
A:  Ten CVS receipts.

Shrinking Bank Capital is Going to Kick This Economy in the Teeth:

It's not just the fact that bank capital is getting whittled away daily by their unfortunate investments in low-yielding Treasuries.  Cheap deposits are also leaving the banks for high-yielding money market funds.

If that wasn't enough, please recall that $100 BILLION flew Silicon Valley Bank in just one day.  Banks everywhere now have to constantly worry about liquidity.  "We shouldn't make this new loan, even though it's sweet.  We need to stay liquid."

When banks stop lending, bazzillions of dollars still flow back to the banks in the form of monthly loan payments.  If more money flows back to the banks than what they are loaning back out, the multiplier effect kicks into reverse.  Money is thereby destroyed at supersonic speed.

As money tightens, companies fail, bank loans go bad, loan losses skyrocket, their capital gets impaired, and banks pucker even more.  This banking crisis has the potential to get very, very ugly.  

One potential surprise:  Inflation could suddenly slow... until the Fed capitulates, ends quantitative tightening, lowers interest rates, and imbeds inflation for the rest of our lives.  As the Church Lady might say, "Well, isn't that special?"

Final Funny:

“Password is incorrect.”
“Password is incorrect.”
“Password is incorrect.”

*Clicks forgot password.*
*Changes password.*

“New password can’t be old password.”

Joke Du Jour:

"Here is the situation," a teacher said.  "A man is standing up in a boat in the middle of a river, fishing.  He loses his balance, falls in, and begins splashing and yelling for help.  His wife hears the commotion, knows he can't swim, and runs down to the bank.  Why do you think she ran to the bank?"  A girl raised her hand and asked, "To draw out all his savings?"

Well, Poop, This is Not What We Wanted:

We start from the basic observation that banks are terrible capitalists.  Banks don't charge whatever interest rate the market will bear.  Instead, they charge the exact same interest rate as the bank down the street and the exact same interest rate as the bank on the opposite coast.  It seldom makes sense to shop banks on the basis of rate.  They all charge pretty much the same thing.

The second observation about banks is that they are herd animals.  Once one of them bolts for cover, so does the entire herd.  You will seldom see a single gazelle on the Serengeti Desert standing his ground.  As soon as the herd starts to move... poof... they are all gone.

And right now, too many banks are in poor financial health.  They accepted too many deposits, paying virtually no interest on these deposits.  Flush with cash, they should have been making loans to small businesses.  Instead, because of COVID, they bought long-term Treasuries.

Cute One:

A small boy badly wanted a baby brother, so his dad suggested he pray every night for one. The boy prayed earnestly, night after night, but his prayers seemingly weren't answered. After a few weeks, he didn't bother to ask anymore.

Some months later, his dad said they were going to see Mom in the hospital and he was going to get a big surprise. When they got to the room, the little boy saw his mother holding two babies.  "Well, what do you think about having twin brothers?" his dad asked.  The little boy thought for a moment and replied, "It's a good thing I stopped praying when I did."

Well, Poop, Continued:

Oopsie.  When interest rates skyrocketed, these long-term bonds plummeted in value.  An example will make this clear:

Suppose a bank was paying only 0.25% interest on deposits, yet customers kept depositing even more money.  Terrified of COVID, the bank "safely" bought a $1 million 30-year Treasury bond that was yielding just 1.5%.

Bam!  Three years later, interest rates on 30-year Treasuries soar to 4.5%.  Now the bank has a problem.  That 30-year Treasury, with 27 years left to run, is now only worth around $600,000.  If the bank was forced to market that Treasury bond to market, the bank would have to immediately recognize this $400,000 loss.

Betcha you wished you had started
servicing loans last year.

Mark-to-market means that the bank would have to show that security on its financial statement, not at its purchase price or book value, but rather at what that security is worth in the open market today.

A bank is required to maintain extra reserves if it wants to make highly-profitable commercial loans.  The larger those reserves, the more juicy commercial loans that a bank can make.  

But if the bank is forced to recognize a loss, the bank's reserves are reduced.  In fancy banker language, their reserves are impaired.  

Blackburne & Sons started this way...  :-)

Why It Matters That Bank Reserves Are Being Impaired:

I have been writing to you optimistically about how American small businesses are bustling with energy and confidence.  A mere four-percent increase in the cost of their business loans was not going to slow them down.

The stunning failure of Silicon Valley Bank, however, now has the entire herd in a panic.  Loans to small businessmen may be starting to dry up.  I could be wrong.  I have no evidence of this drying up of credit.  It just would make sense.

Well, poop!  Just when the U.S. economy was poised to massively expand, circumstances collude to kick it back down.

Finally Funny:

A golfer, now into his golden years, had a lifelong ambition to play one hole at Pebble Beach, California, the way the pros do it.  The pros drive the ball out over the water, onto a green that is on a spit of land that juts out off the coast.

It was something he had tried hundreds of times without success.  His ball always fell short, into the ocean.  Because of this, he never used a new ball on this particular hole.  He always picked out one that had a cut or a nick.

Recently he went to Pebble Beach to try again.  When he came to the fateful hole, he teed up an old cut ball and said a silent prayer.  Before he hit it however, a powerful voice from above said, "WAIT...REPLACE THAT OLD BALL WITH A BRAND-NEW BALL."

He complied, with some slight misgiving, despite the fact that the Lord seemed to be implying that He was going to let him finally achieve his lifelong ambition.  As he stepped up to the tee once more, the voice came down again: "WAIT...STEP BACK... TAKE A PRACTICE SWING."

So he stepped back and took a practice swing.  The voice boomed out again, "TAKE ANOTHER PRACTICE SWING."  He did.  Silence followed.  Then the voice spoke out again: "PUT BACK THE OLD BALL."

Joke Du Jour:

Caller:  "Darling, I just called to tell you how awesome you are.  You really are the love of my life…"
Receptionist:  "Sir, I’m sorry, but this is a brewery!"
Caller:  "Oh, I know.

The Invasions of Russia:

In June of 1812, Napoleon led his Grande Armee of almost 500,000 men into Russia. Rather than give Napoleon the opportunity for a knockout punch, the Russian army wisely kept giving ground and drawing Napoleon further into Russia.  The Russians even abandoned the city of Moscow, rather than lose the Russian army.  The article continues below the funny pic below.

Disturbing News:

Microsoft, which is really pushing their new AI search engine, just laid off their entire AI ethics team.  This was the team that was devoted to imbedding into AI instructions not to kill all of mankind.  Elon Musk is far from an idiot.  He just tweeted the image below.

The Invasions of Russia Continued:

The Russians relied on General Winter, an imaginary general of Russia wielding the power Russia's bitter winters.  General Winter froze and starved the over-extended French Army.  By September of 1812, the survivors of the Grande Armee started their long retreat back to France.  Harassed by Cossacks, without sufficiently warm uniforms, and starving, the French army died in their hundreds of thousands.  

Napoleon entered Russia with 480,000 men.  By the time the Grande Armee had retreated to the borders of Germany, the French army was down to fewer than 25,000 men.

Now let's scroll forward to June of 1941.  In Operation Barbarossa, Hitler sent 3.8 million German and allied soldiers in a surprise attack on Russia.  Fewer than 20% of those 3.8 million soldiers ever returned home.  

Once again, the Russians relied on General Winter.  They slowly gave ground and drew the inadequately-clothed German army further into the country.  The Germans drove to within sight of the suburbs of Moscow, before the incredible cold of the country froze them in place.  The Germans couldn't even start their tanks without lighting a fire underneath them.  The temperatures reached a minus forty-nine degrees.

Suddenly, On December 5th, 1941, the Russians counterattacked.  The surprise was complete, and many German units were overrun.  The Germans eventually recovered and returned to the offensive, but long supply lines and the bitter Russian winters were simply too much.  In May of 1945, Berlin surrendered.  General Winter was 2-0.

With residential mortgage banking getting slaughtered,
don't you wish you had servicing income?  It's easy.

The Point of This Section:

In light of the brutal Russian winters, the vast distances of the Russian steppe, and the disastrous French and German invasions of Russia -

WHO IN THEIR RIGHT MIND
IS EVER GOING TO INVADE RUSSIA???

It is therefore time to call bullshit on Vladimir Putin and his alleged worry of being encircled and invaded by NATO.  This guy is simply a mass murderer bent on glory and conquest.

How does calling bullshit on Putin help?  It helps to spotlight China's increasing military assistance as pure evil.  Russia doesn't need help.  No one is invading the country, and no one is ever going to invade Russia... except possibly China.  Kinda ironic, huh?

Final Funny:

A woman, employed as a telemarketer, was making phone calls to different households.  A little boy answered and whispered, "Hello." The woman asked if his mother was there. The little boy whispered, "Yes."  The woman asked if she could speak with her.  The little boy whispered, "No, she's busy."

The woman asked if his father was there.  The little boy whispered, "Yes." The woman asked if she could speak with him.  The little boy whispered, "No, he's busy too."  The woman asked if anyone else was there and the little boy whispered, "Yes, the fire department is here." The woman said, "May I speak with one of them?"  The little boy whispered, "No, they're all busy."

The woman asked if anyone else was there, the little boy whispered, "Yes, the police department."  The woman said, "May I speak with one of them?"  The little boy whispered, "No, they're all busy too."  The woman said, "May I ask what they're all doing?"  The little boy whispered, "They're all looking for me."

Joke Du Jour:

I'm at my boss's funeral, kneeling and whispering to the coffin...  "Who's thinking outside the box now, Gary?"

Mortgage Applications:

Holy crap, mortgage applications are at a 28-year low.  How are you residential loan brokers surviving?

Quick Commercial Loan Lesson:

A cap rate is simply the return on his investment that an investor would earn if he bought an investment property for all cash.  For example:  If you bought an industrial building for $1 million all-cash, and the net rental income was $100,000 - then you would be earning a 10% return.  You have bought the building at a 10% cap rate.

With rates on certificates of deposit so high, commercial property values are facing downward pressure.  Why even buy a commercial property when you can earn such  handsome returns on C.D.'s.  On the other hand, inflation is dramatically increasing the replacement cost of any existing commercial building; so sideways we go.

Fun Stuff:

Amazon Prime just released an 8-part mini-series entitled, The Consultant.  OMG.  You will be shocked and mesmerized.  Your brain will explode.  Good stuff, Maynard.

Right now you're starving, while my hard money company
enjoys substantial loan servicing fees every month.

Sideways Stock Market II:

Three weeks ago, I wrote to you suggesting that the stock market may be trading sideways for the next ten years.  For example, if you buy $10,000 worth of stock today, three years later that stock might still be worth only $10,000.

You might also remember the part where I asked myself, “What about the gains in the past two weeks?”  I then replied to myself, “If we come back in a month, we may find ourselves right back where we are today.”   After that recent 700-point rout, we are indeed right back where we started.

So why are we having this big financial tug-a-war?  First all, there are a lot of positive developments going on out there.  We start with my pet economic theory that no news is good news.  When the government is not interfering with and terrorizing small businessmen, those hungry, energetic, and brilliant little engines of economic progress are unleashed.

I guarantee I will double your income... for just $30.

For an example of a government interfering with and terrorizing small businessmen, one only has to look at what President Xi has done in China over the past three years.  Talk about killing the golden goose.  Other than the threat posed by 8,000 new IRS agents, no one is terrorizing small businessmen in America right now.  They are confident enough to hire and expand their businesses.

After all, the Ukrainians are holding back the Russians.  Because their troops are too sick, it looks like the Chinese will miss a critical window to invade Taiwan this April.  (Get ready for my "George is Retarded Zoom Beer Party in May.")  Soon the U.S. will have its own missiles, which will triple the cost to China of any future invasion.  The mullahs in Iran are highly unpopular, although 84% enriched (bomb grade) plutonium was found by inspectors this week in Iran.  And while Little Rocket Man keeps playing with his toys, the world continues to ignore him.

American small businessmen are also unleashing the massive energy they built up during COVID.  “When I finally get back to my business, I’m going to do this, that, and that.”  Go-go-go is the battle cry of small businessmen right now.  “To be rich, all a country must do is to leave its small businessmen alone.”  What a powerful force!

Our Final Invention - No Wonder Why Elon Musk is 
Trying to Get a Handful of Survivors to Mars

Hundreds of nations and companies are developing AI.  Thinking
that ALL of them will get the ethics right is a pipe dream.

Opposing the optimistic and industrious spirit of American small businesses are higher interest rates.  An investor can now buy a risk-free CD that pays around 75% of the inflation rate.  All other investments must compete against those CD’s.

The good news is that any business that needs a loan will find be greeted by his bank with a smile.  U.S. banks are confident, flush with cash, and happy to lend.  This is important:  Any business with a good expansion plan should easily be able to handle a four percent increase in interest rates.

But here’s the deal.  U.S. corporations have over six trillion dollars in debt maturing over the next three years.  That’s a whole lot of debt to refinance, especially with the budget deficit projected to be $1.4 trillion dollars this year and with the Fed conducting quantitative tightening to the tune of another trillion dollars.

I am not saying that our investment bankers will be unable to raise the money; but there is no way that the Treasury will be able to sell all of its Treasury bonds at today’s interest rates.  Our corporate controllers will also have to dramatically increase the yields they are offering to sell their commercial paper (short term bills) and corporate bonds.

Interest costs will soon become the hot new buzz word on the Wall Street business shows.  There is no way that I can see that the stock market rising dramatically in the face of rising interest costs and the competition offered by bonds.  So sideways we go.  

Joke Du Jour:

An actual conversation a friend of mine had this morning with her son:

Her:  "Eat your breakfast."
Him:  "Why?"
Her:  "You want to grow up to be super smart, don't you?"
Him:  "No.  I want to grow up to be like daddy."

Fun Stuff:

My wife and I watched a strange but captivating free movie on Netflix this week, Hold The Dark.  Children are being dragged off by starving wolves.  When a naturalist arrives to hunt down the wolves, really weird and violent events erupt.  The wolves may not be the guilty parties.  Close your blinds and build a fire.  I promise you will shiver.  Wow-zowie, you will never see this "stuff" coming.  [Nothing supernatural]

The Miracle of Fractional Banking:

When the Federal government creates $100 in new money, that $100 quickly increases the U.S. money supply by a whopping $2,000.  That's a 20:1 growth rate.  This is the miracle of fractional banking.

Life is much easier during periods of easy money.  Banks have more money to loan.  Companies have money to expand, increase production, and hire more workers.  Wages often even rise, as expanding companies compete for workers.

Five-hour Practice Course only $29

Here is how most new money is really created:  The government spends more than its revenue.  [Gasp, really?]  It borrows the difference, but that is a subject for another day.  The point is that the government spends money.  Let's say $100.

That $100 ends up deposited in a some bank.  We'll call this bank, Bank A.  Bank A keeps 5% in reserve, per banking regulations, and then it lends out $95 to say, Joe's Barber Shop to add another chair.  Joe pays $95 to Steve's Barber Chair Company for that new barber chair.

Steve eventually deposits that $95 in some different bank, say, Bank B.  Bank B keeps 5% of $95 in reserve and loans out the remaining $90.25.  That $90.25 ends up in Bank C, which keeps 5% in reserve and loans out the remaining $85.74.

The process continues until that original $100 has grown to $2,000.  When the reserve requirement is 5%, the money multiplier or deposit multiplier is twenty.  

What if, in order to cool down bank lending and the rapid growth in the money supply,  the Fed increases the reserve requirement from 5% to 8%? The money multiplier falls to 12.5.

How did we reach this money multiplier of 12.5?  The formula is one divided by the reserve requirement of 8%, expressed as a decimal.  Therefore 1/.08 = 12.5.

Amazing Industrial Story from Iceland:

Iceland???  Yup.  Talk about being in Bum Flowers, Egypt - the middle of nowhere.  Haha!

The Wall Street Journal had a fascinating story this week about a small company in a suburb of Reykjavik, Iceland, that builds machines to process fish.  Until recently, vast loads of fish were frozen and shipped to China to be processed. 

When the pandemic hit, and shipping went to hell, fisheries across the world were in a world of hurt.  Suddenly this tiny company in Iceland starts selling a large number of amazing machines for the fisheries to process the fish right on site.

This manufacturing plant in Iceland must be huge, right?  Nope.  This tiny manufacturing company merely has seven 3D printers that print metal parts.  

You can print metal parts?  Yup.  In a process called additive manufacturing, the machines spray metal dust in layers into the molds.  The metal dust is then treated with intense light.  This changes its composition to a hardened metal in a perfect shape.

This fish processing machine manufacturer is running its 3D printers 24-hours per day, seven days per week.  

Three-D printing is the future of manufacturing.  No longer do parts need to be manufactured in China.  Instead, companies possessing a LiquidMetal machine only need the design and specifications of any desired part.  Then they can simply make any parts needed right on site. 

GM and other auto companies are now winding down their huge inventories of auto parts for older vehicles.  Instead, when needed, the auto makers can simply manufacture any older parts needed.  Wow.

Joke Du Jour:

Q:  What steps would you take if a madman came rushing at you with a knife?
A:  Great big ones! 

Fun Stuff:

Looking around for a free movie, I stumbled across the 2016 movie, The Legend of Tarzan, on Peacock.  I loved it. 

The movie has an adult theme - diamonds and slavery.  Set in the Belgium Congo in 1889, the movie is gritty and meant to be believed.  It succeeded marvelously.  It stars Christoph Waltz (Django Unchained) as the bad guy and a young Margot Robbie as Tarzan's courageous wife.  [Sigh of love]  Do you remember how we were all captivated by Catherine Zeta-Jones in the original Zorro?  Same thing.

Our Bright Economic Future:

Don't get confused.  This stock market is still overvalued, especially with the Fed having raised rates back to historic norms.  The stock market will still likely bleed slowly downwards.  That being said...

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All of the experts are predicting that the United States will suffer a recession in 2023.  I think the experts are wrong for the reasons I outlined in an earlier blog article.

In fact, I predict that the U.S. have a banner year for GDP growth in 2023, enjoying growth as high as 4%.  We will leave China in the dust.  

Basically, there have been no massive malinvestments - boneheaded investments that blow up, go almost to zero, and thereby impoverish the people.  Examples of malinvestments include tulips, the South Sea joint-stock Bubble, money backed by land in Louisiana (Mississippi Bubble), vacant office buildings, dot-com stocks, and subprime mortgages.

What about crypto?   “Only" about $919 billion was invested in cryptocurrencies, and most of that was by the uber-wealthy.  I don’t think cryptocurrency losses will be enough to send the U.S. into a recession.

In the meantime, most U.S. corporations are lean, mean, and profitable.  Supply chain problems are now either solved or are close to being solved.  China is also coming back on line, further clearing the parts, products, and shipping logjams.

Unemployment is next to nothing, and fresh, hungry labor is sneaking daily across the border.  I think our economic future is so bright that we gotta wear shades.

China may never catch up to the U.S. in terms of GDP.   China has just not reached the level of political maturity necessary to avoid a social implosion.  As Iran is currently learning, a dictator cannot hold down his people forever.

China’s impressive GDP growth has in recent years been driven by massive debt.  One China expert described described its economy as a train with a burning caboose.  The moment the train slows, the fire will jump to the second to the last car and then the third.  Only by rushing forward (creating new debt) can the train escape destruction.

Do you remember those massive GDP numbers that came out of China for the past two decades?  In recent years, it’s been all smoke and mirrors.  There are now 63 million newly-built and vacant homes in China.  You can’t build buggy whip factories in the middle of the desert and legitimately count them towards your country's GDP.

Most of those vacant homes will never be occupied because China’s population went negative several years ago.  The government can fudge the birth numbers, but they have inadvertently been releasing honest statistics as to the number of diapers sold.  Busted.  Haha!  Those 63 million vacant homes counted towards GDP in prior years.   

There is an even more important reason why I am optimistic about 2023.  Lockheed just finished its last test of our new hypersonic missiles.  The missile tests were a resounding success.  The United States is now rushing to mass produce them.  By April of 2024, Taiwan, Japan, and the U.S. will be bristling with missiles.

These missiles will be able to pluck Chinese landing craft right out of the sea.  Poof.  China will not be able to invade Taiwan and start a conventional world war in 2024 or later.

What about this April, before the U.S. takes delivery of any newly-constructed intermediate-range missiles?  That’s the window that scares me silly.

Well, right now everyone in China is (intentionally?) sick with COVID.  Will China’s army and navy be healthy enough to attack in April?  I am praying that too many of China's fighting men will be too sick to invade during this final window.  April is the only month when the South China Sea is calm enough for landing craft.  We just have to get through to May.

If May arrives, and the invasion window closes, I am going to host a giant Zoom Beer Drinking Party.  The theme will be, “George is Retarded.”  Note to the Political Correctness Police:  You are allowed to use the word "retarded" when you are talking about yourself.

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Me after Christmas:

Everyone has to show up to the George is Retarded Zoom Party with a beer (or wine or whiskey).  Bring along a good joke, if you have one.  

I had one such Zoom beer drinking party about two years ago, and it was a blast.  We had about sixty friends, and before I got totally wasted, I shared 30 solid practice tips.  Tons of fun.  Look for an invitation… or an incoming missile.  Haha!  

I still would not be a buyer of real estate in Hawaii or Guam right now.  Most people get over COVID in two or three weeks.  It troubles me that the national news agency in China, at least in one province, was telling people that it's okay to go to work if you are sick.  What's the big hurry to get everyone sick (and over it), President Xi?

Joke Du Jour:

A henpecked man got tired of his wife constantly picking on him, so he started playing poker on Friday nights with his buddies, just to get some relief.  As soon as he came home, she'd start right in on him again.

After several weeks went by, he came home early one Friday night about 9:30. His wife asked him how come he was home so early.  He told her, "You need to pack your bags and go to Herb's house.  I lost you to him in the card game tonight."

His wife was furious and started to give him hell.  She screamed, "Just how could you do such a thing!?"  He replied, "It was the hardest thing I've ever done.  I had to fold with four aces and a king."

Fun Stuff:

Sylvester Stallone is 75-years-old.  How could the the Paramount+ show, Tulsa King be any good?  First of all, it's produced by Taylor Sheridan, the same guy who produces the smash hits, Yellowstone ("Don't make me go Beth Dutton on you"), 1883, and now 1923.  Secondly, Sylvester Stallone still has the "it-factor".  The show enjoys a rating of 4.8 on the Rotten Tomatoes scale.  Watch it!

Is It a Good Thing That Everyone in China is Sick?

I wrote a blog article last week that posed the question, "Can China invade Taiwan if everyone is sick?"  Suddenly I was hopeful.  Maybe April would come and go without the start of World War III (a conventional war) and without the U.S. losing most of its Pacific Fleet.

Then I read an article about how President Xi's grip on his dictatorship may not be rock solid.  Lots of things have gone wrong there.

We just dropped the price from $200 to just $30.

China's best, brightest, and richest are fleeing the country.  Their property market has collapsed, taking a big chunk of the life's savings of the Chinese people.  Local governments are bust because they cannot find buyers for their state-owned land, which is how they fund local government.  

The country is mired in debt.  This summer, electricity was being rationed (Elon Musk wonders why his electric car sales are down in China?), and blackouts were common.  There is a four-day waiting list to cremate the elderly, who are drooping in droves due to COVID.  And this is after being locked up in their apartments for two years.

The situation is volatile.  The thing to watch out for is riots in China, protesting the rule of Xi and the Chinese Communist Party.

I don't know.  Desert island.  Ginger?  Marianne?  :-)

When people protest in China, they have now taken to holding up blank white signs.  This way they cannot be imprisoned for speaking out against the government.  Everyone in China knows what they are really saying.  "Xi, Get the F-Out." 

President Xi doesn't want to die.  It's interesting to note that after graduating from Harvard, Xi's daughter is staying in the U.S.  Hmmm.

If the protests get bad, rather than being deposed and shot, Xi will likely try to unite the Chinese people by starting a war with the U.S.  We would lose such a war badly.  So watch for signs of riots in China and a military buildup on its Eastern coast.  It means the Chinese are coming.

Bahahaha!

If you see these warning signs, sell-sell-sell your stocks and buy as many gold coins as you can get your hands on.  There is a huge difference between holding gold positions (gold mining stocks, gold bullion funds, gold mutual funds, gold futures contracts, etc.) and actual gold coins.  The former will be worthless when authorities shut down the exchanges and reverse all gold trades.  

But actual gold coins in your grubby, little hands?  They should skyrocket as the U.S. dollar plummets.  If you bought $100,000 in actual gold coins, you might be able to pay off your $400,000 mortgage.  Prices could go, "To the moon, Alice!"  

So you should actually be watching for three things - riots in China, signs of a military buildup on China's coast, and a sharp increase in the price of gold.  I check the price of gold every day.

Final Funny:

There was once a handyman, who had a dog named Mace.  Mace was a great dog, except he had one weird habit.  He liked to eat grass -- not just a little bit, but in quantities that would make a lawnmower blush.

Nothing, it seemed, could cure him of it.  One day, the handyman lost his wrench in the tall grass while he was working outside.  He looked and looked, but it was nowhere to be found. 

As it was getting dark, he gave up for the night and decided to look the next morning. When he awoke, he went outside and saw that his dog had eaten all the grass in the area around where he had been working.  His wrench now lay in plain sight, glinting in the sun.

Reaching down to pick up his wrench, our grateful handyman, with love in his heart, sang,

"A grazing Mace, how sweet the hound,
that saved a wrench for me."

Booooo!  Hiss!  That one was terrible.  Hahahaha!

Won't you please share this with your broker or investor buddy?

This was today, honest!  :-)

I post about three times a month.  Lots of fun,
irreverent stuff, market insights, and training tips.

Joke Du Jour:

At a naval barracks the enlisted men were being given their shots prior to going overseas.  One lad, having received his whole series of injections, asked for a glass of water.  "What's the matter?" asked the hospital corpsman. "Do you feel light-headed?"  "No, just checking to see if I'm still watertight."

Fun Stuff:

One of the best shows on TV these days is surprisingly, Wednesday, on Netflix.  Give it just three minutes, and you'll be hooked like a junkie in a seedy alley.  The premise sounds stupid, but you'll soon be pinching yourself and saying, "This is a really clever show."  Wednesday was the short, very dark, daughter in the original, Adams Family, who would torture her little brother, Pugsley.  

Could COVID Save Us From an April Invasion?

How can China invade Taiwan and start a conventional world war if everyone is sick?  

As you know, I greatly fear that China will invade Taiwan and start a conventional World War III this April, less than four months from now.  Such attacks happen in real life life to real people.  My father was an artillery captain in charge of the shore batteries on the island of Oahu (Pear Harbor) in 1941.  He had no ammunition for his French 75's.

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Why this April?  April is the only time when the South China Seas are calm enough for landing craft.  

Why this particular April?  Right now the U.S. has very few intermediate range missiles and zero hypersonic missiles.  We were banned from producing them by the INF Treaty with Russia for twenty years.  President Trump finally abrogated that treaty in 2019, but by them the U.S. was very much in a hole.

April is an ideal time for China to strike because currently they can hit us from such a long distances that we cannot hit them back.  They will win if they come in April.

Two days ago, however, Lockheed released some very significant military news.   Lockheed just conducted the last of its important tests of our own hypersonic missiles.

The missile was released from a bomber, and this time the release mechanism actually worked.  The missile flew at five times the speed of sound.  It zigged and zagged like an angry garden hose, and then our test missile hit the target right in the bullseye.  In every category, the U.S. hypersonic missile test was a success!  Hooray.

That's the good news.  The bad news is that we don't have any of these wonderful new missiles.  Now that the tests are complete, we have to start to mass-produce them; but there is no way that they will be ready by this April.  

The Chinese will win the war if they invade this April.   A recent war game revealed that we would lose two carriers and 30,000 highly-trained young sailors in the first 30 days of the war.  "We get our butts kicked," said one admiral.

I am listening to a 31-episode podcast entitled, The Fall of Rome.  Want to know the real reason why Rome fell?  Roman generals kept declaring themselves Emperor.  Civil war after civil war killed off too many of Rome's best officers and centurions.  By the time the Visigoths and the Vandals marched on Rome, there were too few trained Roman soldiers alive to stop them.

We cannot lose these 30,000 highly-trained sailors!  President Biden, please pull our fleets back behind Hawaii.  Without missiles of our own that can fly 1,300 miles, our ships are simply sitting ducks.  When Lockheed has manufactured and deployed 2,000 of our own intermediate range hypersonic missiles, then our fleet can return to retake Taiwan, Guan, and Okinawa.

But something has happened recently in China.  The Chinese people got fed up with being cooped up in their apartments. They protested and won their own release.  Now they are out and about, and so is COVID.  

Experts expect 800 million cases of COVID, but most of them will be relatively mild.  Deaths of between 500,000 and one million are expected; a rate not nearly as bad as that suffered in the West.  The bad news for China is that their vaccines are only about half as effective as those produced in the West.  The good news is that when the authorities tell the people to get vaccinated, they get vaccinated.

Okay, so how does all of this affect the likelihood of a Chinese invasion this April?  First of all, now that the U.S. finally knows how to produce hypersonic missiles, you can bet that the invasion will not come in April of 2024 or after.  

Our new hypersonic missiles will be so accurate that those Chinese landing craft will be plucked one-by-one out the water.  "Fly to these coordinates, find the nearest ship, zig when it zigs, zag when it zags, fly down it's smokestack, and then explode."  

Clearly an invasion in April of 2024 is therefore out of the question.  This successful American missile test definitely makes April of 2023 President Xi's only window to invade.  If the Chinese are ever coming, it must be this April.  I definitely do not recommend a vacation to Guam this coming March.

But how can the Chinese invade if half of their soldiers are down with COVID?  Remember, modern COVID vaccines are lousy at preventing sickness; but they are very good at preventing hospitalization and death.  COVID could end up saving the world from a billion combat deaths if the Chinese cannot launch their invasion this April.

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But there is another problem.  Remember the line from above, "The Chinese people protested and won their release."  They learned the power of their own numbers.  That is not good news for President Xi and the Chinese Communist Party.

Xi has essentially destroyed the Chinese economic miracle.  No longer are international factories being set up in China.  New factories now go to Vietnam, Thailand, Malaysia, or Bangladesh.  Apple is moving all new computer assembly to India.  Instead of "off-shoring", manufacturing companies now talk of "friend-shoring" (moving to Vietnam); near-shoring (moving to Mexico); or re-shoring (moving back to the states).

It was once believed that it was only a matter of time before China's GDP surpassed that of the U.S.  The Chinese people put up with the CCP because they guaranteed a 6% to 8% annual increase in the level of China's wealth.  Today, China's real GDP growth - factoring out the construction of even more vacant homes - may actually be negative.  

The quality of life in China is no longer improving.  Is it time for a new lifetime leader?  My fear is that new riots will arise between now and April.  President Xi, in a desperate attempt to preserve his own life, may attempt to unify his people by picking a war with the U.S.  The invasion of Taiwan would likely ignite World War III, a conventional war but still a very devastating one.

So please pray with me that we see no riots in China this winter.  Maybe sickness and the winter's cold will keep the Chinese people indoors.  We just have to survive until mid-May, when this last invasion window will be closed.

Joke Du Jour:

She:  "Honey, I don't like you with the new glasses on."
He:  "But sweetheart, I don't wear any glasses."
She:  "True, but I do."  Ouch!

Commercial Loan Tip:

The lenders who make commercial real estate loans, in the order of the best rates to the worst rates, are (1) Life companies; (2) Conduits; (3) commercial banks; (4) savings banks (former S&L's); (5) Credit Unions; [Big gap] (6) Wall Street subprime lenders (ABS lenders - now largely kaput); and (7) Hard money lenders.

Fun Stuff:

My wife and I just finished watching the Amazon Prime limited TV series, The English,  starring Emily Blunt (John Krasinski's better half - The Office, Jack Ryan).   OMG, it was fantastic and very surprising.  The six-episode mini-series ended last night, and I keep thinking about it.  It covers a subject area never before covered on TV.  I recommend it highly.

Where on Earth is Ephesis?

My 43-year-old hard money shop, Blackburne & Sons, (the nation's oldest), is based in Sacramento, California; but my bride and I live in Indianapolis, Indiana.  Indiana?  Why so far away from my office?

Cisca and I moved to Indiana 23 years to send our three wonderful children to Culver Military Academy.  Best high school in America.  No question.  Phenomenally expensive.  Each of my three kids got a large scholarship.  God bless you, Culver!

My son, Tom, roomed with the son of the Governor of a state in Mexico, who arrived in a helicopter and was protected by two guards with submachine guns.  Why was this governor worth $100 million when his state salary was just $60,000?  Hmmm.  Tom even  played baseball with the the grandson of George Steinbrenner, the owner of the Yankees.

Anyway, during the Spring Break of their junior year, it is customary for Culver students to take an international service trip.  I always accompanied my kids.

I climbed the Great Wall of China with George IV.  It was steep!  Yikes.  George IV hilariously grossed out his friends by plucking out and eating a fisheye with his chopsticks.  Eeuuu.  Funny.

I spent the best day of my entire life with my son, Tom, in Sydney, Australia.  Beautiful, spotless city.  Hired a limo, saw the famous Sydney Opera House, took the harbor cruise (best weather of the year), and saw where each of the famous pirates were hung.  Finally we headed for Bondai Beach.  

I learned afterwards that there are more shark attacks on Bondai Beach than any other beach in the world.  Did I pucker?  Never had another kid.  Just sayin'.  Haha!

We rented a surfing coach, boards, and sand shirts.  Then we discovered that Bondai Beach was topless!  A study revealed that British girls are the most amply endowed women in the world, and there must have been 1,000 Aussie beauties on that beach.  Like I said, "Best day of my life."  [Chuckle.]

On to Greece:

My daughter chose to go to Greece for her Spring international trip.  We climbed the Acropolis to see the Parthenon, that famous Greek temple.  We ate at the Plaka, the famous open-air market at the foot of the Acropolis in Athens, and we shared our dinner with a dozen sweet, irresistible cats - the little beggars.  Haha!  

We saw the battleground of Thermopylae (300 Spartans) and the Isthmus of Corinth, that thin strip of land that joins the huge, lower "island" of Greece (called the Peloponnese) with the larger northern mainland.

Then we took a ferry over to the West coast of Turkey to see the famous ruins of Ephesis.

Ephesis:

You recognize the name, Ephesis, because St. Paul wrote a letter to the Ephesians that became the tenth book of the New Testament.  In the year 60 A.D., Ephesis had a population of 250,000, making it the second largest city in the entire Roman world.

Then one day - in an instant - the entire city was gone.  Poof!

Ephesis was a huge port on the Western coast of Turkey, founded by and populated by Greeks, on the Aegean Sea, just to the East of Greece.  It is 370 miles South of Troy, also on the Western coast of Turkey - the city to where Helen fled and was pursued by 1,000 ships.  Greeks killing Greeks.

And then one day Ephesis was gone.  In 614 A.D., a mighty earthquake liquified the surrounding foothills and instantly buried the entire city in mud, killing the entire population.  Poof.

Archaeologists have excavated the entire site, revealing a largely intact Roman city.  Jordi and I were able to walk down marble streets, with small Roman temples on each side.  

We sat in and walked through its coliseum, including walking through the same tunnel where doomed gladiators once strode.  Erie.  Cool.  Hand me my gladius and my shield.  We who are about to die salute you!

Will China invade Taiwan this April?

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