Looking Backwards …
LB #1
The hottest news of the week other than the fires in Los Angeles has been the dumpster fire that has become the bond market. I considered writing about the LA fires but a bunch of rich people losing their McMansions probably doesn’t appeal to anyone other than pyro voyeurs and those that fall for social media celebrity click bait. But here at the C Thomas Printer Cooperative we love talking about the bond market because it controls the financial world. Who is going to buy the bonds and at what price we started asking when bond yields were half as high as they are now? Well, if the auction on Tuesday was any guide we will have to keep asking. This from ZeroHedge, “The meltdown in bonds, or rather meltup in rates, continued today especially after the red hot JOLTS and ISM prints and today’s 10Y auction simply confirmed just how ugly it is getting out there, when the reopening sale of $39BN in 9-year, 10-month notes priced not just ugly but with the highest yield since August 2007!”
We have covered in detail how many industries are dependent on cheap credit or at least have become dependent on cheap credit over the last 40 years. The answer is everybody and everyone. Buy a house and pay too much, wait for rates to drop and refinance and you can get a cheaper payment. Have a business that doesn’t produce profit, just wait and get a new loan and you get more time to flounder around. Have a house but have a cash crunch, take out a home equity line of credit and voila, cash rich and ready to spend again. This has been the last 40 years. Now imagine it in reverse. You buy a house and get a good interest rate, and the rates only go up meaning your house becomes less affordable while it becomes older. Good luck with those home value appreciations. Your business can’t get refinanced? I hear they are hiring at IHOP. Instead of home equity, you are upside down in your home because as rates go up the price of your home goes down unless we have more inflation. No equity to tap unless your dollar becomes worth less. The economic foundation on which two generations of America have stood has changed and it will never be the same again.
LB #2
Another example of how things have changed forever economically is that commercial real estate is no longer a place to park money. Another building sold for a huge discount. This from Steve Cuozzo at the New York Post via MSN, “Williams paid only $147.5 million for 470 Park Avenue South, an historic, 300,000 square-foot property that takes up the entire west blockfront between East 31st and 32nd streets. The sellers were Steven J. Pozycki’s SJP Properties and PGIM Real Estate, a Prudential Financial affiliate — which bought it for $245 million in 2018…
However, the low purchase price paid by Williams doesn’t necessarily reflect the recent market phenomenon of bargain-basement deals as notoriously epitomized in the $8.5 million sale of 135 W. 50th St., which previously fetched $332 million.”
This building only lost $100 million in 6 years so it is better than another one that lost $325 million. That is true, but it doesn’t instill much confidence. This building has better location, architecture, access, whatever it may be that makes real estate local in nature doesn’t change the industry as a whole. It is getting crushed on paper and that paper is turning into real losses. Someone somewhere is taking real losses now. It is no longer being carried on a bank’s books as a loss, it is having to be realized, and when that happens lenders lose.
LB #3
Speaking of losses, the UK English Gilt market is starting to produce real problem levels not seen since the poor Liz Truss levels which caused her political demise. This from ZeroHedge, “UK Gilt yields topped 4.80% for the first time since 2008 this morning (up 12bps on the day) having blasted higher since The Fed started on its rate-cutting cycle… “While the speed and extent of the move higher in bond yields has not been anywhere near as violent as that witnessed following the Truss budget in 2022, the impact of higher rates on the economy, particularly via higher mortgage rates, is not to be underestimated,” said Matthew Ryan, head of market strategy at Ebury.”
The demise of Truss was caused by the speed of the rise. 4.8% levels are actually higher than the levels during the Truss administration, but they got there in a more orderly fashion. This is similar to the banks in the US being allowed to digest higher rates and their bond losses are maturing, and the problem is starting to abate. Not go away mind you but abate.
Looking Forwards…
LF#1
While we have been talking about the bond market crisis for years, a new crisis has seemingly developed in the last year or so that continues to cause concern- geopolitical and communication sabotage. There have been numerous reports about vessels severing communications cables in the Baltic Sea, but now we have one near Taiwan. This from George English at the US Sun, “A telecommunications cable was reportedly damaged near Yehliu, New Taipei City in the early hours of Friday – just days after Russia was accused of sabotage in the Baltic Sea. It was first reported by Taiwanese telecoms operator Chunghwa Telecom before Taiwan’s Coast Guard was called in to investigate.
They discovered that four cores of the international cable had been mangled. Officials believe the cable was cut near the busy port of Keelung on Taiwan’s north coast. A Cameroon-registered cargo ship known as the Shunxin 39 has been blamed for causing the damage, according to Taiwan’s National Coast Guard Administration.”
This is troubling for numerous reasons. First, the US has stated that they will defend Taiwan. Our bond market couldn’t finance a paintball war right now, much less an extended conflict with the largest manufacturer of everything in the world right now. Second, we are pretty dependent on our telecommunications devices. If the internet stops working because undersea cables start getting cut, the world turns regional again very quickly. I get my shampoo from Italy and if that were to disappear, I am afraid it would be dry scalp for me. I am dependent on the free trade across borders being open. That requires communication for commerce and more importantly banking and banking settlement.
LF#2
We have been chronicling the demise of Europe and its biggest economy for some time now. We are starting to get some measurements of the demise now. This from Remix news, “Germany could enter its third year of economic recession in 2025, according to a report out of the Handelsblatt Research Institute (HRI), cited by the Mandiner news portal, meaning it will face the longest economic crisis in its post-World War II history. Germany, the European Union’s largest economy, may shrink by 0.1 percent this year after a contraction of 0.3 percent in 2024 and 2023.
“The German economy is in the midst of the biggest crisis in post-war history,” said Bert Rürup, chief economist at HRI. “The pandemic, the energy crisis, and inflation have made Germans poorer on average.”
That is true Bert, but I would argue that a) the pandemic was not the problem but the government’s reaction to the problem was the problem b) the energy crisis was also the government doing and c) inflation was certainly the government’s doing. This encapsulates what we have been writing about in a nutshell: government and its involvement is the problem.
Let’s look at the shift to alternative wind energy. We have documented the billions of Euros in this case in subsidies that have been poured into alternative energy sources. What has been the ROI?
Let’s consider this from ZeroHedge, “Germany’s solar industry is in “a lot of distress” a new report from Financial Times highlighted last week. A slump in consumer demand has led to bankruptcies and layoffs in Europe’s largest rooftop solar market. Many installation and distribution companies have gone under, been acquired, or had to change strategies.
The oversupply of panels has driven prices down for consumers, but industry leaders warn it is deterring investors and jeopardizing a key sector for Europe’s climate goals, according to Financial Times. Dries Acke, deputy chief executive of industry lobby group SolarPower Europe commented: “To some extent this is consolidation after a few exceptional years. You cannot have a green transition with red numbers. The sector needs to be profitable.”
Unprofitable decisions have consequences. Throughout history, those investments that are unprofitable don’t last. There are very few steamships tooting their way up the Mississippi these days, why? They were replaced by more profitable ships. Moving from hydrocarbons to alternative nonstable baseload power sources might be idealistic but it isn’t profitable. Even popularity wanes, Tesla delivered less cars last year than in 2023. People vote with their wallets and they always have. Eventually they vote politicians out with their wallets and always have.
LF#3
Europe is becoming poorer, that is being well documented. This has coincided with their decision to back the Americans against Russia. I have been bemused with thinking that the US was doing this as a strategic play to weaken Russia. We have talked about how NATO has been encroaching its borders toward Russia for two decades. When Russia invaded the Ukraine, the US was able to spring its sanctions. I had thought this was their plan. Have the Ukrainians fight their war, and Russia gets weakened in the meantime. Their natural gas is being replaced by our natural gas. They are a huge exporter of energy and now we are becoming the largest exporter of energy. They are fighting a war which is inflationary and yet we are merely supplying weapons, not bodies, warships, or tanks etc. This is chess at the highest level, but what I may not have seen is America’s alternate goal or maybe their primary goal all along, weakening Europe. More specifically weaking a Russian-European working partnership that would indeed be a very large and strategic threat against the US.
Lucas Leiroz, a researcher at the Center for Geostrategic Studies, and military expert writes this, “Finally, energy cooperation between Russia and Europe is (almost) completely over. After nearly three years of sanctions and sabotage, the bilateral Moscow-EU energy partnership suffered its greatest historical blow. Kiev fulfilled its promise not to extend its contract with Gazprom, which was allowing the arrival of Russian gas to Europe, then creating an extremely uncomfortable energy insecurity situation for its own “partners” in the European Union…Despite the sanctions imposed on Russia since 2022, some European countries continued benefiting from the import of Russian gas, particularly Slovakia and Hungary – nations that refused to participate in the Western-sponsored anti-Russian boycott – as well as Austria, a country historically neutral in Europe’s geopolitical and military disputes. Other nations, even adhering to the sanctions, continued hypocritically receiving Russian gas, such as Italy, Poland, Romania, and Moldova. There were also cases of gas resale, with receiving nations re-exporting the commodity to countries seeking to bypass the sanctions.
With the end of the Ukrainian route, all these states lost any guarantee of a safe energy source – precisely during winter, the time of year when gas consumption in Europe is at its highest…With the fall of the Ukrainian gas route, it can be said that the US won an important battle in its economic war against Europe. Sanctions, the terrorist attack on Nord Stream, and the closure of the Ukrainian route to Europe are events that are part of the same strategic context: in all these cases, Anglo-American strategists want to provoke an energy collapse in Europe to enable deindustrialization and the subsequent economic and social crisis. The final goal is a ruined Europe, not only unwilling but also incapable of establishing any future strategic ties with Moscow. The total collapse is merely a matter of time.”
This is a very unique analysis as I have not heard Connie Cung mention this on the nightly news. This is the real chess game being played. Now this has played out for the last three years or so, and now we have Donald Trump who could in theory have a different goal in mind. He wants to also weaken Europe with tariffs. Don’t believe me, just ask him. But as we mentioned last week he is also wanting to encroach on Europe now.
This from the Guardian, “Germany and France have warned Donald Trump against any attempt to “move borders by force” after the incoming US president said he was prepared to use economic tariffs or military might to seize control of Danish-administered Greenland.
In a hastily called televised statement, Germany’s chancellor, Olaf Scholz, said Trump’s remarks had triggered “incomprehension” among European leaders. “The principle of the inviolability of borders applies to every country – regardless of whether it is east of us or to the west – and every state must respect that, regardless of whether it is a small country or a very powerful state.”
Earlier, the French foreign minister, Jean-Noël Barrot, said that Europe would stand up in defence of international law. “There is no question of the EU letting other nations in the world, whoever they may be, attack its sovereign borders.”
What if Trump unknowingly walks in and pushes Europe backs toward Russia seemingly undoing that last few years of strategic gains in weakening both regions. There are half a dozen countries that already want their Russian gas turned back on and now their new gas station is going to put tariffs on them? The biggest countries in Europe saying they will defend Greenland versus the US? Trump hasn’t taken office and he is already turning Europe against us? Remember that when Ukraine gave up their nukes, it was on the word that the US would defend them. Ukraine has been destroyed. Putin must be smiling as he knows what we have known for a long time. In fact, we wrote about it in April of 2023- the words of Ten Bears, “It’s sad that the governments are chiefed by the double tongues.” Not much has changed in the last 150 years. The players are different, but the game is still the game.
Banding together against the US now?
Sincerely Yours,
C Thomas Printer
The Dow Jones finished trading …at 41,938.
The 10-year Treasury bond is at …at the highest yield on over a year at 4.76%
The price of Brent Crude is … at $79.76 per barrel.
The price of gold is … at $2,717/oz.
The price of silver is … at $31.30/oz.
I leave you with this from the information superhighway, Two windmills are standing in a wind farm. One asks, “What’s your favorite kind of music?” The other says, “I’m a big metal fan.”
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.