Over the past year and a half, we have often written about global and national finance and the forces coming together to shape our world for the next few years. We have written about the Federal Debt, the BRICS consortium, the Bank for International Settlements, Personal Financial issues, Corporate Real Estate Issues, undefinable derivatives, and other related topics. Unfortunately, we now see all these forces converging into a very ugly picture, as if we are moving toward a financial brick wall. The sum of these forces will shape the future for us and our children. They would be slow-moving trains in the past, but the world has changed and is now rushing to reshape the global financial structure we have enjoyed since World War II.
As always, the first crack in this wall is bank earnings, and those stress cracks are starting to widen. These cracks reflect what is happening to the consumer in real-time, and since we are a consumer-driven economy, those cracks drive other, deeper issues. Understanding and paying attention to far-away events that can drive local matters is essential in today’s world.
Consumer Debt
I like to start my day watching Squawk Box on CNBC because its coverage is slightly more financial than political. They also host several corporate executives each day who hype their corporations and try to convince you that, economically, everything is all right. Very rarely does an executive spin a tale of woe because it is to their advantage, and their stock’s advantage, to say all is well. To listen over the past few months, you must be Alfred E. Newman (of Mad Magazine fame) to think there were any market concerns.
“What, me worry?
According to CNBC and the executives they interviewed, the consumer shows incredible resilience and continues spending, so all is well when the opposite is true. No matter the category, we are at an all-time high in consumer debt. Credit cards, vehicle loans, home mortgages, second mortgages, and student debts are at all-time highs. And signs of weakness are creeping into every category, with delinquencies rising across the board. The most laughable conversations are now centered on buy-now-pay-later financing and how intelligent the consumer is for choosing this new method of financing.
Buy-now-pay-later is the brick wall for consumers. When you are addicted to spending and your credit cards are maxed out, your car note is due, or your student loan payment is due, this is the last form of borrowing before defaults. This form of lending reveals desperation on the part of retailers offering financing to get inventory out the door. Many lending controls do not apply to these loans; I think they are just one step short of visiting a loan shark.
Federal Debt and Interest Rates
You are asleep at the wheel if you are not concerned about our Federal Debt. Since the pandemic, Congress has put our nation into a fiscal hole from which there can be no return without significant tax increases AND major cost cuts. Since Congress is willing to do neither, we are faced with financing our debt with more debt until the whole system collapses. How long this will take is unknowable because it depends on the “Greater Fool” concept of finance. So long as some individuals and nations believe we are still the safest place for money, the ship sails on. But the FED and the Treasury both know this is unsustainable, leading Treasury Secretary Yellen to proclaim recently that we had obtained the much talked about “Soft Landing,” and all is fine. She is like your goofy old aunt who says inappropriate things at Thanksgiving dinner.
The FED may lower interest rates between now and the election to bolster President Biden’s hope of reelection, but it is a short-term patch at best. In recent bond auctions, the Treasury has had to raise rates because other nations no longer believe we are managing the Country well. They are unwilling to loan us money at the same old low rates. From excess spending to rampant crime to open borders, we are no longer risk-free and guaranteed always to maintain our fiscal house in good order. We have lost our three significant buyers of debt: Japan, China, and Russia. There is just too much US debt for rates to stay low.
The FED cannot set low rates for consumers and banks when they cannot sell their debt at the same low rate. This makes Treasury Securities a better option than the stock market for investors and pulls people away from stocks. Some believe that the FED will need to offer rates as high as 10% in the future, making the stock market even less attractive.
The FED and Congress (taxpayers) are also faced with financing wars supporting Israel and Ukraine. Supporting these nations is a question for Congress, not the President, as Presidents have shown poor judgment in recent decades, and the Constitutional power to declare war rests with the Legislative Branch, not the Executive Branch.
Unleashing the awesome and massive power of the American military should only be done to defend against threats to our democracy and the values and hard-won rights of its citizens. Since World War Two, we have repeatedly used this power unwisely, resulting in a humiliating cycle of wasted lives and money.
Congress is right to question the funding of the Ukrainian War, Israel, and now Yemen. Our defense of Taiwan will not come cheaply if we are engaged there. Having the will to fight is not enough; we must also have the resources and support of the American people. A Declaration of War by Congress forces a complex debate when that debate also includes funding and taxes. Deficit financing all our wars since World War II is one of our biggest financial sins.
The BRICS Consortium
About a year after we started writing about BRICS, it has suddenly become the talk of the town. The Treasury and FED are holding the line and presenting their case for the dollar always being the world’s reserve currency; they are wrong. The recent threat to seize $300 billion in Russian assets sent an ominous signal to world markets and may have been the tipping point on our reserve currency status. Why would any country leave money in America if the President can decide on his own volition to seize the funds?
Our ongoing trade battles with China and Russia and our toothless sanctions have given clear indications to our adversaries that we have feeble leadership and disastrous, uncoordinated policies. This has given the BRICS consortium fresh ammunition to push for de-dollarization, which is gaining ground.
Five years ago, BRICS was a concept with little traction. It is becoming more of a functioning body and has added four other countries, including Saudi Arabia. There are another forty countries that have applied for membership. Collectively, these nations make up roughly two-thirds of the world’s population. And while their collective GDP does not approach North America and Europe, it will.
The danger for the United States is a BRICS currency or bonds like the Euro but backed with something tangible such as gold, oil, or other natural resources. Central Banks of the BRICS nations are loading up on gold (China, Russia, India) as their core currency reserve and dumping dollars. They are quickly trading something of no value (fiat currencies) for something with at least some value. I believe the BRICS consortium and efforts like those of the BIS are the biggest threat to our financial future.
The Bank for International Settlements
Before 2022, the Bank for International Settlements (BIS) was way outside our financial radar. It is the bank for the world’s central banks, and there was no reason to know their existence. But things have changed, and if you would like to put on your Orwellian hat, this is the group.
The BIS is at the heart of the Foreign Exchange (FOREX) process and monitors derivatives involving foreign exchange. They do not regulate FOREX; they monitor activity and report on it. The BIS came on our radar when they reported some unusual and unidentifiable derivative activity in the range of $65 trillion. They raised a red flag that has been ignored by all nations since then, probably because these nations are involved in the process. The latest reports now peg this figure at $1 quadrillion, which is beyond comprehension.
The BIS’s ominous role is off everyone’s radar besides the BRICS nations and central banks. It seems that they are involved in building an electronic exchange platform that will allow all countries to settle foreign transactions in their currencies. This will remove the dollar as the world’s reserve currency if successful. As usual, our Treasury and FED members are asleep at the switch. Testing with China and other BRICS nations has already started and appears to work.
The BIS is also now working to aid countries in the development of Central Bank Digital Currencies (CBDC). This development is the most Orwellian change proposed by Central Banks. While on the surface, it sounds like just another natural progression in digital currencies, it is, in fact, a way for all governments to track and regulate all transactions on all citizens. A CBDC in America would effectively remove all privacies guaranteed under the Constitution. The proposals for its use are so Orwellian and tied into the Green Agenda that some in Europe advocate limiting personal consumption of resources by screening personal purchases based on your individual carbon footprint.
Nothing is more critical than the BIS if there is anything to study and understand more. When you see that acronym, your antenna should go up.
Commercial Real Estate
Refinancing of commercial real estate is the five-hundred-pound gorilla in the room that no one wants to stir up. In the coming months, hundreds of billions in loans will need to be refinanced, and the source of the money is a bit of a mystery. By 2028, the total to be refinanced is estimated at $2.2 trillion.
Corporate real estate loans are often made as “interest-only” loans, meaning that the amount initially borrowed by the developer is the amount still owed on the loans. Unlike consumer loans, there seems to be no expectation that the developers will make payments of both principal and interest. In times of rising values, this is not a big issue because, eventually, the property will be resold at a profit.
“The value of commercial real estate loans is important for several reasons, including that it is a key measure of the health of the commercial real estate market. Commercial real estate loans also affect the overall stability of the financial system.”
But the post-pandemic world we live in today has changed that landscape and developers now hold office and commercial space titles that have lost value. Some estimate that by the end of 2025, the value of many commercial real estate properties will fall from 35% to 40% and that there will be no recovery before 2040. This same contagion could spread to multi-family housing where developers hold floating rate debt.
The latest developments show that many developers are just turning over the keys to lenders and walking away. This will eat away at bank profits and reserves and potentially cause more issues. Pension funds and REITs also hold significant amounts of these loans. The typical “first move” by all is just to extend the loan, which is loan-speak for “kick the can down the road.” The losses are so massive that no single bank or other financier can absorb them. Both borrowers and lenders are praying for a miracle where values will suddenly rise again; in my opinion, it will not happen. We must hope that no Congressional bailout is on the horizon; our taxpayer’s financial cupboard is bare.
Nothing to Do
Unfortunately, for most, if not all of us, there is little we can do other than be careful with our investments and seek the best professional investment advice available. We can also read, learn, and follow these developments. Quite honestly, it is more than a bit depressing, and I am reminded of a Shel Silverstein poem that seems to fit this conundrum as we watch this slow-motion train wreck.
Nothing To Do
Nothing to do?
Nothing to do?
Put some mustard in your shoe,
Fill your pockets full of soot,
Drive a nail into your foot,
Put some sugar in your hair,
Place your toys upon the stair,
Smear some jelly on the latch,
Eat some mud and strike a match,
Draw a picture on the wall,
Roll some marbles down the hall,
Pour some ink in daddy’s cap —
Now go upstairs and take a nap.
Shel Silverstein
It is a dangerous financial world out there, so be cautious and informed! When or if these forces collide, the damage could be significant. Be careful with your vote in November because the current Washington crowd got us in this mess and is clueless about any resolution.
Resources Used In This Article
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NOTE: We are always a little leery of using information from the internet as sources unless we know the organization and its history. This is especially true of YouTube; only channels we follow are used and verified with additional research. A YouTuber might spark our interest, but it is not the final source of information.
