MARKET PERSPECTIVE
By J Mulraj
Feb 24- Mar 1, 2024
How states destroy themselves
Last week a judge in New York fined Donald Trump $454 m. (Including penalty and interest) for over valuing his property in order to get favorable terms for a loan. It seems a bizarre judgement, considering that (a) all lenders do their own evaluation of the value of the security and developers generally over value their properties (b) the loan was fully, and promptly, repaid and (c) the lending bank stated that it was pleased with the profits it made on the loan to Trump and would be happy to do it again!
The judge seems to have overreached by prohibiting banks in New York from lending Trump the money to pay the amount, which infringes on their right to take a commercial decision, and indicates animus.
Frank Sinatra would be mightily displeased to have his song mutated from New York, New York, to New Dork, New Dork! Once considered a vibrant city, New York is in danger of crumbling, if there is an exodus of business. As is the fate with San Francisco where every store is closed in downtown.
The reactions to this judgement have been harsh. Several truckers are boycotting deliveries to New York and, should the boycott continue, supermarket shelves will start to empty. Worse, some businessmen, like Kevin O’Leary, are refusing to invest, eg in a data centre in NY, for fear of being the next victim. He was looking to set up a $4 b high end data centre in New York State, where power costs are low, but has now discarded that option. The judgement will harm investor confidence. In 2023 New York dropped from #16 to # 39 in the Expat City ranking of InterNations. After this decision, the 2024 ranking could drop further. The vacancy rate in commercial real estate (CRE) in Manhattan is 17.4% (and 25.6% in the financial district) and if businesses start leaving, the banks which have lent to CRE will flounder.
Unfair decisions lead to backlashes. Elon Musk moved his business out of Delaware after the state scuppered a deal, which shareholders had agreed upon, to give him a hefty bonus if he achieved some targets which everyone considered impossible to achieve. He did. The cancellation of a valid, shareholder accepted contract, by Delaware, brings to mind scenes in Ayn Rand’s book ‘Atlas Shrugged’ where a society crumbles after achievement is penalized but failure pardoned.
This is how states destroy themselves.
USA has built itself to be the world’s largest economy by allowing free enterprise, and providing a stable rule of law that is free and fair. The fear is that, after this judgement, viewed as unfair, enterprise may move to other states. What happens when businesses are not free to perform and succeed? The economy needs more and more incremental capital to generate a dollar of additional income. As per this article US GDP growth in Q4 was $ 334 b. but required $834 b. in additional debt, an incremental debt:GDP ratio of 2.5. This is unsustainable and dangerous.
The Republicans are trying to drive home to the Democrats the urgent need to rein in spending and reduce US debt, now at $34 trillion. This is the tussle holding up Congressional approval to raise the debt ceiling, to allow the Government to borrow more and continue functioning. The deadline for the deal is this weekend! If there’s no deal, the US Government will shut down!
Trump appealed against Judge Engoron’s decision and the Appeals court has stayed the decision. Over valuing assets is not a crime; borrowers across industries do it. Lenders don’t blindly accept such valuations but do their own due diligence. Lenders were fully repaid and there was no loss to anyone. New York will need to work hard to regain investor and business confidence.
Bad policy decisions are destroying other countries as well. China’s policy makers have, bizarrely, undercut their domestic manufacturers with their zero tolerance to Covid policies, which destroyed their reputation as a reliable global supplier, as well as foreign manufacturers, some of whom (like Bain & Co) were raided under new anti espionage law, simply for doing normal market research activities. The closure of several domestic manufacturing units, and exodus of foreign ones, has led to a serious crisis of high youth unemployment. China’s realty sector, which operated like a Ponzi scheme, has imploded. It accounted for 30% of Chinese GDP.
Now EU leaders are taking sledgehammers to destroy their economies. Perhaps worse. Last week French President Macron unusually, nay, foolishly, suggested willingness to put boots on the ground in Ukraine! Putin countered that any attempt to do so would risk an escalation to a nuclear war! But the collective West continues to poke the Russian bear in its eyes, not the brightest of ideas. US Treasury Secretary Janet Yellen, is pushing for the seizure of $300 b of frozen Russian assets to send it to Ukraine. Stupidity has no glass ceiling!
Amidst all this geopolitical lunacy, stock markets are remarkably resilient. Last week the BSE Sensex rose 553 points to end at 73765.
General elections will be held in India last week of April. If, as likely, the BJP comes in with a comfortable majority, the Sensex could climb further. Then, profit booking could set in.
One hopes and prays that Macron does not put French boots on the Ukranian ground, triggering WW III, nor does he suggest Putin eat cake! Or that Janet Yellen not distribute frozen Russian assets to continue a futile war that has destroyed Ukraine and killed its youth. Let’s pray that a modicum of common sense and a sliver of the survival instinct still linger in the minds of the so called global leaders.
Comments may be sent to jmulraj@asiaconverge.com
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