The Potemkin Village
Get off my lawn.
Tony Greer: "What about you guys, Brent? Favorite Twitter account?"
Brent Johnson: "You know, Rudy Havenstein is always good..."
I can’t compete with this kind of humor:
Never Forget:
Meanwhile, in Clown World…No accountability, ever.
Brian Sullivan: Core PCE - the Fed's preferred inflation metric - came in at 2.9% year over year, "in line with expectations.”
Ugh. Whose expectations?!
Isn't the Fed's legal mandate stable prices? They're almost 50% above their made-up 2% target!
"Reading this transcript made me throw up in my mouth a little bit...At least [Bullard's] honest about the intellectual poverty about the whole FOMC interest rate-setting exercise. They’re just making it up as they go along, a hallmark of magical thinking."
Um, because he’s a billionaire?
Bill Moreland of BankRegData: A Credit Potemkin Village
I highly recommend this interview. One of the most interesting guests I’ve heard in a while.
“They're just manipulating the shit out of the data.”
“We’re doing enormous amounts of loan modifications at levels we've never done before, and then changing the rules around the loan modifications reporting so you don't see it. In some ways, the story is improving. In many ways we are manipulating the way that we report data to drive numbers.”
“I'm a big fan of loan modifications. It's a tool in the toolkit. The problem you run into is it's a gateway drug. Once you step across a certain threshold, it becomes the de facto way.”
“I could have modified five, six, seven, eight percent of my loan book, and you, as an observer from the outside, would only ever see one and a half to 2%.”
“When you see great delinquencies continue to happen, and the trend turned down, and - hey, commercial real estate was hideous, but now it's getting better. Green shoots - understand what's happening behind the scenes is it's an illusion. You live in a Potemkin Village, and the it's getting bigger, and we change the rules to make it to where we can't see the edge of the village anymore. We really honestly don't know where that line is. It's been so blurred.”
“I think there's probably a few banks that didn't pass the stress test, because you can see what their actions were in the call report, and it's like yeah, there's no way in hell that bank passed the stress test, but we're not going to say that, right?”
“Silicon Valley Bank was technically bankrupt a year before they went down in 2023 Q1. They were bankrupt in mid-2022, and about 40% of the banks were bankrupt at that point in time, but we don't talk about that, right?”
“If you stop making rent payments and you stop making mortgage payments and you stop making student loan payments, what do you think you're gonna have as discretionary income? It's gonna go up. So, in 2020 and 2021, discretionary income for the consumer went way up.”
Farley: “Isn't U.S. household debt quite low as a percentage of disposable income or as a percentage of GDP?”
Moreland: “I can flat out tell you it's to a point where people can't pay it anymore.”
“In Q2 2024, see how the number drops from 2.03 billion to 1.67 billion? That's not because the borrowers with the reduced payment are paid off, or sold or charged off. That means it's a reporting. It's fake. It's a 12-month thing.”
Farley: “It used to be if you were modified, you were always modified. But now, if you've been making payments for 12 months, you're suddenly non-modified.”
Moreland: “The last real reporting figure you have on this table is the second row of content, 2022 Q4.”
“Typically, a bank is supposed to be putting 80-90% of their loan modifications on non-accrual. But when times get stressed, the regulators look the other way. And so, to their credit they put 30% on. But that's fake, too…we have $1.96 billion dollars of extend and pretend that's bigger than the actual delinquency”:
”Performing is a misnomer. Performing means we've lowered Bill Moreland's payment, and he's making the payment, but it's read it as lowered payment to avoid delinquency, but the policy makers call that performing modifications. It's 11% of their book.”
“Every big bank with a commercial real estate portfolio all had the exact same thing happen at the same time. Their delinquencies are going through the roof.”
“It's easy to criticize small community banks or mid-size community banks that don't advertise with you. I had several people in the press - and they're all names you would recognize - periodicals, news organizations on cable - They don't want to talk about what's going on in JP Morgan. Wells Fargo.”
“So you're running 16 percent delinquent on people who've had their payment lowered and they still can't make it”:
“So much of their loan book is fake.”
Farley: “I'm just saying that generally hedge funds tend to pay their loans back. And when hedge funds don't pay their loans back, it's it's in the news”
Moreland: “Sort of like AIG was able to pay all their insurance claims in 2009.”
Farley: “Uh, well, because they got taken over by the government.”
Moreland: “No, because they failed. So we can say there's no risk. There's always risk.
Fun with Note on Note Financing1
“An overvaluation problem can't be solved without value destruction. But we got a lot of clever people, right? We're putting our best and brightest into finance for the last two decades, three decades. So we come up with very creative ways of solving problems, but really all you're doing is financial engineering…So basically, we're [JPMorgan][ giving you money to take the stuff off our balance sheet so we don't have to report it.”
“Part of note on note financing is bank A funds a private equity or private buyer to buy assets off bank A's balance sheet. And I've I've asked the FDIC and the regulators…how much is it loan laundering, right? How much of those non-depository financial institution massive loan growth is banks paying or lending to people to take bad balance sheet assets off their own book temporarily. It's temporarily. Don't think that it's off the book. It's fine. It's non-recourse. It can get put right.”
“There's a lot of very bright people trying to solve an overvaluation problem. The problem is when have we ever solved an overvaluation problem in an asset class without some asset destruction?…
By extending and pretending and by changing the rules and hiding what we report and not report, and by pushing it off balance sheet, it gives the illusion that things are better…the Potemkin Village just keeps getting bigger…
I'm not the Pied Piper of doom. I'm just showing you numbers, man. I got kids that are trying to get jobs. I don't want a bad economy. But I also want my kids to be able to afford a house, right? And so we have overvaluation in asset class after asset class after asset class. Eventually we're going to have to have value destruction. How do you have value? Well, we don't. We just keep changing the rules and changing how we do things to hide it.”
Farley: “Bill, so what what does the modification cycle or modification rates normally look like in the 80s, 90s, 2000s, 2010s? How frequent was the use of modifications in terms of a rough percentage, and what does it compare to to now?”
Moreland: “Way lower.”
“The more loan modifications a bank does, the more likely they are to fail.”
Farley: “When you talk about systemic risk, look at JP Morgan or Bank of America, all of those numbers, I think, in terms of modifications are a very, very small fraction of their earnings or their equity. You're shaking your head.”
Moreland: “No, no way at all.”
“Big banks do so many more things than the local community banks do. Their exposure to commercial real estate is enormous.”
“Publicly traded banks want to be tech stocks.”
“You can go back and look at Silicon Valley Bank - they were one of the most tier-one capital banks in the country, but it's fake.”
I kept thinking during this interview that I’m sure glad the big banks have Jack repeatedly defending them.
Remember DSCR Loans?
Armed with capital from firms like KKR & Co., Apollo Global Management Inc.’s Athene and Singapore’s Temasek, lenders to home flippers and small-time real estate investors have cranked up originations in recent years. What was once an industry backwater churned out nearly $140 billion in debt last year and looks primed for another annual record.
Juiced appraisals are particularly dangerous in this corner of the mortgage market because of the way originators approach the loans. Standard mortgages use appraisals as a guardrail to prevent over-lending, but a borrower’s creditworthiness is central to the equation. In the case of these small-scale investor loans, however, deals are done based on a property’s potential cash flow or future sale price — and appraisals are a key element of that calculation."
“We are we are in an insane bubble that has been fueled by speculation that went on steroids after the GFC.”
“What happened at the end of the last crisis…is Wall Street came in at the behest of the government agencies to buy up all that foreclosure property. And then we had every television show out there, HGTV, Fix and Flip, and everybody thought, well, you know, the institutions are doing it. I'm going to do it. And so people started buying up these houses to flip them and then rent them out, because people couldn't afford homes anymore. and they saw rent prices kind of skyrocketing and that looked like a good investment.
Well, here comes COVID and then everybody gets told by their bank, well, hey, you know what? You really should pivot to a short-term rental, because instead of getting $1,500 a month, you can get $10,000 if you do a short-term rental. Now, people didn't think, well, wait, I'm 20 miles out of Austin. Am I really going to get $600 a night? No, the answer is absolutely not. But this is what kind of the non-banks told folks is like, just come and grab them.
So anyway, we're in a market right now that is going to be way more sensitive because it's not about you and me owning a home. It's about investors who can no longer pencil out that investment, and because they're not cash flowing, because property taxes and insurance have gone through the roof, and they can no longer get those cheap borrowings. And so it doesn't make economic sense. And so in those markets where you have a lot of short-term rentals, that's where the trouble started.”
Pending Home Sales Drop Further
Pending sales are based on contract signings and track deals that haven’t closed yet and could still get canceled because buyers cannot afford or even get homeowner’s insurance, or for other reasons. Signed contracts that then get cancelled are included in the pending sales here, but are not included in closed sales reported later.
Alas, Redfin reported that in July, 58,000 pending sales were canceled, amounting to 15.3% of all pending sales, the highest rate for any July in Redfin’s data going back to 2017
Toronto Real Estate Market in Freefall - Ron Butler and Jimmy Connor
“It's a complete debacle.”
“Well, the GTA [Greater Toronto Area] real estate market, which is the biggest real estate board in the world, is TREB, Toronto Regional Real Estate Board. So there's more agents than any other board in the world, more transactions than any other board in the world. Um, so, it's a debacle. It's a complete debacle. We have several things going on at once. We have a catastrophic disaster going on in the high-rise condo world that will stretch out for another two or even 3 years. We have a profound slowdown in the total real estate resale market. We have complete collapse of construction of new residential properties in almost all of Ontario. The only exception is the creation of purpose-built rental towers.”
“At some time by the end of this year or early next year, we will hear an announcement in Toronto or Vancouver that “the building is finished and the developer has to go to receivership, because 70% of the people refused to close, 80% of the people refused to close.” We estimate it to be about a $15 billion financial debacle for both buyers and developers over the next - we think we've already gone through about three billion, four billion in losses in the last 18 months, but there's more to come over the next two years. One of the things that shocks me about Toronto, downtown Toronto, is that no other city in North America has experienced the stratospheric growth in condo development that Toronto has.”
“Nobody just has one condo. You know, everybody who's in this situation right now has been involved in it for a bit. They've typically bought more than one. They have HELOCs on their homes, their places they live in. They have some savings, some RRSPs, they have something, and they're actually considering stretching themselves, pulling every nickel out of every possible nook and cranny to close out of fear of litigation. And in the end, they will have a ongoing loss, a negative cash flow of about $1,800 a month ad infinitum. Now, you might say, "Well, okay, but maybe rents will go up." Well, actually in Canada for the last 14 months, rents are falling in major cities. So that's bad news. And then uh will the price go up? The prices are expected to continue down for the next two years at minimum, so the idea like the idea of being faced with a hopeless falling asset that is depreciating every day and is costing you $1,800 a month is just financial disaster for these people.”
“Recently we've had a particularly push by Vancouver based developers, they want to eliminate the foreign buyers ban, because they've come to the realization that their prices are so high that no Canadian earning a Canadian income could ever buy it nor rent it nor anything. So they want to go back to being able to effectively launder money from foreigners.”
Vincent Daniel, Porter Collins & Danny Moses
“The Fed has never been, and never will be, independent. We'll start with that, right? We just have this fake persona that it is independent to make all of us on Wall Street feel happy…the only introduction that is new is that you have a president that is significantly more explicit in what he wants than we've ever had in our careers.” - VD
“Wall Street's Party is green, in my opinion. And whenever they're in trouble, at least in our careers, the Fed's there to bail them out, no matter what. That's what happens. That is the premise. And quite frankly, that has turned Porter and myself to have a very subjective, unquestionable desire to own gold.” - VD
“Vinnie and I like to debate - you know, Greenspan versus Bernanke - who the worst ever Fed president was." - PC
“I have no love for the Fed. I think it's always been political. Am I surprised about the the Lisa Cook stuff? Absolutely not. The Democrats are hunting Trump for for four years. He's a vengeful guy. He's like, "F this. I'm going after you." And so he he looked for any cracks in the story. And, you know, I don't think she denied that she did this. And so, I don't know, she's gone. If it was you and me, we'd be gone too.” - PC
“All roads lead to gold.” - DM
“We never touched 2%. We're going back up now, and we all know that they're under-reporting inflation, right? We've been saying this for a long time - inflation is much higher than you think it is.” - PC
"Will they fabricate what inflation is? Well, they've been doing it for a while. They will probably continue." - VD
Meanwhile, in France…
The Government is teetering on the edge of collapse, the budget is out of control, there are emergency tax rises on the way and the rioters are gearing up for protests on the streets.
For France, it is all pretty much business as usual.
…a simple truth remains. The easiest way for France to get out of the fiscal mess it finds itself in is for it to leave the euro and restore the franc.
There would be a massive devaluation, of course, but when you owe €3.35tn (£2.9tn), much of it to foreigners who have lent you the money in euros, that might not be such a bad thing. Sure, you get a bout of inflation, but your exports get a big boost, and more importantly, the debt effectively gets cut in half at a single stroke. It is tempting. And yet it would prove chaotic for what remains the world’s second-largest currency, while what would amount to a partial default would leave banks, fund managers and investment firms around the world facing huge losses.
The French budget crisis may look like a purely domestic matter. But let’s keep this point in mind. The country’s debts are now the third largest in the world, after the US and Japan, and both of those are far larger economies.
I hear this sort of thing a lot.
I’m reminded of this quote from Louis-Vincent Gave:
"I grew up in France, so I had a good dose of Marx in my education. The first thing Marx teaches you is that revolutions are typically the result of inflation."
Speaking of Louis-Vincent Gave, this is from a recent Macrovoices podcast:
“The mark of a rich country, of a rich developed country, isn't that poor people have cars, but that rich people ride the subway.”
“Where do you feel more comfortable indeed riding the subway? Is it Hong Kong, is it Singapore? Is it Shanghai, or is it New York, London or Paris? Not that there's anything wrong with the New York, London or Paris subways, but they're definitely not as pleasant an experience as you get, in Hong Kong. So first things first. What, any visitor, first time visitor to a Shanghai, a Beijing, a Hong Kong. Can't avoid seeing is how superior the public infrastructure has become. Whether you look at your public transport, whether you look at your shopping malls, take any kind of public infrastructure, the parks, the, it's it is mind-blowingly superior.
So you have to ponder, I think if you're intellectually honest you have to take a step back and say, okay, how can they do this? And we can't, given how far ahead we were, 30 or 40 years ago, how, how did we mess this up in the West?”
How did we get to the point where China's life expectancy is now higher than the United States when 30 years ago it was 20 years below? I think these are questions that, we should all be looking in the mirror and say, okay how did this happen?
“Everybody in China now drives electric cars. And so I think the perception we have in, of, in the western world that we have of in China is, oh, the government chooses its champions subsidizes them and that's unfair, et cetera. But it's actually very different. It's a very hunger game, again, model of capitalism where, everybody is competing crushing each other's margins until , you get this, the survivor.
And in the end, that's obviously a terrible outcome for shareholders because, a lot of these companies get wiped out along the way, et cetera. It's a terrible outcome for shareholders. But if the goal was to get a bunch of electric cars on the road then you've actually achieved that goal.
Meanwhile in the U.S., what you've achieved through the government subsidies is that Tesla gets to be part of the MAG 7, and that you don't have that many electric cars on the road, but you have the most profitable and biggest electric car company in the world. And I think in the U.S. that is seen as winning, because in the U.S. the tendency is to view things through the lens of the stock market. It's oh, if our stocks are doing better, then we're winning. But then when you compare, say Shanghai to San Francisco or Beijing to New York if she came off the plane and didn't care about stock market performance, you would think Shanghai was winning, not San Francisco.”
If you subscribe to Hidden Forces podcast, check out the latest interview with Marvin Barth.
I’ve never interacted with Cem Karsan for some reason, but this was a thought-provoking interview.
“At the end of the day, if if things get worse, and instead of through placating the people who are the most hurt by this and trying to solve that problem, if instead we do manage that through control, the wealthy can get wealthier, and the poor can get poorer, and that can go on for quite some time, and that's actually really good for financial assets, but not great for the economy.”
Europeans live longer, have more leisure time and less income inequality, and often live in stunning cities and towns built over the centuries. But increasingly, Americans enjoy a higher standard of living. They have over 50% more living space on average per person. More than four in five Americans have air conditioners and clothes dryers at home, compared with between one-fifth and one-third of Europeans. Executive assistants in New York City earn around the same as specialist doctors in London.
In the absence of economic growth, Europe’s welfare states, which account for half the planet’s welfare spending, will come under growing strain from aging populations. The average European is nearly 45 years old, compared with 39 for the average American, and the continent’s working-age population is predicted to fall by nearly 50 million by 2050, leaving fewer workers to pay for more retirees.
A World in Debt
A very timeless book from 1935 that I don’t have in very readable digital form, so I might transcribe parts from time to time.
“If the first visible effect of a panic or depression is the deflation of debt; then, debt must have caused the panic or depression. Indeed, nobody of common sense has ever suggested any other reason. But then the question how can debt, so sweet, so stimulating, so beneficent, so productive of all blessings - if you believe the professors of modern economy - how can debt suddenly change from dove to serpent, from Jekyll to Hyde, and ruin its faithful friends just as they have come to trust and love it?
To this question the professors of political economy murmur something about the '‘overextension of credit.” Or, if you insist on being vulgar, you say, '‘too many people in debt.” But that hasn't explained anything. How did too many people get too much in debt?
…To find out what the masters had said upon this obviously vital subject…I ransacked the libraries, both in my own country and in Europe. I found nothing - nothing at all. That is, nothing which could cast more than a random beam upon the object of my speculation. Myriads of volumes upon the specific phases of debt, of course: how to get into debt, how to manipulate debt, how to keep books, how to borrow, how to lend; books upon banking, books upon brokerage, fiscal technique, statistics without end: but of Debt as an Institution - a mechanism which has become so far-reaching and all-powerful that commerce exists alone by its aid; and of the Consequences of Debt - moral, social, economic and political - implicit in the use of such a convention, all was silence! Can you believe it? Incredible, but true.
…This struck me as so anomalous and so senseless that I began to wonder why the political economists had so deliberately avoided the matter. I do not yet know: l can only conjecture that they have wished not to give anybody any pain, not excepting themselves…
Capital is one thing: capital-at-interest is not quite the same thing, as I hope my pages will presently show. Aristotle was very clear about the distinction: I fear the modern economist is not.”
Dan Rasmussen on ‘Trump's Great Private Equity Bailout’
“The S&P 500 is at all-time highs, and the stock market is booming, and the economy seems to be booming, and for some reason private equity can't sell their deals, right? Like, they can't exit their their deals, and you're like, well, you know, if these companies are so so good, uh, why can't you sell them, right? Like it seems like a good time to sell. Like it seems like public markets are doing fine. IPO market's open. Maybe these companies just aren't that good, or maybe they paid too high prices for them, right? I mean that's I think the sad truth here.”
“If I'm sort of index weighting, I should have about 4% of my U.S. public equity allocation in private equity, something like that, four or 5%, Right? And if I'm 60/40 stocks, bonds, you know, then maybe I should have 3% of my overall portfolio in private equity. But you look at what the quote unquote smartest people in the room are doing, and they're putting 40%, 45%, 50% of their portfolios in private equity. Like you look at Yale, Harvard, Brown. And by the way, like you go down the top 10 college endowments, and look what percent they have in private equity, it's all like 40%. There's no outliers. There's no divergence. It is complete consensus groupthink that you should have 40% or 50% of your money in these tiny, tiny little really-levered companies. And how everybody came to that conclusion, why there's no disagreement, I don't know, but it is true.”
“What you find is that revenue growth slows a little bit, and my thesis for that is that private equity firms tend to buy things that look like they're high growth, but growth follows a random walk, so you buy stuff with high growth, and then it follows a random walk, and you end up with a little lower growth than you bought it at, margins basically flat, but you see a massive increase in debt and interest payments and a decrease in capex spending And I think that's sort of intuitive, right? Like, it's an LBO. What do you expect? The reason they took control of the company is to increase the debt. That's what happened. That's what happens in every LBO. What happens in every LBO is an increase in debt. What happens in some LBOs might be an increase in margins, and another decrease in margins. Some revenue growth increases, but there's no reason systematically to think that private equity is better at running companies than public company CEOs or families, or any other group of people.”
"Why is the federal government aiding and abetting child trafficking?" - Nick Bryant
"I would tell them there's this nationwide pedophile network that is for very powerful people that's connected to the CIA - people just didn't want to hear that at that point."
“It would be very advantageous for [Ghislaine Maxwell] to exonerate Donald Trump, because she gets moved to a cushy prison and hopefully she doesn't get a pardon. I mean, I'm really hoping that she does not get a pardon. She led a lot of lambs to the slaughter and she's a vile evil woman.”
“We have a political system that's rife with blackmail. And I firmly believe that the people that hold the pictures are pretty powerful people that have a lot of juice.”
“What we need to do is make sure that the government doesn't cover up child trafficking anymore. Don't you think that that's what we need to do?”
"The CIA, Mossad, and Epstein: Unraveling the Intelligence Ties of The Maxwell Family"
"Between 2013 and 2017 alone, Barak is known to have traveled to New York City and met with the convicted criminal at least 30 times"
Ehud Barak was Israel's Prime Minister 1999-2001.
Inside Jeffrey Epstein's Spy Industry Connections
“After his first arrest for sex crimes, Jeffrey Epstein tried to get into a new line of work: surveillance. In 2015, he partnered with former Israeli Prime Minister Ehud Barak to invest in a security tech startup called Reporty Homeland Security, now known as Carbyne. Leaked emails show that Epstein was using Barak to seek out opportunities in the surveillance industry and build connections with powerful figures around the globe, including American businessman Peter Thiel, the former director of Israeli signals intelligence, and two people in Russian President Vladimir Putin's circle…
Epstein signaled to [Former Israeli Prime Minister Ehud] Barak that he was interested in keeping abreast of security-related technology, emailing Barak articles about cyber warfare, emergency preparedness, Russian nanotechnology, and Unit 8200, the Israeli equivalent of the National Security Agency.”
Just for fun, this book, "Behold a Pale Horse," was published in 1991:
“Note-on-note financing involves an investor (the “note-on-note” lender) providing a loan to a bridge lender, which is secured by an assignment of the underlying loan as collateral for repayment. Typically, note-on-note lenders advance between 60% and 80% of the underlying loan amount. If the bridge lender defaults, the note-on-note lender can instantly foreclose on the bridge lender, wiping out their entire investment and becoming the direct lender to the original borrower.”
Reading Behold a Pale Horse again. Read it 25 years ago, at least. Pretty astonishing stuff.
I've been reading about the Epstein scandal like a fiend lately, and my conclusion is that it wasn't primarily about trafficking girls for blackmail material, though that happened too.
Epstein was primarily a tax fixer for billionaires like Leon Black and Les Wexner. He would find illegal ways to save them massive amounts in taxes, and then take ~10% of the savings. This is why Leon Black paid Epstein $158 million. Because Epstein saved Black $1.58 BILLION in taxes. And this is why Wexner gave Epstein that mansion in NYC. Epstein's mysterious wealth is suddenly explicable.
Note that tax evasion is also criminal, making those who engaged in it subject to blackmail even aside from the underage girl videos. And maybe Epstein was providing Ehud Barak details on all that tax evasion, giving Israel leverage over many rich Americans. He did seem to meet with Barak a lot.