Commercial Loans and Fun Blog

In my last post about mini-perms, we learned that a permanent loan is a first mortgage, secured by a multi-family or commercial property, with a term of at least five years and at least some amortization.  A permanent loan cannot just have interest-only payments for the entire term.  There must be some principal pay-down during the loan, usually using a 25-year amortization

Permanent loans are made by - starting with the commercial real estate lenders with the lowest interest rates - life companies, conduits, commercial banks, savings banks, credit unions, ABS lenders, and finally hard money lenders.

You are reminded that a commercial bank, as opposed to an investment bank or a merchant bank, is that garden-variety institution on every street corner that accepts guaranteed deposits and makes loans.  A commercial bank has a big steel vault and maintains large amounts of cash on hand.

A big steel vault - please remember that.  I offer a free training course to any mortgage broker who introduces me to a commercial real estate loan officer working for a bank.  Guys, just please remember that this loan officer must work in an office with a great big, honking, shimmering, shinning, steel vault; otherwise, he is not a banker.  It's easy to to find these bona fide bankers to trade for my wonderful courses.

An investment banker is a stock broker on steroids, like a Merrill Lynch or a Morgan Stanley.  Investment bankers help companies to go public, and they also deal in securities.

Merchant bankers make actual equity investments in companies, as opposed to making loans to them.  You will recall that equity investments have no required interest payments.  Equity investors merely share in the profits, if any.  In real life, I have never met a true merchant banker.  If someone ever comes up to you at a trade show and calls him a merchant banker, be on alert.  He is almost certainly either a blowhard or a fraud.

So now that we understand permanent loans, we can now tackle takeout loans.  A takeout loan is just a permanent loan that pays off a construction loan.

Example:

David Developer builds an office building using an uncovered construction loan from Nearby Bank.  (I'll blog on uncovered construction loans this month.)   Upon completion, and after the building has reached 90% occupancy, David applies to Money Center Bank for a permanent loan to pay off his ballooning 12-month construction loan.  The permanent loan to pay off Nearby Bank's construction loan is therefore a takeout loan.

Please note that while all takeout loans are permanent loans, not all permanent loans are takeout loans.  For example, suppose ten years from now, David Developer has to refinance his ballooning takeout loan from Money Center Bank.  That new permanent loan from Mid-Market Bank would not be a takeout loan.

Clever, Clean Funny:

A first-grade teacher, Ms. Brooks, was having trouble with one of her more precocious students.  The teacher asked, "Harry, what exactly is your problem?"

Harry answered, "I'm too smart for the first grade.  My sister is in the third grade, and I'm much smarter than she is.  I think I should be in the third grade too."  Ms. Brooks finally had enough.  She took Harry to the principal's office.

While Harry waited in the outer office, the teacher explained the situation to the principal.  The principal told Ms. Brooks that he would give the boy a test.  If he failed to answer any of his questions, he was to go back to the first grade and behave.  She agreed.

Harry was brought in and the conditions were explained to him.  He happily agreed to take the test.  Principal:  "What is 3 x 3?"  Harry:  "9."  Principal:  "What is 6 x 6?"  Harry:  "36."  And so it went with every question the principal thought a bright third-grader should know.  The principal finally looks at Ms. Brooks and tells her, "You know, I reckon Harry can go to the 3rd grade."

But Ms. Brooks is still skeptical of the little bugger and says to the principal, "Not so fast.  Let me ask him a few questions."  The principal and Harry both agree.

Ms. Brooks asks, "What does a cow have four of that I have only two of?"  Harry, after a moment:  "Legs."  Ms Brooks:  "What is in your pants that you have, but I do not have?"  The principal wondered why would she ask such a question.  "Pockets," replied Harry, to the Principal’s great relief.

Ms. Brooks:  "What does a dog do that a man steps into?  Harry:  "Pants."  By now, the principal is sitting forward with his mouth hanging open.  Ms. Brooks:  "What does a man do standing up, a woman does sitting down, and a dog does on three legs?"  Harry:  "Shake hands."  (Dang, this kid is smart!)

The principal is now trembling with apprehension as Ms. Brooks asks the last question.  Ms Brooks:  "What word starts with an 'F' and ends in 'K' and indicates a great deal of heat and excitement?"  Harry:  "Firetruck."

The principal breaths a huge sigh of relief and tells the teacher, "Put him in fifth grade.  I got the last five questions wrong myself."  Hahahaha!

Personal Note:

The entire Hunger Games series is now available for free on IMDB.  May the odds ever be in your favor.

If you found this lesson to be helpful, would you please-please-please share it on Linked In, Twitter, or Facebook?  It is when you share my posts that I meet more subscribers for my blog.  Thanks!"

"A company in the U.K. is making news for developing a new vegetable called a Brussel-Kale, which is a hybrid of Brussels sprouts and kale.  They said, 'We got the idea from a child's nightmare.'"  -- Jimmy Fallon

In a recent tombstone, George Smith Partners, in their wonderful, free newsletter, FinFacts, wrote:

"George Smith Partners secured a $4,690,000 construction loan with a 2-year term, that converts to a 5-year permanent loan upon completion of construction, for a total term of 7 years.  The loan is for a medical office building in Oxnard, CA."

"The construction loan floats at Prime plus .5%, with a floor rate of 3.75%, and the mini-perm is expected to have a fixed interest rate of 3.65%. The mini-perm carries a step down prepayment, but there is no prepay during the construction term, allowing the borrowers to secure more advantageous capital depending on the capital markets."

You are reminded that a tombstone is a closing announcement describing a commercial real estate loan just closed or arranged by the publisher (lender or broker).  Yes, a broker can create and distribute tombstones!

Tombstones are a fantastic way to market for commercial loans because they show (1) that the commercial lender is "in the market" and actively making commercial loans; and (2) borrowers needing similar loans are drawn to the lender to close their own deals.

For example, if you were looking for a large construction loan on a medical office building right now, you would know to apply to my friends at George Smith Partners.  

The next time I update my commercial mortgage marketing course, I need to remember to add a section on tombstones.  Email tombstones have been fabulously successful for my own commercial hard money shop, Blackburne & Sons. 

Okay, but what is a mini-perm?  To understand a mini-perm, you must first understand a permanent loan.  

A permanent loan is a first mortgage, secured by a multi-family or commercial property, with a term of at least five years and at least some amortization.  A permanent loan cannot just have interest-only payments for the entire term.  There must be some principal pay down, usually using a 25-year amortization.  

It is still possible to have a permanent loan, with the first year or two (no more) having just interest-only payments.  Prior to Great Recession, conduits were making permanent loans with interest-only payments during the first two years.  A few such loans were actually made in 2007 with interest-only payment for the first three years.  

During the Great Recession, commercial real estate fell in value by 45%, and these high-leverage, partially-interest-only conduit loans got absolutely hammered.  As Dr. Phil might say, "How did that work out for you?"  Hahahaha!

I am expecting the Coronavirus Crash at any moment.  It's been 12 years since the Great Recession, and real estate seems to crash every ten to fourteen years.  When it does, it has historically crashed by almost exactly 45%.

Forty-five percent is how much commercial real estate fell during the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.  I have been preparing my private investors to start buying well-located commercial real estate once it has fallen by 35%.  You never catch the absolute bottom.

Okay, now that we know what a permanent loan is, we can now tackle the mini-perm.

A mini-perm is a first mortgage on multifamily or commercial real estate - made by a lender with low, A-quality, interest rates, like a bank, S&L, or credit union - that has a term of less than five years.

Most mini-perms have a term on two years, although terms of one year and three years are also reasonably common.  

In the old days, when interest rates varied, mini-perms were floating rate loans, typically tied to either prime or LIBOR.  Nowadays, commercial lenders are desperate for yield, and interest rates have been falling for more than a decade.  Therefore, many mini-perms are now written with a fixed rate.

Who makes mini-perms today?  Most mini-perms are made by commercial banks and their lookalikes - savings banks (S&L's) and credit unions.

When are mini-perms used?  You see them most often as part of a construction loan. The bank gives the developer a 12-month or 18-month construction loan, followed by a mini-perm takeout loan, made by the same bank, with a two-year term.  This gives the developer two additional years in which to find tenants.

From the bank's point of view, the bank gets to charge one point for the construction loan, plus another one point for the mini-perm forward takeout commitment.  The bank might charge another 1/2 point or 1 point if the mini-perm ever funds.

Bona fide Game of Thrones dragon

A forward takeout commitment is just a very expensive letter that promises to deliver a takeout loan in the future if the property is built according to plans and specifications and leased at the target rental rate.  The typical forward takeout commitment will cost a developer one to two points, plus at least one additional point if the loan ever funds.

Okay, what's the difference between a first mortgage bridge loan and a mini-perm?  The two loan types look very similar to me.  Maybe it's a prestige thing.  Yucky, shark-like hard money lenders and mortgage funds make bridge loans.  Hoity-toity banks make mini-perms.  

But perhaps there really is a difference.  Bridge loans are typically made quickly to borrowers in a little bit of a jam.  In contrast, banks just saunter down to make mini-perms, taking their sweet, 'ole time.

Centerfold in the latest Play Puppy.

Mini-perms are also about 2% to 3% cheaper than even the cheapest bridge loan.  The reason why is that even the largest bridge lenders borrow from bank to get their dough to make their bridge loans, so obviously the bridge lender has to charge a rate higher than the bank, in order to make a profit.

Anyone catch the mistake in the above tombstone from George Smith Partners?  In one paragraph, they call the takeout loan a permanent loan.  In the next paragraph, they call the takeout loan a mini-perm.  The correct term is probably a permanent loan because the loan has a term of five years.

Perhaps the takeout loan only had interest-only payments, making it a mini-perm.  Perhaps the rate is intentionally a little high for a permanent loan, in order to encourage the borrower to seek permanent financing elsewhere.  That would arguably make it a mini-perm too.

On a Personal Note:

I absolutely love the free network  on my Fire TV named IMDB.  The shows and movies are free; but you have to watch commercials.  The good news is that the commercial are very short, and IMDB does not overdo it.

Right now my wife and I are watching the old Western, The Quick and the Dead.  Sharon Stone, back twenty-five years ago, must have been one of the most beautiful women on Earth.  The ladies also get some great eye candy too - Leonardo DiCapprio, when he was just a few years older than when he made Titanic.  

Cisca and I are also watching the TV series, on IMDB, called Unforgettable.  The show stars Poppy Montgomery, as a police detective with a perfect memory.  Poppy really hit the gym before making that show.  Fit-and-toned arms and shoulders on a woman can be very attractive.

John, who lived in the north of England, decided to go golfing in Scotland with his buddy, Shawn.  They loaded up John's minivan and headed north.  After driving for a few hours, they got caught in a terrible blizzard; so they pulled into a nearby farm and asked the attractive lady who answered the door if they could spend the night.

"I realize it's terrible weather out there, and I have this huge house all to myself; but I'm recently widowed," she explained.  "I'm afraid the neighbors will talk if I let you stay in my house."  "Don't worry," John said.  "We'll be happy to sleep in the barn.  If the weather breaks, we'll be gone at first light."  The lady agreed, and the two men found their way to the barn and settled in for the night.
 
Come morning, the weather had cleared, and they got on their way.  They enjoyed  a great weekend of golf; but about nine months later, John got an unexpected  letter from an attorney.  It took him a few minutes to figure it out, but he finally determined that it was from the attorney of that attractive widow he had met on the golf weekend.
 
He dropped in on his friend Shawn and asked, "Shawn, do you remember that good-looking widow from the farm we stayed at on our golf holiday in Scotland about nine months ago?” "Yes, I do," said Shawn.

"Did you, er, happen to get up in the middle of the night, go up to the house and pay her a visit?"  "Well, um, yes!," Shawn said, a little embarrassed about being found out.  "I have to admit that I did." "And did you happen to give her my name, instead of telling her your name?" 
 
Shawn's face turned beet red, and he said, "Yeah, look, I'm sorry, buddy I'm afraid I did.  Why do you ask?"  

"She just died and left me everything."

Just helped my neighbor throw a rolled-up carpet in the dumpster...  Her boyfriend would have helped, but he is out of town.

Short Video - Husband plays gag on wife.

I have been telling you guys for years to subscribe to the FinFacts Newsletter from George Smith Partners.  The forerunner of this wonderful commercial mortgage banking company was ancient before I even started my own ancient commercial mortgage company forty years ago.

You will recall that a mortgage banker is a mortgage company that retains the loan servicing rights.  If you want to be wealthy in the mortgage business, you need to retain the servicing.

"But George, I need cash now."  Live more frugally, man!  Keep your overhead down, so you don't have to sell off your precious loan servicing rights.

Why is loan servicing income so vitally important?  

Every ten to fourteen years real estate suffers a major crash.  It normally crashes by exactly 45.000%.  Those of you who are math or engineering majors will chuckle at my silly insignificant digits, but the truth is that commercial real estate estate fell by almost exactly 45% during the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.

The next crash, almost surely to be known as something like the Coronavirus Crash, is now past due.  It has been twelve years since the 2008 crash.

Want to know why everyone thinks that I am this big brain?  The only reason is because my company didn't crash-and-burn during these three horrible crises.  Why didn't Blackburne & Sons crash-and-burn, like all of our hard money competitors, during these 45% commercial real estate meltdowns?

The answers is that my family lived frugally, and the company focussed, not on making a quick profit, but rather on building long-term loan servicing rights.  When the inevitable real estate crashes occurred, we were able to tighten out belts and live off of our loan servicing fees.  

I sell a course on becoming a hard money broker and developing long-term loan servicing rights.  I am only half-joking when I urge you to mug some nun, if necessary, to buy this super-important course.  Let me be brutally honest.  If you are not working towards building a loan servicing portfolio, get the heck out of of the commercial loan business.  If the Coronavirus Crash doesn't get you, the next one will.

Okay, so what have the super-experienced folks at George Smith Partners taught us this week?  David Pascale, their Senior Vice President, wrote this week:

Spotlight on Hotels:

The hotel sector has been hardest hit by the pandemic.  Recent weeks have seen permanent closures of high-profile hotels such as, The Luxe on Rodeo Drive in Beverly Hills and the “Crossroads of the World” Hilton on Times Square.  Experts indicate that without significant aid from Congress the wave of closures is just beginning.

CMBS has been the preferred loan execution for hotels for many years with $85 billion in outstanding hotel loans.  Statistics from Trepp, the leading CMBS analytics group, indicate unprecedented stress on the sector. 

Loan delinquency are at 23.4%, highest on record (December 2019 it was 1.3%).   The volume of delinquent loans exceeds the highest level reached during the Great Recession by 53%. 

Over 35% of CMBS loans are on servicer “watchlist”, with 24% in special servicing now.  The hardest hit MSA’s are New York/Newark, Houston, Chicago, Dallas, LA, and Atlanta.  All these metros were major convention and business travel hubs.

There are some bright spots in the industry, as many desirable drive-to destinations are experiencing high occupancy.  Travelers are getting comfortable with procedures such as contactless entry, intense cleaning procedures, etc.

It is apparent that a return to “normal” levels of air travel and business meetings will be dependent on the widespread distribution of an effective vaccine.   This is estimated to occur in mid-2021, at best, so Congress must act, or the industry will see waves of foreclosures over the next several months.

Yikes!

In economic terms, I think China has gotten massively battered in the past two years. The economic statistics coming out of China look fine, but I simply don’t trust them.  I think the statistics from China have been doctored.  Just think about all of the economic body blows that China has recently absorbed.

It started with President Trump making it outright unpatriotic to move any more U.S. manufacturing plants to China.  Maybe even a few manufacturing jobs have come back home.

Then the U.S. slapped sanctions on many Chinese imports. Suddenly a few U.S. industries, like steel, could start to compete with China.

Trump’s hammering of China has resonated in Europe and throughout the Pacific Rim.  You might hate Trump’s sharp New York tongue, but he has been very influential in shaping a worldwide distrust of China.

International factories that otherwise might have been constructed in China are now going to Vietnam and India.  On the margin, China has surely lost a few sales, if a reasonably-priced competing product was available.

And then came the Coronavirus Crisis.  Was the virus really created in a Chinese lab? Who knows?  But President Trump has achieved some success convincing both Democrats and Republicans that China was to blame.  This could NOT have been good for business in China.

On top of that, tens of thousands of Chinese small businesses must have failed during the Coronavirus Crisis.  Eighty percent of all urban Chinese workers work for private businesses.  Millions must have lost their jobs.

I am starting to see signs that China is running out of U.S. dollars, the currency the world uses to buy raw materials and to trade.  They had something like $3 trillion in currency reserves several years ago.  I think they are down to just $1 trillion.  Be careful here.  I could be totally wrong on these numbers; but I doubt seriously whether the Chinese have been able to add to their currency reserves in the past two years.

Hahahaha!

Why should you care?  I recently exchanged emails with a Hong King citizen, and he pointed out that in a war, the U.S. could kill one billion Chinese citizens, and they would still have more people than we have.

President Xi of China has made himself President for life, so just one guy controls all 1.35 billion of them.  The Chinese are graduating five times more engineering students than we are.  In a war of attrition, we lose.

But why should you care?  If the economy in China starts to suffer, the people could start to get restless.  President Xi might start to lose political support.

There is nothing like a war to rally people around the flag.  I therefore predict, in order to distract the Chinese people from their worsening economic woes, that China will invade Taiwan within the next two-and-a-half years.

The U.S. will have no choice but to enter into a full-fledged conventional war with China.  No nukes will likely be used because that would mean the destruction of all life on Earth.  If we lose that first row of islands - Taiwan, Guam, the Senkaku Islands (called the Diaoyu Islands by the Chinese), and Okinawa - then the Solomons, Midway, Hawaii, and possibly even California would be next.

Imagine Chinese missile ships raining conventional, but highly-accurate, missiles down on California.  Our military policy is to fight World War III out there on that first row of islands, not on our own soil.

Fanciful?  China now has more modern warships than the U.S. Navy.   They are halfway done on their third aircraft carrier.  As I often tell my sons, “History doesn’t always happen to the other guy.”

Okay, so what can you do?  My oldest son, George IV, lives in Sacramento.  I've told him that his next car needs to be powerful enough to pull a trailer out here to the water-filled, food-stuffed State of Indiana.  Need water in Indiana?  There is a veritable ocean just thirty feet down.  

He is also to look for a cheap trailer, in case he ever has to bail out of California before the missiles start falling.  He'll probably never use that trailer.  Dad is probably just a Chicken Little;  but like I said, history doesn't always happen to the other guy.  If you are going to buy a new car, make sure its large enough to carry your family to safety.

My second son, Tom (the good one who gives me grandchildren - IV, hint, hint), here in Indianapolis, is already looking for a larger home with enough acreage for more chickens and even a Victory Garden.  Make it happen soon, son.  Fortunately, here in Indiana, my lovely wife and my 22-year-old daughter were able to get carry permits.  Carry permits in California are virtually impossible to get.  Yikes.  I'd hate for these ladies to be in California when law and order starts to break down.

In the years leading up to World War I, there was an arms race going on between England and Germany.  Each country was rushing to build dreadnoughts (battleships) with larger and larger guns.  Whichever country could build battleships with larger guns could sink the enemy's ships before they ever came into range.  The famous Spy versus Spy cartoons in Mad Magazine were based on the spy warfare on each other's ship designs that took place between 1910 and 1914.

My point is that the educated of both countries knew with an almost certainty that war was coming.  The likelihood of war between the U.S. and Japan in 1941 was thought to be so obvious that many people believed that President Roosevelt dangled our battleships in Pearl Harbor as an invitation for the Japanese to attack, so that we could finally enter World War II.

Finally.  Haha.  Hooray for Acme Industries.

My father, an Army captain at the time, was stationed at Pearl Harbor in 1941.  He was in charge of the French 75 howitzers defending the harbor.  He told me a story of how he was one day sighting his guns, when he spotted a Japanese spy on a Japanese fishing trawler using a sextant to plot his own guns.

You know what?  My father had no ammunition for this artillery pieces!!!  The Japanese could have just waltzed right onto Oahu.  He went to his General so many times to complain that they finally encouraged him to take a medical discharge, and he was sent home.  (Thank goodness.  I might not otherwise have been born.)  Six months later Japanese Zeroes strafed and destroyed virtually the entire U.S. Air Force on Oahu.  Our planes were conveniently arranged in a row for easy strafing.

Still think old George is a whacko?  The U.S. military just did a simulation of a Red Chinese invasion of Taiwan.  We lost.  Want to know why?  When our fighters and bombers tried to return to Guam, the airfields had all been destroyed by Chinese missiles.  History does not always happen to the other guy.

Last week a novice commercial loan broker came to me and gave me the complete contact information for twenty commercial real estate loan officers working for banks and credit unions across the country.  Each one of these bankers worked for a different bank, and he included no other lender types, like hard money lenders, conduits, ABS lenders, etc.

Here is how he found these bankers.

In trade, I gave him a copy of my famous nine-hour video training course (online now), How to Broker Commercial Loans.  I say, "famous", because a decent percentage of all practicing commercial loan brokers have taken my course.

This guy who made the trade will learn how to market for commercial loans, how to underwrite them (five of the nine hours), how to package them, how to find lenders, and how to collect his fee.  It also includes my famous fee agreement.

Once you have taken this nine-hour training in commercial real estate finance, your confidence will soar.  You will have learned over sixty new terms of art specific to commercial real estate finance.

No longer will commercial brokers (commercial real estate brokers) and commercial lenders intimidate you with their sophisticated language and fancy terms, like cap rates, loan constants, and the debt yield ratio (different from the debt service coverage ratio).  In plain English, you will finally know what the heck they are talking about.  You will absolutely know this business inside and out, especially if you use my regular blog training articles as a source of continuous updates to this course.

Here is how to get this very valuable training in commercial real estate finance in a trade.

No-Cost Commercial Loan Software
For Newbies and Old Veterans

Every business day about a dozen commercial mortgage brokers come to C-Loans.com and enter a  commercial loan into the system.  At the very end, they click one button and create for themselves a beautiful PDF of their latest commercial loan package.  The PDF includes no reference to C-Loans, and our logo appears nowhere.  They then send this PDF to dozens of their own lenders.  The entire process takes just four minutes.

Below I will explain how to use C-Loans.com to quickly produce a commercial loan package that you can use to submit your commercial loan to fifty of your own lenders.  When you submit your handsomely-prepared commercial loan package to your own lenders, neither your nor your borrower will not owe a fee to C-Loans, Inc.  

Of course, if a C-Loans lender sees your deal, makes you an offer, and you or your client accepts it, C-Loans will earn its minuscule software licensing fee.  It's only fair.  This software took us over 20 years and cost us over $2 million to develop.

When you use our software to create a PDF, here is what your commercial loan package will look like:

Sample Commercial Loan Package

The PDF is small enough to be easily sent by email to your favorite fifty commercial lenders.

Where do you go to get access to this wonderful software?  And how much does it cost?  You will find this software on C-Loans.com, and the cost is... get ready... it's expensive... ready?  It's totally free.

"But, George, I have been to C-Loans.com before, and I don't remember ever seeing it."

When you visited C-Loans.com, you probably got distracted by the enticing blue call-to-action ("CTA") buttons on our home page offering a free commercial loan placement kit or a free list of 200 commercial lenders. (The buttons below are not live.)

Because you probably got distracted by these CTA buttons, you may have never actually entered a commercial loan into the six-step C-Loans System.  

Below is the first step, Step 1 of 6, that you'll find on the home page of C-Loans.com:

:

Had you done so, you could have placed a checkmark next to six lenders and pressed, "Submit".  Within minutes, hungry commercial lenders would have been contacting you with offers.

After submitting your commercial loan to six banks, you are given a chance to make your C-Loans app into a PDF:

Voila!  It's that simple. Now you have a PDF of your commercial loan package that showcases the property.  There was no cost, and perhaps a C-Loans lender will make you an offer that you cannot refuse.

The companies making up the U.S. tech industry are now supposedly more valuable by market cap than the entire European market, according to Bank of America.

You kids are too young to remember Woodstock and the Hippies, but Country Joe and the Fish sang the following song at that mother of all music festivals, "Don't Bogart That Joint, My Friend."  Bogie was famous for cupping his cigarettes under his fingers, so as to hide the flame and not create a target for snipers.  This was a holdover from the trench warfare of World War I.  Basically, "to Bogart a joint" was to hog it and not share it.  

So the U.S. tech industry is now supposedly worth more than all all of the listed stocks in Europe.  Hmmm.  Don't Bogart that joint, my friend.  Hahahaha!

Okay, still not a believer?  Warren Buffett's preferred market gauge just hit a new high on Wednesday, suggesting US stocks are overvalued and a crash may be coming.

The "Buffett Indicator" compares the stock market's total value to quarterly GDP to assess whether it's overvalued or undervalued relative to the size of the economy.

The ratio reached a historic 183% on Wednesday, reflecting the breathless stock rally in recent months and the plunge in second-quarter GDP.  Buffett said it was a "strong warning signal" when the indicator peaked before the dot-com crash.

Be sure to study 2007-2008.  

And you don't believe we're on the Eve of Destruction.

In last week's article about the coming war with China, I posed the question, "Is China going to wait for the U.S. to develop aerial refueling drones, which would allow our jets to actually reach the South China Sea and the Chinese bases on their eastern coast?

Apparently not.  It looks like China is getting ready to go to war this month, before our aircraft carriers can solve their reach problem.  

Discovery Channel Building During Shark Week.

In case you missed last week's article, Chinese ballistic missiles, particularly their carrier-killer DF-26, can easily outrange America’s carrier fleet.  The range of a typical carrier combat plane, with a nine-ton payload, is only 1,300 miles.  The range of the Chinese DF-26 carrier-killer ballistic missile is a whopping 2,490 miles.

This means that the Chinese can blow our carriers out of the water before they ever get our aircraft close enough to be in range.

But what about the ships supporting our carriers?  Can't they establish a wall of lead to intercept any incoming missiles?  

I watched a video the other day that described the likely Chinese attack strategy.  They would blanket each carrier fleet with cheap drones and missiles, making us use up all of our defensive missiles and ammunition.  Then the Chinese would use their expensive and highly-sophisticated DF-26 carrier-killer missiles to travel far out to sea and then to circle back to attack our capital ships from the rear.

Folks, I remind you that during World War II not a single American or Japanese battleship got within range to fire a single shot at an enemy aircraft carrier.  The battleship became completely obsolete, once it was outranged.

Until our new unmanned aerial refueling drones reach our fleet in three to four years, we are screwed, blued, and tattooed.  By the way, the "blued" here refers to the blue medicine that used to be lathered onto sailors to kill the crabs they would catch from their bar girls.

I read an article about a war game played this month in the islands south of Japan.  Both sides got hammered because everyone's weapons were so accurate, but the Americans and Japanese lost because our airbases on Okinawa got just hammered by the Chinese.  Our planes could not return to refuel and reload.  

Maria Bartiromo, on Fox Sunday Morning, just made a comment about a video posted online in China that showed the Chinese Airforce engaged in massive drills.  That video was quickly taken down.  The units responsible for Chinese landing craft were reported ten days ago is be drilling unusually and extensively.

What's going on?  There is a group of islands - really just eight barren rocks - north of Taiwan and south of Japan.  They are called the Senkaku Islands.  If these islands become bases for missile batteries, they could command the northern portion of the South China Sea.

China is determined to take the Senkaku's.  Beijing has informed Tokyo that a large number of Chinese fishing vessels and government ships might soon enter territorial waters around those islands.  (China calls them the Diaoyus.)  China's officials have informed Tokyo that it "is not entitled to demand" the boats leave, a clear Chinese assertion of sovereignty over the islands.

Newsweek Magazine, in an article this week, posed the question:  "Why are these eight rocks in the East China Sea of any concern?  They could trigger history's next great conflict, perhaps as early as this month."  Great conflict?  This month?  Yikes.   This is Newsweek Magazine too, not some blog farm in Russia.

China and Taiwan both claim the specks, which have been under Japanese control since the U.S. turned over administrative rights to Tokyo pursuant to a 1971 agreement.  Washington did that when it reverted sovereignty over the nearby Ryukyu chain to Japan.  For the last eight years, Beijing, in especially belligerent moves, has been sending vessels and aircraft into Japan's territorial water and airspace.

On August 2, Chinese vessels set a record of 111-straight days of incursions.  In May and June, China chased away Japanese fishing boats that were in Japan's territorial waters.  Over time, Beijing has been sending larger vessels to the islands.

Because of persistent efforts to control the surrounding seas, some expect China to soon declare "administrative control" over the Senkaku's.  The American military has committed to defending the islands.  "That is 365 days a year, 24-hours a day, seven days a week."

Ominously, China, for more than a decade, has been eyeing the entire Ryukyu chain, pushing the notion that these strategic islands belong to China.

Why should the U.S. go to war with China over the Senkaku's?  For one thing, American forces are based in the Ryukyus, especially Okinawa.

Yet there is a far more fundamental reason. For more than a century, American policymakers have drawn the U.S. western defense perimeter off the coast of East Asia, and Japan is the "cornerstone" ally in that defense line.  Washington believes, correctly, that it is better to face an Asian aggressor over there than near Hawaii or off the coast of California.

The U.S., like Japan, can see that China will not stop until it is stopped. As a Japanese white paper recently noted, China is "relentless."  At this moment, China's arrogant, confident generals and admirals know no limits.  They have a blood lust, itching to use new weapons.  By their own admission, they are spoiling for a fight. "Their nationalistic ambition will not end," said Kunihiko Miyake, a former Japanese diplomat to The New York Times. "I am very concerned, and nobody can stop it..."

Now let's add some more fuel to this bonfire.  Trump appears to be losing his bid to win re-election; although the latest polls show him closing the gap in the battleground states.   Rightly or wrongly, the American people now recognize the Chinese as our enemy.  Nothing rallies the people around a flag like a good war.

The bad news is that we would probably lose that war.  Has anyone else noticed that the price of gold has been going bat-snot crazy?

A year ago, I wrote a blog article entitled, Commercial Loans, Missiles, and the Longbow.   I just re-read it, and it's an interesting article.  

The point of the article was that a weaker force can devastate a far more powerful one, if it enjoys a longer reach.  The article goes on to describe the Battle of Crecy, when a tiny English army of longbow men and men-at-arms dismounted and took positions behind trenches and horse defenses at the top of a hill.

Over 100,000 heavily-armored French knights charged repeatedly up that hill, but the powerful English longbows, tipped with bodkin arrowheads, easily pierced the French armor.  The French knights were slaughtered.  Few got close enough to even wield their swords, axes, and maces.  The longer range of the English longbow made short work of first the French crossbow men and then the charging French knights.

The battleship in World War II became obsolete, once it was outranged by the aircraft carrier.  I don't think a single battleship from either side even fired a shot on an enemy aircraft carrier.  In the same way, the American aircraft carrier faces range obsolescence in the age of the missile.  

Ballistic missiles, particularly China’s carrier-killer DF-26, can easily outrange America’s carrier fleet.  The range of a typical carrier combat plane, with a nine-ton payload, is only 1,300 miles.  The range of the Chinese DF-26 carrier-killer ballistic missile is a whopping 2,490 miles.

Imagine a grammar school fight with the schoolyard bully.  The tough little guy wants to get close enough to land some blows on the bigger guy, but the bully can just put his palm on the smaller guy's forehead and keep his punches from falling.

The U.S. military has woken up to the problem.  We are racing to develop midair refueling drones, which would accompany our aircraft on bombing missions and refuel them in flight.  This would allow us to reach Chinese targets.  Unfortunately, we don't have these unmanned refueling drones yet, and war may break out before they ever reach the Far East theater of operations.

With the passage of its recent extradition treaty with Hong Kong, the Red Chinese have finally taken control of Hong Kong.  Any protestor in Hong Kong can now be extradited to China for "trial" and hard labor.  Those young  protestors absolutely understood the real-life effect of this new treaty.  Four Hong Kong protestors were extradited to China this week.

The next step in China's hegemonic ambitions is now Taiwan.  Hegemony is the political, economic, or military predominance or control of one state over others.  In ancient Greece, hegemony denoted the politico-military dominance of a city-state over other, nearby city-states.  

The dominant state is known as the hegemon.  For example, Sparta was the hegemon of the Peloponnese, that huge chunk of the mainland of Greece that is southwest of the Corinthian narrows, a tiny choke point.  That choke point is incredibly narrow.  My daughter and I have actually seen it.

Four years ago, Jordan, my wonderful 22-year-old old daughter, and I visited Greece, as part of her Spring foreign trip, while she attended Culver Academies.  I moved to Indiana, even though my company is located in Sacramento, California, in order to be close to our three kids while they attended this wonderful school.  

Culver Military Academy is famous for its Culver Black Horse Troop - 80 all-black horses.  I rode in President Nixon's second Inaugural Parade.  George IV rode in George W. Bush's first Inaugural Parade, and Tom rode in W's second Inaugural Parade.  Jordi rode, as part of the Culver Equestriennes, in Trump's first Inaugural Parade.  As the Equestriennes were passing in review, right past Trump and Mike Pence, the camera for CNN zoomed right in on my lovely daughter's sweet smile.  She rocked!  Haha!

Will China wait for the U.S . to develop a response to its carrier-killer missiles?  Unfortunately, there is an old military adage that generals always fight the last war.   For the past 15 years, our admirals have been preparing for another World War II in the Pacific.  Our Navy has fallen terribly far behind.

This is why I read with interest an article in the National Interest, a magazine dedicated to military matters.  The article mentioned the work of Dr. TX Hammes, a retired Marine Corps colonel and a Distinguished Research Fellow at the National Defense University’s Institute for National Strategic Studies.

35-minute time exposure of illegal fireworks
being set off in Los Angeles

The article described Hammes’ solution - to phase out America’s carriers and to replace them with a large fleet of small, inexpensive missile-armed merchant ships.  Outfitting former merchant ships with missile launchers would be a substantial cost savings for the Navy.

A mere $5 billion would be enough to create forty missile merchant ships supplied with between 1600-2000 missiles, requiring only 1,600 sailors to crew all forty of them.  According to Hammes, these merchant vessels, whether they be tankers or container ships, are more expendable, tougher, and have a lower profile than aircraft carriers or other surface ships.

Developing conversion kits and experience to quickly modify merchant ships into missile platforms would allow the U.S. to quickly mobilize, in time of war, by converting even more merchant ships.  

I fear that a missile war with China is coming.  What if the economic damage to  China from COVID and the resulting worldwide condemnation is greater than what we have been told?  What if the Chinese public starts to get restless, and the communists fear that they they are losing their grip on power?  The classic move would be to go to war with someone - this time with the U.S. over Taiwan - so that the Chinese people would rally around the flag.

Both sides know that a nuclear war would destroy most life on Earth; therefore these missiles will NOT be nuclear-armed.  These will be conventional missiles; but they will also be incredibly accurate.  The Russians are working on nuclear-powered missiles that could even reach Indianapolis.  Yikes!

Heavens, I sure hope our next President follows the advice of Dr. Hammes.  As I often tell my kids, history doesn't always happen to the other guy.

Last week, Bank of America shook up the investing world with their latest letter to their investors.

"A torrent of fiscal and monetary stimulus to fight the effects of the coronavirus, combined with already-low interest rates, will contribute to a 'Great Debasement' of the U.S. dollar in the years ahead," according to Bank of America Merrill Lynch.

"That, in turn, will make investments in commodities and emerging markets more appealing, as investors look for reliable inflation hedges and savvy ways to play a weaker greenback," BofA chief investment strategist Michael Hartnett wrote.

“Interest rate repression means investors can’t hedge the inflationary risk of $11 trillion of fiscal stimulus via ‘short bonds’ … so investors are crowding into ‘short US dollar’, ‘long gold’ hedges,” Hartnett wrote.

U.S. dollar depreciation is “well underway as the default narrative for a US economy with excess debt, insufficient growth, and maxed-out monetary and fiscal stimulus,” he added.

"Holy Poopski!" as they say in Russia.  In my lifetime, the dollar has always been the strongest currency in the world.  Now Bank of America is saying that the value of the dollar will be falling steadily in the coming years.  This means we will start to suffer inflation again, after decades of disinflation, as imports cost more and more.  

But what was The Great Debasement?  Debasement means mixing more of a common metal with the precious metal (usually gold or silver) that gave the coins its worth, while maintaining the face value of the coin.

The reasoning behind debasing the coinage was to be able to make more coins and therefore create more money.  However, the side effect was inflation, with people hoarding the older coins that contained more of the precious metals.

The Great Debasement (1544–1551) was a currency debasement policy introduced in 1544 in England, under the orders of Henry VIII.  The Great Debasement saw the amount of precious metal in gold and silver coins reduced, and in some cases, the precious metal replaced entirely with cheaper base metals, such as copper.

By 1551, the coinage was worth one fourth to one-sixth what it had been before Henry VIII began the debasements.  Eventually the layer of silver had become so thin that it would wear off, revealing the copper below.  This happened particularly on Henry VIII’s nose on his image on the coin, giving him the nickname, Old Copper Nose.

Delta aircraft that was diverted in NYC due to hail from a thunderstorm.

Overspending by Henry VIII to pay for his lavish lifestyle and to fund foreign wars with France and Scotland are cited as reasons for the policy's introduction.  The main aim of the policy was to increase revenue for the Crown, at the cost of taxpayers through savings in currency production, with less bullion being required to mint new coins.

During debasement, gold standards dropped from the previous standard of 23 carat to as low as 20 carat.  Silver was reduced from 92.5% sterling silver to just 25%. Revoked in 1551 by Edward VI, the policy's economic effects continued for many years until 1560, when all debased currency was removed from circulation.

In defense of Henry VIII, the countries of Europe had been debasing their own currencies for decades.  A common practice of the period was the clipping of coins, or removing some the valuable metal from their edges.  This is why the edges of later coins were eventually given those scores of vertical groves, to expose any evidence of clipping.

Because English currency had not yet been debased, it was, prior to 1544, the envy of Northern Europe.  Unfortunately, English currency kept disappearing from circulation.

Think about it.  You owe a debt that must be repaid with a one-ounce gold coin.  You have two coins.  One is a French gold florin that is 50% gold.  The other is an English gold sovereign that is 88% gold.  Which will you likely use to repay your debt?  Which coin will you keep?  This leads us to Gresham's Law.

Gresham's Law is the tendency for money of lower intrinsic value to circulate more freely than money of higher intrinsic and equal nominal value.  Nominal here means face value.  In layman's terms, “Bad money drives out good.”  Debased coins drive good coins out of circulation.

When merchants worldwide lost confidence in the English mint, English traders were financially punished.  If they had a coin that was 20 carat, it traded at an even lower exchange rate, say 18 carat.  Since England was a trading nation, and its merchants were losing money on every exchange of coinage, the debasement was eventually ended.

But that didn't immediately end the problem for English merchants.  English coinage had lost the confidence of the world.  The discrimination against English coinage continued for another nine years.  Finally the Crown was forced to buy up all of the debased coins - sort of like when the U.S. eventually redeemed all of the greenbacks issued during the Civil War.  The debased coins had to be melted down and replaced with totally new coinage.  

Okay, so what do we with this new knowledge?  If Bank of America is to be believed, investors should buy gold and international stocks, located in countries that are debasing their own currencies slower than the United States.  How humiliating!  Geesch.