How the US Election Could Ignite a Global Financial Tinderbox

So now we have the nominees, and the race is on. It is a very clear choice this time for very different governing models. Donald Trump is all about what worries most people: law and order, terrorism and immigration and revitalizing the slow economy. Hillary Clinton is all about more regulation, more government interference, and pandering to Black Lives Matter and Elizabeth Warren. The contrast could not be more stark. While I can’t stand Trump, and I likely know too much about his dealings, a Hillary administration would be devastating for CRE. Warren would have a huge role in massive, added regulation on lenders of all types, resulting in a far more costly and difficult borrowing situation. If you think it is tough now, just wait until Warren pushes to break up the banks, fine them for all sorts of new things, and puts on all sorts of new regulations related to development, wetlands, condo sales, and then raises your taxes because you are too successful and make too much. Trump may be deeply flawed, but for those of us in CRE or banking, Clinton and her new left-wing cohort will be far worse. In the end it is a choice of who is best for us, and not who is best for all things. They are both probably the worst candidates in decades if not ever. We have the State Department Inspector General saying Hillary broke the rules, the FBI saying she lied and was extremely careless, the Benghazi committee saying she lied, and now we see how she and Debbie Wasserman Schultz screwed Bernie. It is hard to imagine how anyone can vote for her. I am sure the server was put in place to hide the payoffs from foreign governments and businessmen, and the destroyed emails would have blown the roof off. In a conversation today with my Asia partner, the report is good for US CRE, but not good for the world economy. China is in a debt crisis. The government is forcing the banks to improve their capital ratios. The banks are loaded with bad loans and thus are not taking the write offs to avoid the hit to capital, instead continuing to fund the bad credits. On the other hand, good credits borrow to fund production of their goods, and when they sell and collect from the customer they are required to repay the facility. What happens now is they repay, but the bank does not renew because they need to reduce loans outstanding to improve their capital ratio. As a result companies are paying the interest but not the facility so they can hold the cash to keep production going. So now the banks have even more defaulted loans. This is a story with a very bad ending. The government will have to step in and recapitalize the banks, set up a bad bank or other facility, and write off many of the now bad loans. China will survive this way but there is a massive debt crisis building in the country which could get out of the control of the government. As a result of the world situation and the weird US election, most Asians are hiding in the bunker, waiting to see what happens next. Few are willing to take long-duration risk. Japan will have a hard time growing under these conditions. South Korea seems OK for now. The rest of Asia is going nowhere good. While the US is considered the last place on the planet left to invest, everyone is afraid of 2017, uncertain of the US direction after January 20. It seems clear things are going nowhere for the next nine months until we see what happens and what it all means. Brexit just complicated things and made the uncertainty worse. The EU has mounting problems, with little hope of any real improvement for a long time. There is a bigger risk of things going badly in the EU than get better. If you are invested in the EU, there is a high probability you are going to lose more money the longer you remain there. Consider closing your EU funds, and bring the capital back.  The risk adjusted return in the EU is simply not worth it.