Fed Set to Detonate BlackRock | QPOL Issue #45
How Commercial Real Estate is a ticking time bomb under a hawkish Federal Reserve.
Thanks to the recent CPI report, Powell shows no signs of stopping rate hikes. He’ll take this as a sign that the economy is healthier than expected during the Fed’s unprecedented hiking that has not been this aggressive since Volcker.
The point is that Powell is winning the war for monetary dominance against Davos and the Neocons. The question though becomes “at what expense?”
It’s crucial to remember that Powell doesn’t come from the academic elite. He’s not like Bernanke or Yellen before him. He comes from real world experience in the markets via working on Wall Street. He’s private equity Powell. But doesn’t raising rates hurt his private equity friends? Depends which “friends”.
Who does this really hurt? The PE who’s only profitable when rates are at the zero bound. He’s doing it to the shadow banks that were after his lunch like BlackRock who competed with the traditional primary dealers with access to the Fed Window. But most telling of the sectors that is getting crushed from raised rates is commercial real estate (CRE) and those with the most exposure to it.
Let’s examine exhibit A: Blackstone
For a real detailed expo on this story, I’d highly recommend this video from Nobody Special. The short and skinny of it is that BlackRock (not to be confused with Black Stone, but both are involved) is gonna dump $1.5 trillion of over-leveraged loans (which is owed before the end of 2025) exposed to CRE on USA teacher pensions. Nobody wants to touch CRE with a 6ft. pole because it’s magnitudes worse that the MBS financial crisis of 2008. So instead of dumping it in the economy to a market that wants nothing to do with it (and would correctly price it at its real value) BR will try and gradually sell it off to teachers’ pensions. Simply put, the teachers are BR’s exit liquidity.
It all started back as early as December 2022 when PE investors were trying to pull their money out of Black Stone’s CRE investment fund (the B REIT), but Black Stone locked the door and swallowed the key for obvious reasons (they would’ve had to sell CRE and would devalue their assets and send the fund to 0). They pulled the typical move a crypto exchange makes when it’s about to go tits-up because they’re insolvent.
No Takers? BlackRock to the Rescue
Obviously with office vacancies from the WFH lifestyle, and higher interest rates making mortgages even more expensive to refinance, the market is reacting appropriately by signaling that CRE is a bubble that needs to be popped. It goes beyond shadow institutions like Black Stone and BlackRock. As the FDIC was breaking up the assets of SVB and Signature Bank, banks took everything but CRE assets, notably New York Community Bank. With the Fed Funds Rate racing North of 5% come May, nobody want’s to buy securitized debt backed by commercial real estate. Vacant buildings don’t create returns for MBS’s. As the banks left CRE hanging out to dry, the buyer of last resort became none other than BlackRock. In order to avoid dumping CRE on the open market and causing more bank runs, BR instead intends to sell it off nice and slow to teachers’ pensions.
The Fed’s Ticking Time Bomb
As rates continue to rise the CRE bubble grows closer to exploding. Even if it’s the smaller banks that may become impacted by this as well, the outfits that are the most over-leveraged, exposed and that deserve to fail are the shadow institutions like BlackRock and Black Stone. This is the independence Powell is striving to regain for the Fed and the banks.
Under the CARES Act, BlackRock was granted privileges the primary dealers had and could access to the Fed window to buy up a ton of real estate for practically free. That is, when rates were at the zero bound. The Fed has virtually set off a ticking time bomb. For the Fed to blow up outfits like BlackRock would make the most sense in order to put monetary control back into the banks rather than these shadow institutions/non-banks, as Danielle DiMartino Booth explains.
Causing BR and other shadow institutions to blow up would cause the “pain” and price correction the Fed is truly looking for. The bottom line of the Fed’s goal can be summed up by the tweet below:
That’s the point, especially to force the 1/5 of companies that are over leveraged zombie companies that shouldn’t exist in the first place. Yes, the teachers carrying the CRE bag may get wiped out. As crude as this may sound though, many teachers are over paid to propagandize your children in commie/globalist indoctrination camps we call public schools. Tit for tat. You fuck around during times of zero bound interest rates, you’re gonna find out.
Political Repercussions
One thing to look out for however is the politicization of Powell’s policy. We’ve already seen it from the UN et.al, but the Democrats are fixing up their rhetoric to be “end the Fed” for the 2024 campaign. It’s even rampant within the anti-CBDC crowd coming from people who don’t understand the difference between a retail and wholesale CBDC and fear mongering about how FedNow is a CBDC trojan horse (looking at you, RFK Jr.).
This couldn’t be further from the truth, and this rhetoric coming from the Democrats will make even the most “based” crowds turn into useful idiots by ramping up the Fed bashing when the reality is the Fed is doing our job for us by defeating the globalist elites we hate most by destroying their money and placing the control of America’s monetary policy back into the Fed/US banks. All is going according to plan, but it’s going to be an uphill battle, especially as NATO continues to flirt with all out WWIII against Russian and the global South.
Thankfully as Europe continues to shoot itself economically in the foot, capital will flow into US safe-havens and outside money like gold and Bitcoin. Frankly it’s only a matter of time before Davos and ilk do anything really stupid. Baerbock’s posturing towards China is just an appetizer for things to comes that could spark off serious geopolitical tension. As big of a bubble CRE may be, it’s only fraction of the problem we face.
Powell can’t seem to raise rates fast enough, but as long as QT continues to decrease the Fed’s balance sheet in the background, hopefully that ticking time bomb goes off sooner than later. Davos’ money spigot is drying up, fast…
~ Phil Gibson
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