Dear Readers,
It’s Thinking Time! This week we cover the US and the IMF’s opposing views on China’s trade surplus, and the continued battering of the commercial real estate sector, this time with AAA rated bonds.
TBL Thinks is our way to summarize the most important paywalled, longer reads relevant to global macroeconomics, helping you cut through the noise. With that in mind, please enjoy.
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The US and IMF Disagree About China. That’s a Problem (WSJ) The International Monetary Fund (IMF) was created by world leaders 80 years ago to help prevent economic imbalances that resulted in the Great Depression. It has done no such thing, and in many ways has made it worse, as economic imbalances once again threaten to upend global harmony — China’s move to boost manufacturing and exports, while holding down consumption within the country, has resulted in a massive trade surplus which negatively impacts its trade partners around the world. The US would like the IMF to call China out on its unfair trade practices, but the organization has chosen to walk the path of neutrality and diplomacy as it urges China to change its economic model while playing down its effects on the rest of the word.
Decades ago, US leaders were under the assumption that bringing China into organizations like the IMF and the World Trade Organization would make the country more market oriented. However, as has been evident over the last many years, China doubled down on an authoritarian, state-driven economic model that many in the West find incompatible to their own.
The IMF, which currently walks the middle line and is staying neutral, may find itself stuck between a rock and a hard place, especially if Trump is re-elected next week. Trump has been vocal about prioritizing decreasing the trade deficit, particularly with China, through tariffs, an approach the IMF has criticized. Project 2025 has suggested that the US leave the IMF, but as of yet, there have been no signs on whether Trump agrees or disagrees with this approach.
China’s growth wiped out US factory jobs in what came to be known as The China Shock (the years between 1990 - 2010s when the US saw job losses, income losses, and labor market variation), and the growing flood of cheap manufacturing imports is being called China Shock 2.0. The difference this time around is that the world is ready to fight back — the US and Europe are raising trade barriers to Chinese-made EVs and renewable energy gear, and Brazil, India, Indonesia, and Mexico are zeroing in on Chinese imports of steel, ceramics, and chemicals being dumped on their domestic markets. A global trade war.
The IMF monitors trade deficits and surpluses, although it rarely attributes them to cross-border influences, instead focusing on fiscal and domestic factors. In a recent blog post, IMF staff investigated the US deficit and Chinese surplus and found little connection, and stated that the US deficit and China surplus were homegrown issues, and that “worries that China’s external surpluses result from industrial policies reflect an incomplete view,” a conclusion we find highly susceptible to critique. From the lame duck to Trump, current US trade policy toward China is bipartisan and is trying to adjust for Chinese economic cheating.
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The Commercial Real Estate Crisis is Battering Even the Safest Bonds (BBG) The commercial mortgage backed securities (CMBS) market continues to struggle to regain solid ground post pandemic, and within that market, a new breed of bonds known as SASBs (single-asset, single-borrower) feeling the most pain. SASBs are typically backed by one mortgage tied to one building, and are unlike conventional CMBS which bundle together hundreds of property loans, and represent an alternative financing option for investors and commercial property owners.
Many of the SASBs also represent buildings across the country whose debt was rated AAA by ratings agencies. Flashbacks, anyone? Now, for the first time since the great financial crisis, investors in these AAA rated CMBS are getting hit with losses.
A Bloomberg analysis of almost every SASB tied to a US office building, found that creditors across numerous deals are on track to get only a portion of their investment back, with the debt reaching buyers of the AAA portion of the debt in many cases. The pandemic introduced us to work-from-home, remote-work, and lockdowns, and illustrated how fragile SASB debt really was by proving to investors how easily commercial real estate could become obsolete. This theme of a post-pandemic work reality and digital economy aren’t going anywhere, and we believe this transition will be a major theme for years to come. Simply, larger debt writedowns due to poorly performing commercial property is likely to cause bank impairment, which tends to have deleterious ripple effects and can sometimes perversely cause enormous rescue facilities.
Even as the hardest hit deals continue to pile up losses, the SASB market and the overall CMBS market have begun to rebound with sales for new SASB almost matching numbers seen a couple of years ago. Bargain hunters are making the best of distressed SASB deals and buying buildings at a fraction of what they cost a few years ago, leading to the SASB market showing the beginning signs of stabilization. The question for the broader commercial real estate market is whether those distressed price haircuts are already or not yet reflected in market prices elsewhere.
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Until next time,
TBL Thinks
With today’s macro landscape, many people are worried about whether they’re saving enough for retirement. Now you can grow your retirement savings using tax-advantaged bitcoin in an Unchained IRA! The Unchained IRA is the only solution that allows you to hold the keys to real bitcoin in a standard IRA.
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