MUST RE-READ: Banking’s Woke vs. Unwoke Split and the CRE Collapse
EXCLUSIVE INTERVIEW WITH BANK EXEC PLUS ELLIOTT'S PAUL SINGER WEIGHS IN
UPDATE Mar 18th: Spoke with a GoldFix Founder yesterday on the disturbing nature of the CRE crisis unfolding. We then went back and looked at his comments last time we talked. Here they are from November 12th. The comments are extremely relevant.
Spoiler alert: He was right
OVERVIEW
Recently had an email conversation with a good friend who happens to be an Exec at a major real estate bank. The bank’s business focuses on East coast commercial and very high-end residential real estate1. He had been spot on in seeing many trends in RE over the years from the GFC to the Covid generated urban/suburban migration and implications2 thereof.
He answered some questions we had on RE Banking and went on to hit us with related trends developing. Finally he invoked Paul Singer of Elliott fame, which prompted us to hunt down the recent Elliott investor newsletter for you all. That is included at bottom.
With his permission, we are sharing it all with you along with that November Elliott letter. It is all very interesting. The world is changing.
**Only subtitles, minor spelling edits and reference hyperlinks were added**
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Banking’s Woke vs. UnWoke Split
I think the big guys WFC, BOA, MS, (and JPM to a degree) are heavily influenced by the Blackrock / CALPers crowd who are very ESG, woke minded. Smaller banks... less than $10B in assets, their Boards are still run by local businessmen and family offices. So it's not East Coast West Coast as it is Giant vs Upstart.
[EDIT- and how is that playing out now?- VBL]
Commercial Real Estate in Crisis Shortly
The investment sale market for commercial real estate has completely fallen apart. Every participant I know can tell me a story of a deal that recently fell apart. This will result in recession and crisis shortly. Real estate markets much like the broad economy are like supertankers in that they take a long time to get moving, and are very tough to stop.
[EDIT- And how is thisplaying out now?- VBL]
But low rates has been the fuel for it all, and it has suddenly vanished along with Pax Americana. President Blinken [EDIT-lol- VBL] and the US State Dept have altered the geopolitical landscape with the Ukraine War (which the US had a hand in letting start. US knew it was coming and is now pursuing with all force) and the China/Russia sanctions.
On Regulatory Culpability in 2008:
“Citi created its SIVs to prop the markets”
Regulation (or the lack thereof) has a huge impact on banking. More than anything, a lack of regulation led to the 2008 financial crisis. The seeds of the 2008 crisis were sown by the "Make housing more affordable to everyone" crowd as regulation was relaxed to allow millions of NINJA loans and the like, which cascaded through the economy as Citi created its SIVs to buy/prop the residential markets, and Lehman became a massive commercial real estate lender... Think Yellowstone Club, massive CMBS positions it could not sell, etc etc etc.
More Will Get Torched by Crypto
“SBF barely has hair on his balls”
The staggering size of this crypto bubble has really surprised me. SBF barely has hair on his balls and he's been throwing around billions?? It is all going to tears and there will be others besides Softbank, Sequoia, and Tom Brady getting torched. With Prime at 7%, on its way to 8%... it's game over for speculation.
[EDIT- and he was right here too.. not BTC, crypto banking in general- VBL]
Speculative Excess’ Poster Boy is Dead
“All the altcoins platforms are going to single digits”
Crypto is the poster boy of 2020-2022 spec excess. Few people even understand the space. High rates smash speculation because investor pain occurs quicker and intensifies, and potential new investors are now grabbing a reasonable much lower risk return..All the altcoins platforms are going to single digits along with whatever "token" they are pimping.
Jamie, Citadel, and Elon Are Preppers
“Woke Ideology Will Soon Be The Last of Our Worries”
What you are seeing in the rhetoric from Citadel, Jamie, Elon, and other business leaders et al, is simply an effort to prepare people to brace themselves for a much different economic backdrop in the next 3-5 years.
In other words, THE WORLD HAS CHANGED and woke ideology will soon be the last of your worries. People, like the regular corporations you referred to in your narrative, go along to get along when everyone is making money, and the fridge is full of beer. When that stops, people begin to speak up. And get angry.
Hyperinflation Risk Props Stocks
“Wiemar Happened in About 18 Months”
I believe the very real threat of hyperinflation is the only thing propping the stock markets worldwide. If stock markets crash, and I believe every index fundamentally has at least 40% downside, there will be massive problems the US money printers may find very difficult to solve.
[EDIT- Important to note, the bank exec isn't fearmongering and neither are we. He merely believes that some part of the rallies have to be related to the continuation of inflationary policies, which puts hyperinflation on the table. Especially in Japan. He notes Wiemar took only 18 months to happen. If nothing else, it makes the case the Fed will be less accomodative than the markets may be hoping for some time.- VBL]
Here's a black swan... In the face of a crashing market... Suppose Japan hyperinflates? The yen has gone from 120 to 150 in a blink. Wiemar happened in about 18 months. Remember what Singer said years ago? [ EDIT- He then proceeded to send us these quotes- VBL]
He closes our email chat with:
“Now, as a reminder, here’s Singer from 2013…”
"Things have gotten really complex and subtle in the modern banking and derivatives era, and that the old model of money as being solely or mainly the product of bank reserves and bank loans is woefully inadequate...
…the government adopted a zero interest rate policy, or ZIRP, and Treasury’s borrowing rates dropped as the Fed purchased its bonds, elevating the prices of virtually all other securities...
it is causing massive distortions of risk-reward in stocks and bonds, as well as significant expansion of future risks of both inflation and severe losses in asset prices....
Bonds that otherwise might be collapsing and repudiated are at sky-high prices with stingy yields. Investors either have not figured out that they are long seriously overpriced promises or think that they will all have the luck and perspicacity to reject such instruments before they plunge in price....
QE is exceptionally dangerous and way past its tipping point.... We do not believe it can be unwound without serious consequences... When the rejection of long-term bonds and paper money starts at some unpredictable future time, it may be fast and difficult to contain or reverse....
History is replete with examples of societies whose downfalls were related to or caused by the destruction of money. The end of this phase of global financial history will likely erupt suddenly. It will take almost everyone by surprise, and then it may grind a great deal of capital and societal cohesion into dust and pain.
Singer has a new forecast out now as well I hear.. Gotta read that one now
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We will share his latest thoughts in a special dispatch next week. For now call him Bon Scott
And here is that very disturbing new Paul Singer forecast in a 27 page letter to Elliot investors