Trust Issues with Modi and a Capsizing Commercial Real Estate

Peter's Market Wrap for Week Ending 6.23.23

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Slowly, like a capsizing ship, global stock markets are rolling over while bond markets are rallying in the face of a persistent inflation that augurs a long term period of high interest rate austerity.

We have seen no market crash yet – indeed, the stock market has exhibited strong bullish pulses at times over the last year.  Yet, reviewing the tea leaves, that long dreaded, recession-driven bear market may finally be at our door.

What caught my eye this week in this news was the visit of Prime Minister Narendra Modi to the White House and Capitol Hill.  There is also mounting evidence of a meltdown in the commercial real estate market.

Modi was elected as the Trump of India, he is a Populist Economic Nationalist much like Trump, he has ruled the unruly beast of India with an iron hand, and he has performed surprisingly well even in the face of a worldwide pandemic.

The big advantage India has is its population – the largest in the world.  It is skewed to a much younger demographic than many other countries around the world.  This gives India the twin advantages of a robust labor force willing to work for cheap wages and a lower relative burden of pensioned retirees on the government budget.

While India should be a natural ally of the United States – Communist China has invaded it twice and poses an existential threat from ships in the Indian Ocean and large bomber and fighter jet bases in Tibet – India and Modi can’t really be trusted to have our back.

When it broke away from the British Empire in 1947, India began to pursue a policy of nonalignment and quickly snuggled up tightly with the Soviet Union.  That continues to this day.

I remember as a young lad one of my first adventures traveling across India by 3^rd class train. Curious even then about geopolitics, I tried to visit some of the steel plants the Soviet Union had helped India establish. Not surprisingly, authorities wouldn’t let an American anywhere near such plants; but the India-now Russia link was as apparent then as it is today.

In the trade arena, I wrote a detailed report at the Trump White House that described India as the “Maharajah of tariffs.” While Communist China is the worst unfair trade aggressor against America, India does have the highest tariffs in the world.

When Modi came to Washington DC or when Trump met Modi at the various G 20 meetings, the Boss always raised these issues; but we were stonewalled by Modi.  

India also dumps it’s highly educated, tech savvy workforce into the US, and this has stunted the growth and development of Americans. Like the Chinese, Indian students take away seats from Americans at our universities, particularly our graduate schools. The growing power of the Indian and Silicon Valley lobbies have also resulted in expansive visa programs which cost American jobs.  Those issues need to be addressed!

In the foreign policy arena, India has tried to hug the United States in the face of a rapid militarization of Communist China.  Yet, India is also quite successfully exploiting the Russia-Ukraine situation by buying up bargain-basement Russian oil at the same time the US is trying to impose sanctions.

My bottom line: India under Modi is an uncertain trumpet, one not to be counted on unless India’s territory itself is threatened.

As for the looming catastrophe in the commercial real estate market, here are the salient facts:

We have about $20 trillion in commercial property. While warehouses are doing well in a post-pandemic Amazonian era, there is a severe contraction in office space as corporations are moving to make more permanent full and part-time remote work.

This structural shift trickles down to retail spaces which simply can’t sustain themselves in urban environments when half the people on any given day are sitting at home in the suburbs doing remote work.

Add to that the massive crime problems and rising taxes, particularly in Democrat blue cities like Chicago and New York and Detroit and San Francisco, and you’ve got commercial property owners ready to jump out of their own buildings.

Unlike the home mortgage market which finances structures using long-term 30-year fixed rate mortgages, the strategic norm in commercial real estate is short-term financing with the big balloon payment at the end.  With trillions of dollars of loans coming due each year, with interest rates high, and with bank lending practices tighter in the aftermath of the Silicon Valley Bank debacle, experts are predicting a huge amount of foreclosures.  Banks are going to be buried under the weight.

So we will be watching this one closely. In the meantime, watch your portfolio and job very closely. More on the markets next week.