Don’t Count Out China

Welcome to This Week’s Leyendecker View

Whenever you are on the side of the majority, it is time to pause and reflect.
– Mark Twain

A BIG THINK

What is going to induce the Fed to drop interest rates? My answer? When something material in our economic system breaks. Some friends of mine think that “something material” is going to be in real estate.

The WSJ recently published an article suggesting that banks could be in a real estate doom loop, and regional banks in particular.

Anyone paying attention to economic and business news knows there’s a big problem in commercial office buildings. Articles in our Real Estate section point to these problems. And as reported in this newsletter a couple weeks ago, office tenants are renewing leases but for far less space.

The obvious is that a lot of office buildings are going to be repriced. Foreclosures are already happening, and more are likely coming. But do regional banks really hold a lot of office real estate loans? 

The above WSJ article does outline overall bank real estate exposure, but it does not break out exposure to the different real estate asset classes. While office buildings may be in troubled waters, the other real estate asset classes—multi-family, retail, industrial, medical and residential development—seem in OK shape. 

Right now, home building is in the catbird seat because of the scarcity of existing houses for sale. Existing homeowners are not giving up their cheap mortgages. Multi-family is also in the catbird seat because fewer people overall are buying houses. And retail seems to be chugging along post pandemic, thanks to consumer resilience. Retail mall issues are a problem we’ve known about for years, but a problem that’s probably already been addressed. Industrial real estate has been on a tear, making me wonder if we’re overbuilding, but then any reshoring of manufacturing is going to fill up more industrial buildings. Medical likely has some problems recovering from the covid revenue collapse, but medical isn’t an obvious big real estate problem right now.

I would guess that regional banks are mostly exposed to their broader regional real estate market and not so much to high-profile, big city offices. If that’s the case, then who has the big exposure to these high-profile, high-cost office buildings that now may be worth less than 50 cents on the dollar?  

It’s probably the big institutional investors like Brookfield (mentioned in above WSJ article).  Big city office buildings are big-dollar projects that require big-dollar investors, investors who can take good-sized losses because their overall investment portfolios are in the multi-billions. 

Harvard has a $50B endowment. Harvard can take a few hundred million dollar losses in real estate and it affects nobody, save maybe their chief investment officer and their real estate investment team. Same with Brookfield, Blackstone, and all the other giant institutional investors. 

I certainly think regional banks are still ripe for consolidation, but I’m not so sure they are highly exposed to big city, high-profile office buildings. So for now, real estate problems don’t seem like the “something material” that will break the economy and induce the Fed to reduce interest rates. This means we may not yet know what the “something material” could be.

THE ECONOMIC VIEW

Are we in a recession?
Over 50% of Americans think we are
Yet Americans are spending like we’re not

Bankruptcies are rising
For individuals (10%) and companies (23.3%).

The market for super yachts has exploded
Could this be an economic indicator?

THE INFLATION BOGEYMAN

US crude prices hit 2023 high
And then go higher
The cost of energy waterfalls everywhere.

Credit card fees are going up
Health insurance costs, too
That’s inflation, right?

The dollar is soaring
How does this influence inflation?

THE LABOR VIEW

The Great Gloom
Worker unhappiness grows at record pace.

The leadership traits of successful CEOs
BE BOLD!

The minimum wage may be obsolete
As companies raise wages.

The potential auto union strike
Gives automakers yet another challenge

MEANWHILE IN EUROPE

Britain’s 2nd largest city goes bankrupt
Problems, problems, problems in the UK.

Europe seeks the next generation fighter jet
It’s going to cost a fortune.

McKinsey’s advice to Europe’s automakers
Is staying the course actually a revelation?

GLOBAL

Mexico’s next president will be a woman
Breaking the machismo barrier.

India’s moment arrives
Is it ready to be a global power?

Kenya says Africa can fight climate change
African leaders want global carbon tax
Send us money, and we may do something.

PLAYING WITH FIRE

Russia threatens the US
Don’t dare put nuclear weapons in the UK.
While US pledges $1B more for Ukraine

Russia was recruiting Cubans to fight Ukraine.
Cuba put a stop to it

Zelensky replaces his defense minister
Ukraine’s casualties are mounting big time
Military graft is a problem for Ukraine
Russia isn’t going to run out of missiles
Is this war going well for “the good guys”?

GEOPOLITICS IN FLUX

The Middle East has tons of cash
Oil & gas gives them global influence.

The Three Seas Initiative
A new alliance is developing in Europe.

G20 summit will be in India this weekend.
But Xi Jinping likely won’t attend

FINANCE

Hedge fund synthetic leverage
Is worrying FSB regulators

Ramaswamy succeeds in finance.
His anti-ESG fund eclipses $1B

Bonds have worst 4-year return in history
Time to buy?

Expiring high-yield debt
Is now using assets as collateral

REAL ESTATE

100MM sq ft of empty office space.
What if it stays empty?
Is it a great buying opportunity?
WeWork wants to renegotiate leases
The office workplace has found a new normal

Demand for mortgages at 1996 levels
Who wants to give up their cheap mortgage?
Home price declines across the country

NYC cracks down on Airbnb
A big win for the hotel lobby.
Cities with highest density of Airbnbs

TECHNOLOGY

Beijing has a new phone national champion
Apple’s stock falls
What does the Chinese market mean to Apple?
Apple invests big on conversational AI
Is a Her world right around the corner?

Is Google a monopoly?
The Justice Department is asking.

Want to be creative in Silicon Valley?
Then get on a daily psychedelic routine
US psychedelic drug use at record high
Psychedelics may soon be legal in California

THE CHAT ON AI

Khan Academy has a chatbot tutor
Chatbots enter the mainstream.

Money leaves crypto for AI
But crypto wasn’t going to destroy jobs.

The AI revolution is coming
But maybe not as fast as we think

THE NEXT NORMAL

Is privacy important to you?
Then you’ll have to give up your car

Internet retail was supposed to kill stores.
Why hasn’t it?

The state of US education is pathetic
So homeschooling and microschools are on the rise.
Fewer folks want a college degree
More states adopt free lunch while in school
Too bad the education part sucks.

THE WAR ON CARBON

Are you worried about the environment?
Polar bear population has been rising since 2009
The bald eagle population has quadrupled since then
The Great Barrier Reef is thriving
Europe’s forests are booming
And the world is actually getting greener

Green steel company gets $262MM
Will it be economically competitive?

Buffett helps West Virginia go green
Ah, er, with a lot of government subsidy.

THE NEW ENERGY TRANSITION

The impending green energy bailout
Here comes more energy inflation.

The cost of solar is now rising
After a decade of getting cheaper.
US offshore wind costs are exploding

Indonesia’s once-celebrated green revolution
Is not happening as expected.

THE EV DREAM

Hey, Western EV makers, take notice!
China’s BYD has an $11,400 EV coming
As it blows by Tesla to become global EV leader
Chinese autos dominate Europe’s biggest car show
Big subsidies for China’s EV industry
China is flooding the world with cars

EV costs to remain higher for longer
Mercedes CEO isn’t Chinese.

Recycling EV batteries still uncertain
What if it’s never possible to recycle them?

THE CHINA SYNDROME

There’s no bazooka stimulus for China.
Why they’re playing it subdued

China’s economy is back on track
Suggests Premier Li Qiang.

China’s largest export market
Is now closer to home

THE WASHING-TONE

The Pentagon is going big with AI
Gotta keep up with China.

Biden’s China chip sanctions
Look too little too late

Auto companies get $12B subsidy
To transition to EV makers.
Can they make us an $11K EV?

MAKING A BETTER YOU

Are you in a rut?
Here’s how to break out of it

The life events
That can change your personality

An apple a day keeps the doctor away
Maybe that old saying is real.

HOW ABOUT A BREAK

Why politics need philosophers
Would it lead to better thinking and policy?

Bird photographers of the year
Stunning!

A portrait of Tenochtitlan
How the Aztec capital likely looked.

PLANNING THE NEXT VACATION?

Thinking of a fall vacation?
Here are some nice outdoor ideas

The most beautiful places in the world
A bucket list for the uber rich.

The coolest new US hotels
Maybe for a long weekend?

SONG OF THE WEEK

The Rolling Stones are releasing a new album
“Angry” is their first single.
Lyrics are poetry, supposedly.
Are the Stones stuck in the 1980s?

CASTING AROUND THE PODS

US debt, the dollar’s challenge and China
Economist and China expert Louis-Vincent Gave lays it out.

VIDEOS OF THE WEEK

Did you like The Queen’s Gambit?
Then give Drops of God a look.

How humans became mostly right-handed
Useful knowledge for…

Our senses are fine-tuned for utility
Not for reality.

FROM THE HEADHUNTER’S KITCHEN

Want the perfectly tender steak?
Here’s what to do

Chicken parm in 8 minutes
I’ll take two.

Thai chicken coconut curry
Opening Pandora’s box for yummies.

THE RANDOMS

The US Department of Energy just committed a $400MM loan to zinc-based battery maker Eos Energy. The idea is to find a mineral, zinc in this case, that’s cheaper and more reliable than lithium. If Eos’ “better mousetrap” works, then company owners will likely make billions. If it doesn’t work, then your tax money was wasted. Now why don’t taxpayers get an equity carry in deals like this? Why are taxpayers high-risk/low-return investors?

Is it the information that chatbots generate that may be dangerous, or is it the authority that technology, government and media will assign to that information—whether accurate or not,—that may be dangerous?

Do you think the January 6 trials and sentences are going to put a stop to anti-establishment and anti-Washington sentiment, or add fuel to that fire?

When people suggest fixes to our social and economic challenges, they generally pitch binary solutions, like a standard, old light switch. “Get rid of the IRS.” “Get rid of the Department of Education.” These kinds of things will never happen. Any worthwhile “fixes” have to take into account that we can’t change or destroy institutional infrastructures overnight without some form of massive crisis. 

The best way to lose weight is by changing habits, which will change one’s weight gradually over a long period of time. Maybe that’s the right way to make policy changes—changing habits a little at a time.

The business media reports frequently on China’s economic woes, but folks may want to pay attention to the 8,000-pound panda that may dramatically change the global automotive world. BYD’s cheap EVs look ripe for Western consumers weary from stagnating wages and inflation. How can any legacy auto company compete with a car at this price?

Why is it that the time it takes to reach 60 mph and driving range are the most talked about attributes of an EV? How often does the average driver need to get to 60 mph in 3 seconds or less? And how often does the average  person drive more than 100 miles a day? Kelly Blue Book estimates that the average person drives 37 miles a day.

How do we know that humans can be easily brainwashed? Just consider the citizens of North Korea who idolize Kim Jong Un.

By the way, Meta says it has uncovered and disrupted massive disinformation campaigns from China and Russia. What have they not uncovered?

IN CASE YOU MISSED IT

Can a Song Start a Revolution?
September 1, 2023

Are We in a Polycrisis?
August 25, 2023