Commercial Loans and Fun Blog

Vladimir Putin has been badly wounded.  Yes, the President of Belarus allegedly negotiated a settlement between the Wagner Group and Putin, whereby Yevgeny Prigozhin will flee to the safety of Belarus, while the troops of the Wagner Group will return to the front lines in Ukraine.

Putin is going to let Prigozhin live?  Stalin and Beria (Stalin's torturer and exterminator) are rolling over in their graves.  "You don't let mutineers survive!  You torture them and then kill them.  Bada-bing-bada-boom."

Clearly, Putin lacked the military support of his generals to win a shooting battle with Prigozhin.  In a lightening move, armored units of the Wagner Group seized Rostov-on-Don, a regional military headquarters.

Just 100 kilometers (60 miles) from the Ukrainian border, Rostov-on-Don is the largest city in southern Russia. With a population of over 1 million, it is the capital of the Rostov region that adjoins parts of eastern Ukraine.

Where was the resistance?  The local police ran.  The Wagner Group did shoot down a Russian airborne command craft (like an AWACS) and six helicopters; but where was the rest of the local Russian Army?  Where were the Russian jets that could have strafed the long column of Wagner Group armored vehicles?  They chose not to get involved.  

The people of Rostov-on-Don cheered and gave the Wagner troops water and candy.  I saw a pretty Russian girl in Rostov posing for a picture in front of a Russian tank captured by the Wagner Group.  The Russian people clearly don't hate Prigozhin.   

And the Russian Prime Minister and the Mayor of Moscow were absolutely silent throughout the crisis.  They rallied no support for Putin at all.

But even worse than the military move towards Moscow, Prigozhin told the Russian people, in an interview broadcast by a pro-Kremlin blogger, that the war against Ukraine was unjust.  That blogger was immediately fired, and he might find getting life insurance a little difficult.

But the Russian people ate up that interview.  They had long-suspected that the war was based on lies.  If Putin had trouble with recruiting and the draft before the interview...

Let's summarize:  A Russian warlord dared to march on the Kremlin.  Putin was forced - because he didn't have enough military support - to let the warlord flee with his life.  Some (soon-to-be-dead) blogger had the stones to broadcast the interview.  The Russian people now know that they have been the recipients of lies about the war in Ukraine.  The Wagner Group, Putin's best force, has left the front lines in Ukraine and may never return.  

The Russian military simply sat back and watched the potential civil war play out.  The people of Rostov-on-Don (and Moscow?) may be rooting for Prigozhin and the Wagner Group.  

Ready for the big irony?  In this battle of warlords, Putin arguably is the good guy!  Okay, that was too much.  Putin is a lying, evil bastard who murders lots of people.  But Prigozhin is even worse!  His troops have committed horrible atrocities in Ukraine, Mali, and central Africa.  We do NOT want Prigozhin to win.

One American television general pointed out that the Russians store a whole bunch of tactical nuclear weapons at Rostov-on-Don.  So the Wagner Group rushes to the city, stays a few days, and then voluntarily withdraws?  I'm sure they just ignored those nuclear artillery shells and those tactical nuclear missiles.  

Why do we want Putin to win?  For one thing, if those warlords get into a civil war, the chances are much too high that someone will use nukes.  Ramzan Kadyrov, the crazy leader of Chechnya, has offered to use his Muslim fighters to put down Prigozhim and the Wagner Group.

And then there is the bitter blood-feud between Prigozhin and Russia's military chiefs, including Defence Minister Sergei Shoigu.  Prigozhin claims that Shoigu ordered a missile attack on Wagner Group's field headquarters, killing as many as 2,000 Wagner soldiers.

If Putin flees, there is no backup plan for Russia.  The warlords, generals, and oligarchs will battle for control.  Tactical nukes can be found in several depots around the country, and these crazy dictator-wannabes are crazy enough to use them on their enemies.  Once the use of tactical nuclear weapons becomes "accepted practice," how long before some Russian "patriot" uses them against Ukraine?

I read this morning that the real reason why Prigozhin turned back from Moscow might have been that Putin threatened to kill his wife and three children, who are now living a low profile life in the EU.  Heaven knows that Putin is good at assassinations.

“When you play the game of thrones, you win or you die. There is no middle ground.” -- Cersei Lannister, Game of Thrones.  

Enough for today.  But make no mistake.  Putin's blood is in the water, and what comes after Putin may be very, very ugly.  Just think about what happened in Iraq after Saddam Hussein was killed

Joke Du Jour:

Two policemen call the station on their radio.  "Hello, is this the Sarge?  Yes?  We have a case here, Sarge.  A woman has shot her husband dead for stepping on the floor she had just mopped."  "Have you arrested the woman?"  "No, sir.  The floor is still wet."

Commercial Financing Lesson:

Did you know there was a time when money for commercial real estate lending was amazingly tight?  For the past 30 years, we have lived in a world where banks have had tons of money with which to make commercial real estate loans.

Now to truly understand the significance of what I am about to share, it is important that you understand that there are, as of September 8, 2021, 4,951 FDIC insured commercial banks and savings institutions in the U.S.  That includes Federal savings banks, which are the last of the survivors form the S&L Crisis in 1980.

Most banks today will still gladly make commercial real estate loans, even despite the banking crisis that has the potential to chip away their capital.  You will recall that U.S. banks are saddled with low-yielding, long-term Treasury investments, while the interest rate they have to pay on deposits keeps climbing.  They are upside down - big time.

Did you know that over 500 banks have already used the Fed's new bailout fund, pledging their low-yielding Treasuries against 100% LTV loans?  According to the Fed, "The Bank Term Funding Program (BTFP) was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors."

Hahahaha!  What a bunch of malarkey.  This bailout fund was not created to help consumers and small business owners.  The banks were in trouble, so once again we bailed them out.

Nevertheless, most commercial banks are still making commercial loans right now.  The problem is that bank regulators require banks to have extra capital before they can make commercial real estate loans.  With the banks upside down on all of these Treasury investments, that extra capital is getting chiseled away.

What happens when most banks lack the capital to make commercial loans?

Back in 1981, when the prime rate was 21.5%, there were fewer than 500 commercial real estate lenders nationwide.  That included life companies, who seldom make loans to non-financial-gods, credit companies, banks, S&L's, and private lenders.  Just 500!  It was often harder than hell to refinance a balloon payment when money was this tight and when interest rates were this high.

In 1980, my best investor client had a balloon payment coming due on a gorgeous commercial building near UC Berkeley, a very prime area.  Unfortunately, the city had commercial rent control.  Even the though the building was worth $3 million, it would only cash flow a loan of $500,000.  My client’s balloon payment was $900,000.  

No bank in town would touch the deal; even though my client was a Stanford professor, and his wife was a physician. They enjoyed a huge combined salary.  

I eventually placed the loan with Aetna Finance, a credit company.  Credit companies no longer exist, but they would borrow directly from the credit markets and then re-lend the money out at big spreads.

My fabulous clients had to pay 22% interest, even though their credit score was 850.  Confession:  FICO scores would not be invented for 20 more years; but you get the point.

Could insane interest rates like this ever happen again?  Yes.  In 2023, the U.S. will pay $663 billion in interest alone on our national debt.  Our entire military budget is only $766 billion.  Folks, we are in deep doo-doo.

If you want to compete against the U.S. government to borrow money today and in the future, the cost is only going to go up.

Beer Party:

About six months ago, I boldly predicted that China would invade Taiwan this past April because of the gentler tides in the South China Sea.  If I was wrong, I promised to hold another Zoom Beer Party where you guys could roast me.  Hahahaha!

My last Zoom Beer Party was about two years ago, and we had a blast.  We had about 28 or so guys and ladies.

Not creepy at all...

My "George is Retarded" Party will therefore be held this Wednesday night, May 24th, at 7:00 E.T.  You can access this party here:  George is Retarded Beer Party

The meeting ID number is:  538 406 8858
The security code is:  8ktUmf

The "cost of admission" is that you have to hold up to the group a beer, a glass of wine, or a mixed drink.  "Nobody leaves here without singing the blues."  That was a line from a hilarious scene in the old movie, Adventures in Babysitting, where gangsters chased the lovely babysitter (Elizabeth Shue) into a blues club.  It was a scary place, and they wouldn't let her leave with her kids until she sang a blues song.  So nobody leaves here without singing the blues.  Haha!

The party will last 40 minutes.

What We'll Cover:

China's economy.  The increasing cost of the old single child policy and China's aging grandparents.  One couple caring for four parents, plus their kid.  The young Chinese who are "lying flat."  The lack of savings among young people and the recent Chinese Twitter post.  

The slowing Chinese economy and its dangers.  Maybe the slowing economy will discourage Xi from attacking; but if the economy get really bad, Xi will likely try to unite the Chinese people with an attack on Taiwan.

Xi has promised an invasion in 2027.  Even Donald Trump brought up World War III this month.  You can love him or hate him, but Trump has "put the issue in play."

What I got wrong with my April prediction:  The need to win in space first.

China's new weapons:  Anti-satellite lasers, China's new space plane and its robotic arm, what China just dropped off in space (???), and its new hypersonic stealth drone and its ability to pinpoint the coordinates of our carriers.

The recent surprising success of the Patriot Missile System against incoming hypersonic missiles.  Not all of the news is bad for the U.S.

Time to buy defense stocks?

Elon Musk, his new toilet, and his bodyguards.  The Chinese and Russian assassination target number one?

We'll Also Cover Some Commercial Loan Business:

Remember, I have been through a tight money market before.  That's why I have yellow sticky notes all over my office, "Money Will Be Very Tight."  

This banking crisis is far from over, and money is going to get very tight.  The Federal Reserve is on track to suck $2 trillion more out of the money supply over the next 24 months.

What happens to the commercial loan business when banks are turning down 85% of all commercial loan requests and loan-to-value ratios on commercial loans fall to just 48%?  Remember, I've been through this before.

We'll discuss "bowties", an old-time type of commercial loan where the payments are MUCH less than interest-only.

We will discuss the rise of commercial hard money and a possible flood of foreclosures.

How does a commercial mortgage broker or a commercial real estate investor survive in such a market?

The United States is also slowly re-arming, which will cost ten of trillions of dollars.  What happens to the economy when all other credit is crowded out?  

Where do you invest?  How do you pay off balloon payments on commercial properties?  What happened between 1980 and 1982?  We'll discuss.

Then I'll open it up for questions.

And Finally We'll Just Have Fun:

I'll tell a few jokes to lighten the mood, and then I'll share some fun stuff (baseball, etc.).

Then its your time to share some jokes, some stories, some predictions, and some observations.  

I think the 40 minutes will go quickly.  My last Zoom meeting ran on for 90 minutes, and all but four or five attendees stayed until the very end.  Everyone was clearly having fun.  But this time I only have forty minutes of Zoom time, so things cannot run over.

Please join us!  My "George is Retarded" Zoom Beer Party will be held this Wednesday night, May 24th, at 7:00 E.T.  You can access this party here:  George is Retarded Beer Party.

The meeting ID number is:  538 406 8858
The security code is:  8ktUmf

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.

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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.

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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.

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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!

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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.

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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?