Troubles with Commercial Real Estate Signals a BIG Problems

With the pandemic almost over, children back in school many businesses are encouraging employees to return to the office. The companies that own big office buildings were hoping that the nightmare of the last two years is over. However, things not have gotten better, they have gotten worse. Remote work and rising interest rates are dealing a double blow to office landlords, with potentially grave consequences for the national economy.

Commercial Real Estate value down 39%?

Although more office workers are back at their desks than a year ago,  attendance at office buildings in New York, Boston, Atlanta, Chicago, San Francisco and other cities is well below pre-pandemic levels. As leases come up for renewal, companies are often opting for smaller offices, leaving landlords with millions of square feet in vacant space. More space is expected to hit the market in the coming months as lease expire and more than 100,000 technology workers have lost their jobs. According to a recent study by business professors at Columbia and New York University, the value of U.S. office buildings could plunge 39 percent, or $454 billion, in the coming years,

New York City as an example

Let’s take a look at the New York commercial real estate market as an example of how bad things are.  Rising interest rates have intensified concerns that the New York City office market, the largest in the country and a pillar of the city’s economy is at  risk. Low occupancy rates and falling property values and higher borrowing costs could increase the odds of a recession nationally and a budget crisis for the city. In the latest snapshot of New York City’s largest office landlord, SL Green Realty Corporation revealed that more of its properties lost tenants during the first months of 2023. Shares of SL Green and two other publicly traded office landlords in the city, Vornado Realty Trust and Empire State Realty Trust, stocks are all trading near their lowest level since the pandemic started. SL Green’s stock has fallen 76 percent since early 2020. Vornado is trading at its lowest territory since 1996. Empire State Realty, which owns the Empire State Building, is near its record low. Collectively, $17 billion of their market value has been erased since the pandemic started.

Urban doom loop.

According to a recent study by researchers at Columbia and New York Universities, the value of New York City office buildings could tumble $48.75 billion in the coming years. This would hamper a vital source of the city’s tax revenue. In addition, office workers in the city make about 75 percent more in annual salaries than the rest of the private sector (according to the Office of the State Comptroller) and their absence from the office every day deprives a host of local businesses of their spending. Stijn Van Nieuwerburgh, a real estate professor at Columbia University’s business school, has warned that New York City faces an “urban doom loop” sparked by remote work. While the current commercial real estate downturn shares similarities with previous declines, including periods in the early 1990s, after the Sept. 11 attacks and during the 2008 financial crisis, this drop has a new twist: The lower demand for office space appears permanent.

Trouble in commercial real estate = trouble for banks = trouble for the economy

Large banks like JPMorgan Chase and Wells Fargo have increasingly warned that a heap of commercial loans are coming due by the end of 2024 — estimated to amount to $1.5 trillion nationwide — and that  companies may struggle to repay or refinance them. More than two-thirds of all commercial real estate loans are held by small- and medium-size banks, prompting concern that regional banks might be unable to withstand a wave of defaults if landlords cannot pay off loans. Some analysts have forecast a dim future for city centers, likening the crisis to the slow death of many American shopping malls.

Conclusion

The banking crisis, that started with saving the regional banks such as SVB, is not over! I believe there is another shoe to fall, as expressed above. The banks have not yet felt the affect of the crash of commercial real estate prices on their loan portfolio. Defaults will come as a surprise to most investors, just as did the crash of CMO market.  Most economic disasters are a surprise and can start with something as simple as the SVB failure and escalate! Don’t’ forget the classic THIS TIME ITS DIFFERENT by Carmen Reinhart: It tells the story of eight centuries of Financial Folly. Each time after a catastrophe, (such as the Great Depression or 2008), economists agree that it could never happen again. Who could be so stupid as to let 10 banks control 70% of the US assets (to big to fail) and allow all the US economic growth  go to the top 1%, while eighty people own 50% of the world’s wealth?

FOR MORE, SEE ISL #742 (summarized below)

Trouble in China There is trouble in China. The Chinese Hang Seng Index  hit a new 10 year low in 2023. Also the China’s Consumer Confidence Index is at a record low. Something is wrong. Confidence in China’s economic foundations could cross a threshold, beyond which it becomes far more difficult to recover.

World debt $226 trillion up from $74 trillion in 2019. My concern is in the world’s ocean of corporate debt, worth $226 trillion up from $74 trillion 2019. US corporate debt has climbed during the same period from $18 trillion to $30 trillion. Two-thirds of non-financial corporate bonds in America are rated “junk” or “BBB”, the category just above junk. The growth in debt has now stopped, because suddenly investors are worried and interest rates are high and going higher

US federal debt to GDP was in 1980  34.5%, 2000 57.9% and in 2021 100% The US Federal debt is over $30 trillion dollars and is growing. It took the US from 1789 to 2016 to get to $15 trillion and only 6 years for it to double. With the spending of that kind of money, we could have eliminated US poverty and given health care for all. Now, we are just stuck with the problems, in addition to the debt! Total US and State debt to GDP is 142%. ANNUAL INTEREST ON DEBT; is $450 BILLION AND IS RISING AS INTEREST RATES GO UP. Here is the scariest statistic: OTC Derivatives are $600 trillion (10 TIMES WORLD GDP). $600 trillion is at about the same level that caused the 2008 trouble in the banking system. And now there is talk in Congress to let the US default on its debt. When you play with fire, you can get burnt!

Our DOWNSIDE PROJECTIONS ARE: a DOW of 28,000 to 27,000, NASDAQ 9,000 to 8,000, S&P-2,900 to 2,700. Don’t fight the Fed!

Dow 33,614,     NASDAQ 12,078    S&P 500  4,108

Carl M Birkelbach

4/27/2023

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

A BANK FAILURE

Is this an isolated incident or the begging of a new economic disaster?

The Silicon Valley Bank on Friday became the biggest American bank to fail since the collapse of Washington Mutual in 2008. At the height of the global financial crisis, in 2008, the implosion of Washington Mutual, as well as the investment banks of Lehman Brothers and Bear Stearns, was followed by a system-wide failure of banks. To avoid an economic collapse, a big government bailout was initiated by the government and paid for by the tax payers,  This started the US debt  soaring by the trillions. From 2008 to 2015, more than 500 federally insured banks failed. The big question bothering investors today, is. this indicative of ‘the canary in a coal mine,’ or is this just an isolated incident?

It’s unclear whether the collapse of Silicon Valley Bank (SVB) will spread to the broader industry. SVB was best known for its lending to technology start-ups and it had $209 billion in assets at the end of last year, making it the nation’s 16th-largest bank. But that is still small in comparison with the top three BIG banks, which hold some 50% of total bank assets and have a much more diversified business model and customer base. But SVB and other Regional Banks (see 10 troubled banks below),  do not have the same regulatory oversight as the BIG banks, as in 2018 President Trump signed a bill that lessened scrutiny for many regional banks. If some of the smaller regional banks continue to fail, this could be the beginning of a surprising sequence that will topple an economy, which has been built on escalating debt.

Likely Conclusion

I believe there will be no big immediate fallout from this SVB failure.  On the short run. there will be a Federal Rescue Plan of some kind. However, on the long run, every CEO’s competency can now be questioned, if he puts the company’s money in a Regional Bank. ( Roku will have to wait to obtain any part of its almost $500 million dollars.) This run to pull money out on SVB was caused by a ‘Twitter’ panic post, which could happen again to any Regional Bank. In my opinion, in the long run, the SVB failure will cause further consolidation to the 5 largest Big banks .This will not be good for the Regional Banks or the health of the US economy. What happened to the Saving and Loan Banks, Community Local Banks, Regional Brokerage firms and non-bank owned Brokerage Firms and Mutual Funds??? All gone!  Wall Street wins + Main Street looses = An eventual economic disaster!

All economic disasters are a surprise and can start with something as simple as the SVB failure and escalate! Don’t’ forget the classic THIS TIME ITS DIFFERENT by Carmen Reinhart: It tells the story of eight centuries of Financial Folly. Each time after a catastrophe, (such as the Great Depression or 2008), economists agree that it could never happen again. Who could be so stupid as to let 10 banks control 70% of the US assets (to big to fail) and allow all the US economic growth  go to the top 1%, while eighty people own 50% of the world’s wealth?

It is the Fed (KISS)

As I said in ISL #743,  (with the Dow at 35,000), the reason that I believe the stock market is ready to resume it downside trend and turn into a true ‘Bear Market’ are many, but the main one is that the Federal Reserve is depending on higher interest rates to stop inflation. My worry is that the ‘cure’ may kill the patient. Also, I believe that investors should be worried as the Federal Reserve quickens the pace at which it removes one of its primary pandemic supports, quantitative easing, or QE.

The Fed’s balance sheet ballooned from a little over $2 trillion in early 2008 and $4 trillion in 2020, to a peak of nearly $9 trillion 2022. While QE brought investors back to the stock market and inflated stock prices, it also helped stoke inflation. Now, the Fed is reversing course through quantitative tightening, or QT, pulling back its support for financial markets while it raises interest rates to quell inflation. Investors should worry that the quickening pace of the Fed’s pullback could become too much for markets to bear, undermining the safety and reliability of the Treasury market.

If demand for Treasuries can’t keep pace with the supply, it could pull bond prices down. This could put banks  and may BBB rated business in trouble .Prices move in the opposite direction to bond yields, a measure of borrowing costs. Higher Treasury yields would put more pressure on borrowers and investment portfolios already grappling with the Fed’s campaign to lower inflation by raising interest rates. I am worried that we are putting Q.T. on top of these rate hikes and it will have consequences that could push us into recession or worse.

See how the Fed’s actions to raise interest rates had a devastating effect on SVB:

What Happened at Silicon Valley Bank?

As interest rates have risen, many banks have become more profitable, because the spreads between what they earn on loans and investments and what they pay for funding has widened. But there are always exceptions; flush with cash from high-flying start-ups, SVB bought huge amounts of bonds more than a year ago. Like other banks, SVB kept a small amount of the deposits on hand and invested the rest with the hope of earning a greater return. That had worked well until the Federal Reserve began raising interest rates last year to cool inflation. At the same time, start-up funding started to dry up, putting pressure on many of the bank’s clients, who then began to withdraw their money. To pay those requests, SBV was forced to sell off some of its investments at a time when their value had declined. In its surprise disclosure on Wednesday, the bank said it had lost nearly $2 billion.

SCB showed contracting margins over the past year. A Warning Sign:

Bank	Ticker	NIM – Q4 2022	NIM – Q3 2022	NIM – Q2 2022	NIM – Q1 2022	NIM- Q4 2021
SVB Financial Group	SIVB	2.00%	2.28%	2.24%	2.13%	1.91%
Source::Market Watch FactSet

10 Banks to Worry About

So now, the question is, which other banks might face pressure because their net interest margins have contracted, or because their margins have only expanded slightly. Below is a list of the 10 banks showing contracting margins over the past year, or the smallest expansions of margins:

Bank	Ticker	City	Net interest income/ avg. assets – Q4 2022	Net interest income/ avg. assets – Q3 2022	Net interest income/ avg. assets – Q4 2021	One-year contraction or expansion
Customers Bancorp Inc.	CUBI	West Reading, Pa.	2.61%	3.10%	4.03%	-1.42%
First Republic Bank	FRC	San Francisco, Calif.	2.28%	2.53%	2.50%	-0.22%
Sandy Spring Bancorp Inc.	SASR	Olney, Md.	3.10%	3.34%	3.29%	-0.19%
New York Community Bancorp Inc.	NYCB	Hicksville, N.Y.	2.10%	2.06%	2.20%	-0.11%
First Foundation Inc.	FFWM	Dallas, Texas	2.35%	2.98%	2.41%	-0.07%
Ally Financial Inc.	ALLY	Detroit, Mich.	4.04%	4.20%	4.09%	-0.05%
Dime Community Bancshares Inc.	DCOM	Hauppauge, N.Y.	2.98%	3.20%	2.95%	0.03%
Pacific Premier Bancorp Inc.	PPBI	Irvine, Calif.	3.34%	3.34%	3.27%	0.07%
Prosperity Bancshares Inc.	PB	Houston, Texas	2.72%	2.78%	2.65%	0.07%
Columbia Financial Inc.	CLBK	Fair Lawn, N.J.	2.69%	2.78%	2.60%	0.09%
Source::Market Watch FactSet

TAKE A LOOK AT ISL #729 ABOUT BANK STOCKS ( AN EARLY WARNING 3/14/2020)

“As stated above I worry about defaults on corporate debt and loans.  What worries me most is the collapse of many bank stocks, such as Deutsche Bank (DB), HSBC Holdings, (HBC1.BE), Credit Swiss (CS) and Barclays PLC (BCS). Credit Swiss is down from 78 in 2007 to 8.16. My 25 year charts doesn’t show the stock ever being so low! Barclays was as high as 55 in 2007, now 5.40.That’s a 35 year low! DB was as high as 149, now 5.97. Each rally is met with another new low! What are these falling bank charts telling me? Trouble!”

FOR MORE, SEE ISL #742 (summarized below)

Trouble in China There is trouble in China. The Chinese Hang Seng Index has hit a new 10 year low. Also the China’s Consumer Confidence Index is at a record low. Something is wrong. Confidence in China’s economic foundations could cross a threshold, beyond which it becomes far more difficult to recover.

World debt $226 trillion up from $74 trillion in 2019. My concern is in the world’s ocean of corporate debt, worth $226 trillion up from $74 trillion 2019. US corporate debt has climbed during the same period from $18 trillion to $30 trillion. Two-thirds of non-financial corporate bonds in America are rated “junk” or “BBB”, the category just above junk. The growth in debt has now stopped, because suddenly investors are worried and interest rates are high and going higher

US federal debt to GDP was in 1980  34.5%, 2000 57.9% and in 2021 100% The US Federal debt is over $30 trillion dollars and is growing. It took the US from 1789 to 2016 to get to $15 trillion and only 6 years for it to double. With the spending of that kind of money, we could have eliminated US poverty and given health care for all. Now, we are just stuck with the problems, in addition to the debt! Total US and State debt to GDP is 142%. ANNUAL INTEREST ON DEBT; is $450 BILLION AND IS RISING AS INTEREST RATES GO UP. Here is the scariest statistic: OTC Derivatives are $600 trillion (10 TIMES WORLD GDP). $600 trillion is at about the same level that caused the 2008 trouble in the banking system. And now there is talk in Congress to let the US default on its debt. When you play with fire, you can get burnt!

Our DOWNSIDE PROJECTIONS ARE: a DOW of 28,000 to 27,000, NASDAQ 9,000 to 8,000, S&P-2,900 to 2,700. Don’t fight the Fed!

Dow 31,909,     NASDAQ 11,138    S&P 500  3,861

Carl M Birkelbach

3/11/2023

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

 

YES, I AM BEARISH AGAIN!

The Investment Strategy Letter #739 May 20, 2022 predicted a big drop in in the Dow with its title of “TIME TO LIGHTEN-UP ON ANY FURTHER MARKET RISE.” In June 2022 the Dow was at approximately at 37,000 and then fell to 30,000 and has since then managed to rally to about 34,500. As I said in market letter #741 in June, “Expect Rallies.”  During the same period the S&P dropped from 4,800 to 3,500 and the rallied to 4,000; whereas the NASDAQ fell from 15,300 to 13,100 and is now at 10, 900. I NOW BELIEVE THE RALLY IS OVER AND THE MARKET IS READY TO RESUME ITS DONSIDE ‘BEAR MARKET’ THAT BEGAN LAST SUMMER. Our DOWNSIDE PROJECTIONS ARE: a DOW of 28,000 to 27,000 (Now 33,866), NASDAQ 9,000 to 8,000 (Now 10,876) S&P-2,900 to 2,700 (Now 3,951). Don’t fight the Fed!

The reason that I believe the stock market is ready to resume it downside trend and turn into a true ‘Bear Market’ are many, but the main one is that the Federal Reserve is depending on higher interest rates to stop inflation. MY worry is that the ‘cure’ may kill the patient. Also, I believe that investors should be worried as the Federal Reserve quickens the pace at which it removes one of its primary pandemic supports, quantitative easing, or QE.

The Fed’s balance sheet ballooned from a little over $2 trillion in early 2008 and $4 trillion in 2020, to a peak of nearly $9 trillion now. While QE brought investors back to the stock market, it also helped stoke inflation. Now, the Fed is reversing course through quantitative tightening, or QT, pulling back its support for financial markets while it raises interest rates to quell inflation. Investors should worry that the quickening pace of the Fed’s pullback could become too much for markets to bear, undermining the safety and reliability of the Treasury market.

If demand for Treasuries can’t keep pace with the supply, it could pull bond prices down. Prices move in the opposite direction to bond yields, a measure of borrowing costs. Higher Treasury yields would put more pressure on borrowers already grappling with the Fed’s campaign to lower inflation by raising interest rates. I am worried that we are pilling Q.T. on top of these rate hikes and it will push us into recession or worse.

Gridlock In Washington

I was surprised to see in today’s New York Times an editorial by Bret Stephens and David Brooks entitled “The Party’s Over for Us. Where Do We Go Now?” For decades, conservative values have been central to Bret Stephens’s and David Brooks’ political beliefs, and the Republican Party was the vehicle to extend those beliefs into policy. But in recent years, both the party and a radicalized conservative movement have left them feeling alienated in various ways. Now, with an extremist fringe seemingly in control of the House, the G.O.P. bears little resemblance to the party that was once their home. To quote from the article, “When people get on a bad path, whether it’s drinking or gambling or political or religious fanaticism, they tend to follow it all the way to the bottom, at which point they either die or have that proverbial moment of clarity. I’ve been waiting for Republicans to have a moment of clarity for a while now — after Joe Biden’s victory, or Jan. 6, the midterms, Trump’s dinner with Kanye West. I had a flicker of hope that the Kevin McCarthy debacle last week would open some eyes, but probably not. Part of the problem is that so many Republicans no longer get into politics to pass legislation. They do it to become celebrities. The more feverish they are, the better it sells.”

If these two stalwart Conservative Republicans have lost faith in the Republican Party, it appears there is no hope for a government that works for the people it serves. As James Madison said, “If there be no virtue in the electors there can be no virtue in the elected.” We are indeed in trouble as a man like George Santos serves in the House of Representatives after lying about everything in his resume. I am reminded of a session on June 9, 1954, when Senator Joseph McCarthy hunting Communist in the government when an amazed television audience looked on as Joseph Welch responded with the immortal lines that ultimately ended McCarthy’s career: “Until this moment, Senator, I think I never really gauged your cruelty or your recklessness.” When McCarthy tried to continue his attack, Welch angrily interrupted, “Let us not assassinate this lad further, Senator. You have done enough. Have you no sense of decency?”

I am very concerned. I believe as do Stevens and Brooks that “a successful democracy needs a morally healthy conservative party — one that channels conservative psychological tendencies into policies to check heedless progressivism while engaging productively with an evolving world.” I believe in the core values of old-fashioned democracy, faith in the goodness of people, human rights, the rule of law, free speech, political compromise, the political process itself. I believe in building things up, not just tearing them down. For the next two year, and maybe even longer, I believe the stock market and the country will suffer as the government falls into gridlock and disarray and maybe even defaulting on its debt..

World debt $226 trillion up from $74 trillion in 2019 (worth repeating from  ISL #742)

The market rise was due to low interest rates, quantitative easing, cheap oil and unprecedented growth of debt. Simply put the market went up to far. Now, high inflation, interest rates and gas prices and the war in Ukraine are worrying investors. Last year, we observed the largest one-year debt surge since World War II, with global debt rising to $226 trillion as the world was hit by a global health crisis. Debt was already elevated going into the crisis, but now governments must navigate a world of record-high public and private debt levels, new virus mutations, rising inflation and falling stock and real estate markets. Borrowing by governments accounted for slightly more than half of the debt increase, as the global public debt ratio jumped to a record 99 percent of GDP. Private debt from non-financial corporations and households also reached new highs. My concern is in the world’s ocean of corporate debt, worth $226 trillion up from $74 trillion 2019. US corporate debt has climbed during the same period from $18 trillion to $30 trillion. Two-thirds of non-financial corporate bonds in America are rated “junk” or “BBB”, the category just above junk. The growth in debt has now stopped, because suddenly bankers are worried and interest rates are high and going higher

US federal debt to GDP was in 1980  34.5%, 2000 57.9% and in 2021 100%

The US Federal debt is over $30 trillion dollars and is growing. US Federal spending is $6.2 trillion and tax revenue is $4.2 trillion ($12,000 per person) for a $2 trillion deficit.  $30 trillion is a debt of $243,000 per tax payer and $91,000 per tax citizen. The US federal debt to GDP was in 1980  34.5%, 2000 57.9% and is about 100% today. The unwritten rule is anything above $100% is dangerous! Total US and State debt to GDP is 142%. ANNUAL INTEREST ON DEBT; $450 BILLION AND IS RISING AS INTEREST RATES GO UP. Here is the scariest statistic: OTC Derivatives are $600 trillion (10 TIMES WORLD GDP). $600 trillion is at about the same level that caused the 2008 trouble in the banking system.

Dow 33,916,     NASDAQ 10,881    S&P 500  3,957 

Carl M Birkelbach

1/11/2023

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

Turmoil in the markets

After the big drop in June 2022, the Dow managed to rally from about 30,000 to about 34,000. As I said in our last market letter #741 in June, “Expect Rallies.” Our DOWNSIDE PROJECTIONS of a DOW 28,000 to 27,000 (High 37,000 – Now 30,700), NASDAQ-10,000 to 9,000 ( High 37,000 – Now 11,400) S&P-2,900 to 2,700 (High 4, 800 – Now 3,855) are being revised downward as follows: DOW 26,000 to 24,000, NASDAQ 9,000 to 8,000, S&P 2,800 to 2,700

Bond Market back at risk

In Mondays (9/12/2022) New York Times Business Section, 75% of the page was taken up by an article about going back to the office. At the bottom of the page, taking up 10% of the page, almost unnoticed, was an article titled . “Fed’s Fading Support Puts Bond Market Back at Risk.” With a sub title “Declining liquidity in Treasuries could end up causing turmoil.” What’s this all about and how come everyone isn’t talking about this? Shouldn’t investors be worried about the world’s largest and most important government bond market, as the Federal Reserve quickens the pace at which it removes one of its primary pandemic supports, quantitative easing, or Q.E.

When the global economy crashed in 2008 and in early 2020 when the corona virus pandemic hit, markets went into free fall, the U.S. Treasury market, the $25 trillion bedrock of the global financial system broke down. Sellers struggled to find buyers, and prices whipsawed higher and lower. The Fed stepped in, devoting trillions of dollars to steadying the market. In response to market turmoil in the early stages of the corona virus pandemic in 2020, the Fed unleashed the full force of its firepower, buying mortgage bonds and government debt in huge quantities, in a move known as quantitative easing, or Q.E. By becoming the buyer of last resort, the Fed helped restore confidence in markets, and trading in Treasuries began to recover.

The Fed’s balance sheet ballooned from a little over $2 trillion in early 2008 and $4 trillion in 2020, to a peak of nearly $9 trillion now. Stability also brought investment back to the stock market, enriching investors and helping stoke inflation. However, now, the Fed is reversing course through quantitative tightening, or Q.T., pulling back its support for financial markets while it raises interest rates to quell inflation. Investor’s should worry that the quickening pace of the Fed’s pullback could become too much for markets to bear, undermining the safety and reliability of the Treasury market.

Ralph Axel, an interest rate strategist at Bank of America, wrote in a research report last week. He sees emerging strains in the Treasury market as “the single greatest systemic financial risk today,” with the potential to do more damage than the housing turmoil that preceded the 2008 financial crisis. Oh my! The sheer scale of U.S. government debt also plays an important role. The Treasury market has doubled over the past decade, to around $25 trillion (some say it’s $30 trillion), as the government’s financing needs have grown. All that debt needs to be bought by someone, and not just the Fed.  In a May report the Fed noted a worsening of liquidity and said that “the risk of a sudden significant deterioration appears higher than normal.” We have been warned!

If demand for Treasuries can’t keep pace with the supply, it could pull prices down. Prices move in the opposite direction to bond yields, a measure of borrowing costs. Higher Treasury yields would put more pressure on borrowers already grappling with the Fed’s campaign to lower inflation by raising interest rates. I am worried that we are piling Q.T. on top of these rate hikes and it will push us into recession or worse.

Trouble in China!

There is trouble in China. The Chinese Hang Seng Index has hit a new 10 year low. Also the  China’s Consumer Confidence Index is at a record low. Something is wrong!  Is this supposedly successful fast growing super-giant in trouble? I have said so for some time. And if so, what are the economic global implications? In the September 17, 2022 edition of the Economist Magazine this was the headline on the finance and economics section “China’s Ponzi-like property market is eroding faith in the government. Its meltdown could scarcely come at a worse time for Xi Jinping.”

For decades the property industry has been symbolic of China’s rise. Private entrepreneurs have made vast fortunes. Average people have witnessed their net worth soar as home values trebled. Local governments have filled their coffers by selling vast tracts of land to developers. An astonishing 70% of Chinese household wealth is now tied up in real estate. To undermine trust in this model is to shake the foundations of China’s growth miracle. With sweeping covid-19 lockdowns and a crackdown on private entrepreneurs, this is happening on many fronts. But nowhere is it clearer than in the property industry, which makes up around a fifth of GDP. New project starts fell by 45% in July compared with a year ago, the value of new home sales by 29% and property investment by 12%.

The effects are rippling through the economy, hitting furniture-makers and steelworkers’ alike. The result is a crunch. China’s developers need to sell homes long before they are built to generate liquidity. Last year they pre-sold 90% of homes. But without access to bonds and loans, as banks cut their exposure to the property sector, and with sales falling, the Ponzi-like nature of the property market has come into full view.

Evergrande, the world’s most indebted developer, defaulted in December. An effort to restructure its offshore debts, intended as a model to follow, missed an end-of-July deadline. At least 28 other property firms have missed payments to investors or gone into restructuring. Confidence in China’s economic foundations could cross a threshold, beyond which it becomes far more difficult to recover.

In the US, I have seen prices skyrocket in Summit County Coronado. This was due to its location, which is only a hour from Denver, it’s 5 ski Hills, low temperature and humidity during summer, its vacation atmosphere, recreational alternatives and a good place to work, if you don’t have to go to the office. Just 4 months ago there was no availability. Nobody was selling but new building was progressing quickly. Now, with higher interest rates, people are being forced back into the office and with overbuilding, prices have dropped some 25% and dropping. Suddenly everyone wants to sell. Such is how fragile public confidence is. I draw an analogy to the stock market here. At the top nobody wants to sell, but panic selling once started, is hard to stop.

World debt $226 trillion up from $74 trillion in 2019

The market rise was due to low interest rates, quantitative easing, cheap oil and unprecedented growth of debt. Simply put the market went up to far. Now, high inflation, interest rates and gas prices and the war in Ukraine are worrying investors. Last year, we observed the largest one-year debt surge since World War II, with global debt rising to $226 trillion as the world was hit by a global health crisis. Debt was already elevated going into the crisis, but now governments must navigate a world of record-high public and private debt levels, new virus mutations, rising inflation and falling stock and real estate markets. Borrowing by governments accounted for slightly more than half of the debt increase, as the global public debt ratio jumped to a record 99 percent of GDP. Private debt from non-financial corporations and households also reached new highs. My concern is in the world’s ocean of corporate debt, worth $226 trillion up from $74 trillion 2019. US corporate debt has climbed during the same period from $18 trillion to $30 trillion. Two-thirds of non-financial corporate bonds in America are rated “junk” or “BBB”, the category just above junk. The growth in debt has now stopped, because suddenly bankers are worried and interest rates are high and going higher

US federal debt to GDP was in 1980  34.5%, 2000 57.9% and in 2021 100%

The US Federal debt is over $30 trillion dollars and is growing. US Federal spending is $6.2 trillion and tax revenue is $4.2 trillion ($12,000 per person) for a $2 trillion deficit.  $30 trillion is a debt of $243,000 per tax payer and $91,000 per tax citizen. The US federal debt to GDP was in 1980  34.5%, 2000 57.9% and is about 100% today. The unwritten rule is anything above $100% is dangerous! Total US and State debt to GDP is 142%. ANNUAL INTEREST ON DEBT; $450 BILLION AND IS RISING AS INTEREST RATES GO UP. Here is the scariest statistic: OTC Derivatives are $600 trillion (10 TIMES WORLD GDP). $600 trillion is at about the same level that caused the 2008 trouble in the banking system.

Dow 30,606,     NASDAQ 11,347    S&P 500 3,844 

Carl M Birkelbach

9/16/2022

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

 

EXPECT RALLIES;

DOWNSIDE PROJECTIONS; DOW-28,000 to 27,000 NASDAQ-10,000 to 9,000 S&P-2,900 to 2,700

OMG A BEAR MARKET?

Since our SELL/SELL ISL #740 market letter of December 2021, the Dow has fallen from our suggest sell at 36,000 to 31,400, the NASDAQ from our suggested sell at 16,000 to 11,400, S&P from our suggested sell at 4,500 to 3,900, More importantly some 50% of NASDAQ stocks like First Solar are down 50% and 10% of NASDAQ stocks like Netflix are down 70%.  Also we suggested the sale of Bitcoin at $57,000, now $30,000. After 13 years of continuous up market, the new generations of investors expect an instant rebound to new highs. Not this time.

World debt $226 trillion up from $74 trillion in 2019

The market rise was due to low interest rates, cheap oil and unprecedented growth of debt. Now, high inflation is due to  low interest rates  and high gas prices are due to the war in Ukraine. With debt, we observed the largest one-year debt surge since World War II, with global debt rising to $226 trillion as the world was hit by a global health crisis and a deep recession. Debt was already elevated going into the crisis, but now governments must navigate a world of record-high public and private debt levels, new virus mutations, and rising inflation. Borrowing by governments accounted for slightly more than half of the increase, as the global public debt ratio jumped to a record 99 percent of GDP. Private debt from non-financial corporations and households also reached new highs. My concern is in the world’s ocean of corporate debt, worth $226 trillion up from $74 trillion 2019. US corporate debt has climbed during the same period from $18 trillion to $24 trillion. Two-thirds of non-financial corporate bonds in America are rated “junk” or “BBB”, the category just above junk. The growth in debt has now stopped, because suddenly bankers are worried.

US federal debt to GDP was in 1980  34.5%, 2000 57.9% and in 2021 127%.

The US Federal debt is over $30 trillion dollars and is growing. US Federal spending is $6.2 trillion and tax revenue is $4.2 trillion ($12,000 per person) for a $2 trillion deficit.  $30 trillion is a debt of $243,000 per tax payer and $91,000 per tax citizen. The US federal debt to GDP was in 1980  34.5%, 2000 57.9% and in 2021 127%. The unwritten rule is anything above $100% is dangerous! Total US and State debt to GDP is 142%. ANNUAL INTEREST ON DEBT; $450 BILLION AND RISING AS INTEREST RATES GO UPHere is the scariest statistic: OTC Derivatives are $600 trillion (10 TIMES WORLD GDP). $600 trillion is at about the same level that caused the 2008 trouble in the banking system.

This Time it’s Different,

See the book, This Time it’s Different, Eight Centuries of Financial Folly, by Carmen Reinhart and Kenneth S. Rogoff. This book is one of my favorites. It tells the story that each time after a catastrophe, such as the Great Depression or 2008, economists agree that it could never happen again. Who could be so stupid as to let debt go to 127% of GDP and let six banks control 70% of the US assets (too big to fail) and allow all the economic growth to go to the top 1%, (and then give them tax cuts creating huge budget deficits), while eighty people own 50% of the world’s wealth? Reinhart tells about lessons from history, to show us how little we have learned and that we should prepare for future economic challenges, which are bound to happen again.

The Federal government should sponsors a ‘Retirement Savings Fund’

If you read my blog page titled “In a time of universal deceit, telling the truth is a revolutionary act” which is a quote by George Orwell; you will see that I believe that the Financial Industry has not truly fully disclosed stock market risk to the investing public.  Instead the Financial Industry gives the false advice that, “on the long term, the stock market will always recover.” Keynes has a famous quote that states “in the long run, we will all be dead.” The point being, if you are older and depending on the stock market for retirement, the stock market may not recover from any decline, in time for when you need the money.  During the period between 2000 and 2008 the stock market went down more than 50% twice, which was devastating for people who were retiring or sending their children to college. If you invested in the Dow in 1998, it wasn’t until 2011, that you got your money back. Therefore, in full disclosure, I believe I should tell investors that investing in the stock market is dangerous and that most people, ‘the average American,’ should treat stock market investing only as a speculation and not as a form of savings. Simply stated, most people should not gamble with their savings in the stock market. It is like feeding anchovies to the sharks,

I would like to see the Federal government sponsor a ‘Retirement Savings Fund’ that guarantees a 3 ½% return. (The rate would go up if the Fed fund rate goes higher). A Federal government sponsor a Retirement Savings Fund is needed. It would really help with the average American and their saving planning and keep the ‘average investor’ out of the stock market.  This would make retirement planning a lot easier and safer.

HSI -Hang Seng China Index at a 10 year low

To the word China is the biggest growth story in history with annual GDP growth above 6% per year. Since 2012 the US stock market the Dow have gone from 12,000 to 36,000 and the NASDAQ has gone from 3,000 to 16,000. Yet the Chinese HSI index is at 20,120, below its level in 2012 at 21,000. Why? Is it because the authorial Chinless communist party has been too careless with it ‘s  loans to its insider corporations? Is it because their vaccinations don’t work and the country is in lockdown?  Something is wrong in China and I don’t believe current world stock markets  reflect the risk to world markets.

DOWNSIDE PROJECTIONS; DOW-28,000 to 27,000 NASDAQ-10,000 to 9,000 S&P-2,900 to 2,700

Dow 31,236,     NASDAQ 11,388    S&P 500 3,900 Expect rallies, but eventually new lows!

Carl M Birkelbach

5/19/2022

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

Sell Dow above 36,000, NASDAQ above 16,000, S&P above 4,500,Sell Bitcoin now $57 227

As I said in ISL #739 TIME TO LIGHTEN-UP ON ANY FURTHER MARKET RISE! The time has come to put an end to this foolishness. Things keep on getting worse and the stock market keeps going higher. Covid 19 is persistent and is not going away. Inflation is rising and is not going away. The US Federal debt is over $30 trillion dollars and is growing. US Federal spending is $6.2 trillion and tax revenue is $4.2 trillion ($12,000 per person) for a $2 trillion deficit.  $30 trillion is a debt of $243,000 per tax payer and $91,000 per tax citizen. The US federal debt to GDP was in 1980  34.5%, 2000 57.9% and in 2021 127%. The unwritten rule is anything above $100% is dangerous! Total US and State debt to GDP is 142%. Here is the scariest statistic: Currency and Credit Derivatives are $600 trillion. It was only $90 trillion and that caused trouble in the banking system. So, in 2022: SELL/SELL/SELL

Why is the China stock market at a 5 year low. Something is wrong in China!

DOW 34,022  S&P 500 4,515  NASDAQ 15,254  Watch out below!

 

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

 

Carl M Birkelbach

12/2/2021

Open document settings Open publish panel

 

• Page

TIME TO LIGHTEN-UP ON ANY FURTHER MARKET RISE!

I  feel this BULL Market has been EXTENDED because of  the economic blast from the Trump tax cuts to the rich and trillions of dollars in stimulus packages by both Trump and Biden. The federal debt currently exceeds $23.4 trillion. It’s estimated that it could grow by an additional $13 trillion before 2028. I believe the current level of debt growth is unsustainable and many experts agree that the current rate of deficit growth will have disastrous consequences for the economy in the future. 

The app Robinhood has everybody in the market, as though it is like playing a video game. In the days before computers, big activity in odd-lot trading (under 100 share) was always an indicator (the last dollar is in) of a market top. (see New Yorker Magazine 5/17/21 The Big Gamble).  I  believes an economic disaster is festering along with the collapse of the Middle Class, 40% of which can not to afford to pay their rent.  Because of the weakness of the bottom 40% to 60% of Americans who are not part of America’s prosperity, I believe that a financial crisis surprise is about to happen from somewhere (a debt balloon burst, a 2008 type derivatives disaster, global warming events, a Family Funds disaster (see NYT 5/20/21).  The average investor has few options to protect themselves except to get out of the market, which they have been trained, like Pavlov’s dog, to stay in the market for the long term. (Interest rates are too low not to be in the stock market). However, to quote John Maynard Keynes, “In the long term we are all dead!” As a reminder, in the last 20 years there were two stock market collapses of 50% each, one between 2000 and 2003 and the other between 2008 and 2009. Also a reminder, the Dow in 1998 was 9,000 and after trading both up and down in wild swings, was still at 9,000 in 2009, eleven years later. Not everyone is positioned to ‘buy and hold’.

I suppose the delusion of unsupportable debt can go on. However, See ISL #736 for The Problem with Printing Money. The big unanswered question is,  what is the financial stability of the banks that hold mortgages and loans that are not being paid, because of rent and mortgage payment moratorium? In 2008, Standard and Poor’s ranked all mortgages as AAA, until they were worthless.

Warning, A Political Opinion: Republicans promote an ideology Conservatism, saying they are for business, free markets, less taxes, less regulation, balanced budgets and guns. They are against abortion, immigrants, non-whites and they mistrust big government. However, this ideology is really a subterfuge to help get elected and to help the oligarchy. Under Trump, Conservatives disappeared, when it came to a balanced budget with huge tax cuts for the rich. Trump kept the voters attention away from the real issues of global competition, automation and a carbon free technology, while the super rich played ‘winner take all’. The 2020 presidential and Senate election may help. However, the die may already be cast in huge federal debt and the economic effect of the pandemic on the banks balance sheets as rents and mortgages become unpaid.

What worries me most is what the Republicans are doing now. They are choosing getting elected over democracy, as they encourage State vetoing laws restricting voting rights and support the ‘Big Lie’ that Trump won the election. The Republican are backing President Trump’s assertion of ‘widespread voter fraud’ and claims of a ‘rigged election. Who knows what this packed Supreme Court will do to diminish the votes of the majority of voters, as they back the Republican tactics. Supporting the ‘BIG Lie’ is dangerous to democracy, as they it encourages ‘mob rule’ and can foment riots and insurrection. Autocratic governments are on the rise throughout the world. Is this what America wants too?

The Founders created a system that would produce the most virtuous people to govern. As Madison asked, “Is there no virtue among us?” If there be not, no form of government can render us secure. To suppose that any form of government will secure liberty or happiness without any virtue in the people is a chimerical idea. (Hoped for but illusory or impossible to achieve).”  I ask in Madisonian terms, “If there not be virtue in the governed, how can there be virtue in the government?”

As Tom Freeman  said in a 7/30/2020 PBS interview on Amanpour  “if  the ‘rule of law’ continues to be in jeopardy in the United States, we will not only loose our freedom, but also our prosperity.”

Carl M Birkelbach  5/20/2021

DOW 34,120  S&P 500 4,161  NASDAQ 13,530  TIME TO LIGHTEN-UP ON ANY FURTHER MARKET RISE!

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

NEW INVESTMENT STRATEGY-

Federal Debt May Stop Any New Recession

ONLY FOR THOSE WHO ARE YOUNG ENOUGH OR CAN TAKE RISK I suggest  a new ‘Investment Strategy Program’. Besides  investments in gold and the Bitcoin,  Set up a program’ to be ‘fully invested’ as follows:  Choose 21 of the best performing stocks like Amazon and 21 stocks that have big dividends and hold up well in down markets like Exxon. This portfolio should be updated every quarter.

In spite of my predictions of a slowing economy because of the inability of the US to control the spread of the Covid 19 virus, the resulting chaos caused by the President refusing to concede the election,  a $3.5 trillion 2020 budget deficit and Federal Debt increasing to $23 trillion and counting;  for all of 2020 the S&P Index rose 16% and the NASDAQ rose a whopping 44%. The January 9^th Economist Magazine explains the stock market as, ‘Melting UP!’  The ability of the stock market to rise and thrive in such an environment is probably due to the federal government’s $3.5 trillion stimulus packages, the cooperation of the Fed in keeping interest rates low (thereby creating equities attractiveness as compared to bonds) and the worst economic effect of the pandemic hurting mostly ‘small unlisted’ business.  Standard GDP forecasts show, that in spite of all the chaos, the US and world economy is expected to fall only 4.5% in 2020. In the US, because of pent up demand and increased savings; the economy is expected return to pre-pandemic levels by April 2021. HO HO HO! I continue to believe that the US and worldwide economies will be affected by Covid 19 pandemic well into 2022 and the recovery will be slow.

I continue to be concerned about the 20 million Americans that are unemployed because of the virus, (restaurants, travel, sports, small retail and theater), with only a few possible new jobs. How many restaurants, theaters and small business will reopen? How about the 6 million small family owned businesses that may not survive the pandemic and not reopen?  What about the business owner’s bank loans?  What about the people in the bottom 40% of the economy that recent surveys indicate don’t even have $400 for emergencies? Also, it has been reported that there are some 20 million people that haven’t been paying their rent or mortgages (there is a moratorium on evictions) and won’t be able to make back payment when the moratorium is discontinued.  Although there is a moratorium on evictions, what about the landlords who have to pay utility and mortgage payments? What about all the empty office buildings that are no longer needed? (Many now work permanently out of their homes.) The big unanswered question is therefore, what is the financial stability of the banks that hold these mortgages and loans and are not being paid? In 2008, Standard and Poor’s ranked all mortgages as AAA, until they were worthless. The problem with the banks won’t be visible until it is too late, just like what happened to Lehman Brothers bankruptcy in September 2008.

The Control of the Virus

The Covid virus continues to spread in many parts of the world as communities go on lockdown. Deaths in the US have increased to over 4,000 a day, for an unbelievable total of 360,000 dead. As of January 8, only 5.3 million vaccine shots have been given in the US, including to my wife and myself. Thank you Colorado. However, the vaccine is being distributed much too slowly in the US and throughout the world.  Pfizer and Moderna are expected to inoculate only 2 billion people, whereas the ‘yet to be approved’ ArtraZeneca-Oxford and the Novavax vaccine shots, are expected to inoculate some 5 billion people maybe sometime next year. So, with this slow roll-out, I believe the economic effect of the pandemic on a worldwide basis will continue to slow the world economies. However, it is interesting to note that where the pandemic began, in China and because of a realistic national prevention polices, the virus has been stopped and China’s economy is expected to show economic grow of 4.5% in the 4^th quarter 2020. Also, because of  of ‘realistic national prevention polices’ the death rate in Taiwan, Singapore and the rest of Southeast Asia, is each in the single digests.  This brings up the political situation in the US.  Is it too late for the upcoming Biden Admiration to make a difference?

Will the Biden Administration Make any Difference?

Hopefully, the new Biden administration can make a difference from the Trump administration, which basically ignored any Covid ‘realistic national prevention polices.’ So far, the Biden Administration has asked for 100 days of ‘realistic national prevention polices.’ This may, on the short term, slow down the economy, but these measures are expected to be accompanied by a new stimulus package. With the Democrats control of the Presidency, the House and the Senate; the Biden administration legislation should be a lot easier. A week ago it appeared that without control of the Senate, Biden would only be able to make appointments to government agencies and execute executive orders. Now, it appears that Biden can get quick confirmation of his judiciary and Cabinet positions and go directly to sweeping reforms and maybe even increasing taxes on the rich and using the proceeds for the ‘common good.’ I can dream! Although the ‘filibuster rule’ of 60 votes will still prevail, the Biden administration may be able to get legislation through via the 50 + Harris vote ‘reconciliation process.’ This depends on how much the Republican will comply to the Trump stranglehold on the party. Before the Trump inspired capital ‘insurrection,’ 65% of Republicans believed in the myth that Trump had won the election.   Trump has a 90% approval rating among Republicans. However, his lies, his disregard for the constitution and his demagoguery lit the fuse of a brainwashed mob that stormed the capital building. His initial message to the rioters was, “We love you, you’re very special.” It remains to be seen if the 74 million Republican’s that voted for him, can break loose from the death grip he has on the party.  We can only hope that the long ‘nightmare’ is over!  It would seem not, as party members at a gathering of the Republican National Committee in Florida, endorsed President Trump as the man to lead the party forward, ignoring the turmoil in Washington.

Currently the rioters that disgraced the capital building are being arrested and charged. However, the responsibility for this ”insurrection’ must also surely rests with the President and his enablers. Ted Cruz, John Hawley, Kevin McCarthy and others, tried unsuccessfully to overthrow the constitution and the the votes of our citizens. They should be punished or democracy will fail. Otherwise, as Anne Applebaum says in her new book Twilight of Democracy “Maybe new information technology will continue to undermine consensus, divide people further and increase polarization until only violence can determine who rules.” I believe that progress is a journey of process and sometimes like a spring, we have to fall backward to re-compress, in order to spring forward again. Let’s hope so!

Debt

A lot of un-repairable damage has been done. It seems that Trump has initiated a ‘new economic policy,’ (Ever Expanding Debt) It has created the illusion, that increasing debt will eliminate the US from ever going through another recession. Just issue more debt (print money), spend it and the economy will thrive!!! History indicates that like the 1922 German Wiemar Republic, an economic disaster will follow. The Trump administration ‘goosed’ the economy before the pandemic with $8 trillion of debt. Trump’s businesses always used debt to finance his bad decisions and went bankrupt 4 times. However, the US cannot go bankrupt! Trump loves printing money and all the ‘conservative’ Republican voices have been eliminated. Now, that using debt to save the economy is needed, because of the pandemic, the US finds itself in debt at the dangerous level of 100% of GDP. If interest rates go up again, we are screwed. Except nobody seems worried. See the book, This Time its Different, Eight Centuries of Financial Folly, by Carmen Reinhart and Kenneth S. Rogoff. This book is one of my favorites. It tells the story that each time after a catastrophe, such as the Great Depression or 2008, economists agree that it could never happen again. Who could be so stupid as to let debt go to 100% of GDP and let six banks control 70% of the US assets (too big to fail) and allow all the economic growth to go to the top 1%, (and then give them tax cuts creating huge budget deficits), while eighty people own 50% of the world’s wealth? Reinhart tells about lessons from history, to show us how little we have learned and we should prepare for future economic challenges, which are bound to happen again.

China

China is an autocratic state and is a wonder of economic growth, even though it ignores free markets and abuses human rights. As the US stumbles, China has made big gains in making countries trading partners. In 2000 the US had 40 trading partners compared to China’s 5. Now China has 64 trading partners compared to the US’s 18.  In the same time China’s economy has gone from 3% of the world economy to 18% and own 10% of our bonds.  It now feels embolden, as it has just arrested 50 Hog Kong patriots under their new national security laws. The US, Europe and other democracies still encompass 50% of world GDP. It is time to get our act together. That last sentence summarizes the way I feel about my country.  Let’s hope for the best, but prepare for the worst.

Investment Strategy

I suppose the delusion of unsupportable debt can go on. However, See ISL #736 for The Problem with Printing Money. The big unanswered question is  what is the financial stability of the banks that hold these mortgages and loans that are not being paid? In 2008, Standard and Poor’s ranked all mortgages as AAA, until they were worthless. Even with a new and better Biden administration, I believe the markets are overdue for a big selloff.

Carl M Birkelbach  1/29/2021

DOW 31,098  S&P 500 3824  NASDAQ 13,202  Watch out below!

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

NEW INVESTMENT STRATEGY-

Federal Debt May Stop Any New Recession

ONLY FOR THOSE WHO ARE YOUNG ENOUGH OR CAN TAKE RISK I suggest  a new ‘Investment Strategy Program’. Besides  investments in gold and the Bitcoin,  Set up a program’ to be ‘fully invested’ as follows:  Choose 21 of the best performing stocks like Amazon and 21 stocks that have big dividends and hold up well in down markets like Exxon. This portfolio should be updated every quarter.

Fasten your safety belts, it going to be a bumpy ride. I am concerned about some surprises, both economically and politically, which may be affecting the stock markets in the next four months. First, while the GDP is forecast to be down only -8% for the year, I believe, there is sector damage in the banking industry that may cause a Lehman Brothers type 2008 surprise to our 2020 supposedly strong banking system. (See below) Secondly, there is increasing professional opinion that President Trump ‘will not concede’ the election and there is a possible scenario whereby on December 14, (if Republican State legislators in swing states approve Trump electors, even though Biden believes he won the state) and if there is no resolution by the House and Senate on January 8^th, that by Inauguration Day (January 20), we may have 3 possible Presidents and a public that could react violently. (More later)

Economic chaos

Something is wrong with the bank stocks. The International Monetary fund projects 2020 GDP in the US as down -8% with +4.5% year after year growth in 2021. For Europe, the figures are -10.2 and +6%. With such a small decline in the economy forecast for this year and a big recovery forecast for next year, consequently worldwide stock markets are selling close to pre-pandemic highs. However, I propose this question; if everything looks so well, then why are the banking stocks not following the bullish pattern?  J P Morgan’s high in January 2020 was 142 now 92 and for the same time periods: Wells Fargo Bank 53 now 23, BPN Paribas 54 now 31, HSBG (Hong Kong/Shanghai) 7 now 3, Credit Suisse 14 now 9 and Barclays 10 now 4.6. Something is not adding up. I propose that there is a systemic weakness in the banking system because of the continuing economic effects of the virus, of which investors seem not to be aware.

No Economic Recovery without Control of the Virus. As I said in the ISL #736 there will be “No Economic Recovery without Control of the Virus. The corona virus appears to be out of control. THE VIRUS IS NOT TEMPORARY AND WILL HAVE A LONG TAIL.” The virus continues, in my opinion, to be out of control. Any potential vaccine is a long way off and will not be available to the general public until mid-2021. The problem may still remain, as by then; there may be a variant (covid-21) that the vaccine won’t cover and that there are some 40% of Americans that say they won’t take the shots. Put this together with the reluctance of many Americans to wear a mask or social distance and in dangerous places like Florida, where the Republican governor has lifted all covid-19 restrictions on businesses, including restaurants and bars, the pandemic will probably continue to grow. Therefore, I believe the pandemic effects will be worse and worse, not better and better, which is not the common consensus.

What if there is no fast economic recovery? There are now 30 million Americans that are unemployed because of the virus, (restaurants, travel, sports, small retail and theater), with only 5 million possible new jobs. How many restaurants, theaters and small business will reopen? The good news, and probably why the stock market is up, is because most of the big corporations will survive and so will the many well-educated or well-trained employees. However, how about the 6 million small family owned business that may not survive the pandemic? As this pandemic lengthens, what will happen to their employees? What about the business owner’s bank loans?  What about the people in the bottom 40% of the economy that recent surveys indicate don’t even have $400 for emergencies? Also, it has been reported that there are some 20 million people that haven’t been paying their rent or mortgages (there is a moratorium on evictions) and won’t be able to make back payment when the moratorium is discontinued.  Although there is a moratorium on evictions, what about the landlords who have to pay utility and mortgage payments? What about all the empty office buildings that are no longer needed? (Many now work permanently out of their homes.) The big unanswered question is therefore, what is the financial stability of the banks that hold these mortgages and loans that are not being paid? In 2008, Standard and Poor’s ranked all mortgages as AAA, until they were worthless.

Prediction of a slow recovery with consequences. So in a nutshell, I see the economic recover as slower than predicted, with a lot of upcoming personal and business bankruptcies (along with some more big corporations).The consequences of a continued (proposed) economic slowdown will be that once again (as in 2008)  the banks will get into trouble with their loans and mortgages. Are they still too big to fail? This proposed economic chaos does not depend on who becomes the next President. It is dependent on an out of control pandemic, which I believe will continue unabated for longer than most expect.  However, as stated above, I believe the election will bring another factor of chaos into investor’s decision making process.

Possible Election Chaos.

The following comments have been influenced by two recent articles that I have read. The first appears in the New Yorker Magazine in its September 28 issue entitled “The Political Scene. What come next?” by Jeffrey Toobin, with the sub-title of “How Trump forces could challenge the election results and turn the country into a battleground.” The second article is in the Atlantic Magazine November issue, (published on the website early ‘because of its urgency’) titled “The Election that could break America” by Barton Gellman, with the sub-title of “If the vote is close, Donald Trump could easily throw the election into chaos and subvert the result. Who will stop him?” The cover of the magazine has a flashing red warning signal. Both articles go through the mechanics of the Electoral College process, its flaws and its vagueness.

Under no circumstances will President Trump ‘concede’ Both articles agree that there will be no outcome on November 3ed, election night, even if one side takes the lead. The tabulation of mail-in provisional ballots and litigation will keep the outcome unsettled for weeks. Both articles agree that under no circumstances will President Trump ‘concede’ the election to Biden as both believe Trump is incapable of accepting defeat. Trump has told us so. “The only way they can take this election away from us is if this is a rigged election.” Trump said this at the Republican National Convention on August 24. The Atlantic article says, “Unless he wins a bona fide victory in the Electoral College, Trump’s refusal to concede—his mere denial of defeat—will have cascading effects.” This will create a problem, as our Constitution does not secure a peaceful transition of power. When in 2000, Gore ‘conceded’ to Bush after the Supreme Court ruled in Bushes favor, he had no obligation to do so and could have brought the dispute to Congress.  The Atlantic article says, “We have no precedent or procedure to end this election if Biden seems to carry the Electoral College but Trump refuses to concede. We will have to invent one.”

The Election Day problem. The problem begins on Election Day, when Trump allies can begin by suppressing the Biden vote.  The Republicans have recruited some 50,000 volunteers in 15 contested states to monitor polling places and challenge voters they deem suspicious-looking, to purge voter rolls, tighten rules on provisional votes, uphold voter-­identification requirements, ban the use of ballot drop boxes, reduce eligibility to vote by mail, discard mail-in ballots with technical flaws, and outlaw the counting of ballots that are postmarked by Election Day but arrive afterward. Mail-in ballots have plenty of flaws for the Trump lawyers to seize upon. Voting by mail is more complicated than voting in person, and technical errors are common­place at each step. The intent and effect will be, to throw away as many Biden votes as possible.

The importance of December 8^th As to what happens next, gets pretty complicated and hard to believe, I am going to paraphrase and quote directly from the articles: The law allows 35 days for the count and its attendant lawsuits to be resolved. On the 36th day, December 8, an important deadline arrives. At this stage, the actual tabulation of the vote becomes less important than the votes cast. That sounds as though it can’t be right, but it is: The combatants, especially Trump, will now shift their attention to the appointment of presidential electors. December 8 is known as the “safe harbor” deadline for appointing the 538 men and women who make up the Electoral College. The electors do not meet until six days later, December 14, but each state must appoint them by the safe-harbor date to guarantee that Congress will accept their credentials. The controlling statute says that if “any controversy or contest” remains after that, then Congress will decide which electors, if any, may cast the state’s ballots for president.

We are accustomed to choosing electors by popular vote, but nothing in the Constitution says it has to be that way. Article II provides that each state shall appoint electors “in such manner as the Legislature thereof may direct.” Since the late 19th century, every state has ceded the decision to its voters. Even so, the Supreme Court affirmed in Bush v. Gore that a state “can take back the power to appoint electors.” How and when a state might do so has not been tested for well over a century. With a justification based on claims of rampant fraud, Trump would ask state legislators to set aside the popular vote and exercise their power to choose a slate of electors directly. A Trump official told the Atlantic “The state legislatures will say, ‘All right, we’ve been given this constitutional power. We don’t think the results of our own state votes are accurate, so here’s our slate of electors that we think properly reflect the results of our state.’ The Democrats of course would object and we could have two men claiming the presidency.

The importance of January 6^th The next occasion to settle the matter is another three weeks away. January 6 comes just after the new Congress is sworn in. Control of the Senate will now be crucial to the presidency. Pence, as president of the Senate, would hold in his hands two conflicting electoral certificates from each of several swing states. The Twelfth Amendment says only this about what happens next: “The President of the Senate shall, in the presence of the Senate and the House of Representatives, open all the certificates and the votes shall then be counted.” Note the passive voice. The Atlantic asks “Who does the counting? Which certificates are counted?” The Trump team would take the position that the constitutional language leaves those questions to the vice president (the president of the Senate). This means that Pence has the unilateral power to announce his own reelection, and a second term for Trump. Democrats and legal scholars would denounce the self-dealing and point out that Congress filled the gaps in the Twelfth Amendment with the Electoral Count Act, which provides instructions for how to resolve this kind of dispute.

The importance of January 20^th If Democrats win back the Senate and hold the House, then all roads laid out in the Electoral Count Act lead eventually to a Biden presidency. The reverse applies if Republicans hold the Senate and unexpectedly win back the House. But if Congress remains split, there are conditions in which no decisive outcome is possible—no result that has clear a force of law. Each party could cite a plausible reading of the rules in which its candidate has won. On this argument, no one has attained the presidency, and the decision is thrown to the House, with one vote per state. If the current partisan balance holds, 26 out of 50 votes will be for Trump. Then this may happen: as Congress counts the votes and before Pence can move on from Pennsylvania to Rhode Island, which is next on the alphabetical list, House Speaker Nancy Pelosi expels all senators from the floor of her chamber. Then Pence is prevented from completing the count “in the presence of” the House, as the Constitution requires. Pelosi could then enact plans to stall indefinitely. If the count is still incomplete on Inauguration Day, the speaker herself will then become acting president. Then Pelosi could prepare to be sworn in on January 20 unless Pence reverses his ruling and accepts that Biden won. It would be expected that Pence would not budge. He thereafter could reconvene the Senate in another venue, with House Republicans squeezing in and purports to complete the count, making Trump the president-elect. Under theses circumstance, THREE people could now show up on Inauguration Day.

I am most concerned about how the public, armed to the teeth, will react to this chaos. Will our citizens try and settle this election in the streets through violence? The 1807 Insurrection Act was last utilized in 1992 in the Los Angeles riots. Will Trump use the Insurrection Act to take control of contested states and thereby take control of the election process? How will the military and National Guard act and under whose orders? Will they fire on US citizens as they did at Kent State in 1970? I believe that it is possible that our democracy, as we know it, is at stake and I do believe the next four month ‘could’ be very chaotic.   I believe investors should be prepared for of the possibility of chaos. Let’s hope all votes on both sides will be counted accurately

What can you do?

If you are a voter, try and avoid voting my mail. Vote early in person if your State permits it, or think about voting in person on Election Day. If you are at low risk for COVID-19, volunteer to work at the polls. God bless America!

Carl M Birkelbach 9/28/2020

DOW 27,584,  S&P 3,351 and NASDAQ 11,117

Carl Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Carl Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com

NEW INVESTMENT STRATEGY-

Federal Debt May Stop Any New Recession

ONLY FOR THOSE WHO ARE YOUNG ENOUGH OR CAN TAKE RISK I suggest  a new ‘Investment Strategy Program’. Besides  investments in gold and the Bitcoin,  Set up a program’ to be ‘fully invested’ as follows:  Choose 21 of the best performing stocks like Amazon and 21 stocks that have big dividends and hold up well in down markets like Exxon. This portfolio should be updated every quarter.

The corona virus appears to be out of control. THE VIRUS IS NOT TEMPORARY AND WILL HAVE A LONG TAIL. What affect will that have on the economy? If there is anything the stock market hates, it is uncertainty and here is the stock market (Dow and The S&P) close to its all-time highs, with the NASDAQ above 10,000. (Some 50% of the NASDAQ is now represented by only 6 stocks. 5 are monopolies.) Although the Dow did fall to my 18,062 to 18,974 projected low, I am astounded at the extent of the recent rally. Investors appear to be looking for a V shaped economic recovery. However, the Conference Board has the US GDP down -5% for the First Quarter, down -33% in the Second Quarter, up +20% in the Third Quarter, 0% in the Fourth Quarter (full year down -7%), with 2021 forecast as up only +1%. These forecasts  (Third Quarter?/2021?), in my opinion do not include the recent surge in corona virus cases, which are increasing worldwide at a 250,000 a day rate with 5,500 new daily deaths and the US cases increasing at 70,000 per day with a death rate of over 1,000 a day. It appears to me that  the economy looks more like an L than a V shaped recovery. Will this virus  have an effect on the economy for years? I think so, and the stock market is not reflecting this reality. There are now 30 million unemployed because of the virus, (restaurants, travel, sports, small retail and theater), with only 5 million possible new jobs! (such at meatpacking, retail , health care and at Amazon warehouses, all of which are dangerous). We could have unemployment above 10% for a year and that is the definition of a Depression!

Second Wave?

The above is what is happening with the ‘first wave.’ What if there is a ‘second wave,’ which many are predicting and what if there is second variant of the Corona 19, (Corona 21)? When will we have a vaccine and will it cover any new variants? Will a vaccine be available by year end and how fast can we give the shots and how many people will reject the shots? Did you know that there is not a vaccine for AIDS, only HIV medicines called antiretroviral therapy (ART), which reduce the symptoms! A vaccine is not a sure thing. Will schools reopen and what effect will that have on increasing the virus rate?

Evictions?

Before Covid 19 there were 6,000 evictions per day. Now there are 23 million families on CARES rent forbearance and 4.3 million properties with mortgage forbearance. What happens when this Government assistance stops? How many will not be able to pay past and present payments due all at once. How may will be evicted? Even if CARES is extended, how are the landlords paying their bill and mortgage payments and how are the banks fairing without interest payments of their mortgages?

How many restaurants, theaters and small business will reopen? Recent surveys indicate that 40% of the people and the US don’t even have $400 for emergencies. What will happen when the stimulus ends and the jobs do not return? What about the 6% of the people in the US that are off the grid and don’t even have a bank account? The demonstrations about Black Lives Matter is not just about racism, it is about many of the bottom 40% of Americans of all races that are desperate to find a job that can pay their rent, or receiving an adequate education or are cut off from basic health care. There are on average 123 suicide per day and  130 opioid deaths per day. What will it mean to the the top 60% ( many can work out of their homes), if the bottom 40% (most lack internet service) of Americans are desperate?

The States/Hospitals?

States have lost revenue from sales taxes, while expenses have increased. Will the corona infections cause further slowdowns? States cannot go bankrupt, now what? Hospital are desperate to put up with increasing corona virus patients. Health care workers can not keep up and are in physical danger. Our Health Care system is failing. The large Mercy Hospital in Chicago just announced it is closing.

The problem with printing Money

The good news is that most of the big corporations will survive and so will many their well-educated or well-trained employees. That is probably why the stock market is UP. Big corporation will take advantages of this crisis to automate further and endeavor to replace the over 6,000,000 small businesses with a big corporate alternative. That is what happened in the 2008 financial crisis, as Wall Street took over 12 million home in foreclosure and used the tax payer’s money to strengthen their position over the public’s best interests. However, the bad news is that this elite upward pyramid structure is on a base that is deteriorating daily.  Issuing more debt and reducing taxes has its limitations, as we see the dollar down some 5% in worldwide trading and gold above $2,000 an ounce. Because of giving tax breaks to the rich and the stimulus packages, US debt has soared to $23 trillion and growing! The new Stimulus Package will increase total US debt to $25 trillion. I see the dollar falling 20%. We can’t just keep printing money as though there are no consequences.

Unlimited printing of money has created six problems: Problem 1) Now, US total debt is  over the warning line of 100% of GDP. Problem 2) In order to finance this debt, the Fed will borrow the $4 trillion from investors by selling U.S. government bonds. The money that investors use to buy the bonds could come from their cash accounts, but more likely it will come from selling other investments, like corporate bonds or the stock market. Problem 3) The Fed may buy some of these bonds itself. During the last 2008 crisis, the Fed bought some $4 trillion in bonds (Quanative Easing).  Recently the Fed has vastly expanded its purchases of various bonds as the corona virus crisis weighs on the economy and strains our financial system. The Fed now holds some $7 trillion and growing of corporate bonds and other securities tied to assets like real estate and auto loans. This artificially props up their long-term value of these bonds and companies, as investors exit those markets for the presumed safety of government debt. How much of this debt that the government holds will be worthless? Problem 4) The federal government paid $580 billion in interest in its last fiscal year on $22 trillion of debt. What will happen when interest rates go higher and the interest on this debt costs us more the entire budget does now? Problem 5) How will we (the taxpayers) ever pay down this debt?  Problem 6) By the time this crisis is over, the dollar may be down 25%. What will that do to the US economy and annual budget, when only higher interest rates will attract buyers?

See Above: “In a time of universal deceit, telling the truth is a revolutionary act”     George Orwell. 

Carl M Birkelbach  7/29/2020

DOW 26,539  S&P 500 3,258  NASDAQ 10,542  Watch out below!

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com