Category: Economy

The jobs “report” was great Friday….it really was.  We added 345,000 or so “jobs.”  Why am I using air quotes you may ask?  Well in the recent few weeks we have had layoffs from Meta (formerly Facebook), UPS, Microsoft, and Macy’s to name a few.  My understanding is Alphabet aka Google is laying off folks too.  The jobs at all of these are from management positions, not from closing stores or low-level employees.  My point here is the jobs I see opening are in the fast food, gas station, retail, and government work.  These are jobs at the very low end of the wage scale, even after factoring in California’s $20 an hour wage.  If the economy was so healthy, why have we so many homeless in these parts?  Why do they come here?

The truth is the economy is not well.  But the danger is not lurking where you think it is.  The danger is in commercial real estate and some sectors of the banking industry.  Follow along I’ll tell you.

Commercial buildings and the loans they have are the problem.  They differ from your mortgage in a few ways.  On your mortgage, you pay principle and interest every month. (I’m leaving out insurance and taxes to prove my point since they are not relevant here).  So, your outstanding balance goes down, the principle each month, maybe not by much but you are paying it off.  On commercial loans you pay interest only…yup kind of like the financial crisis circa 2008 on home loans.  You may ask what do they do when the loan comes due in 20, 30 years?  Well, they simply “recast it.” That’s a finance term for re-financing and maybe pulling out the additional equity (remember folks, real estate only goes up LOL) and buying your next shopping center. 

Truth be told, if the shopping center is about 80% capacity, the loan payments can be made each month without much issue.  Sure, you may have a pizza place, burger place, clothing store, etc. go under but they are usually easy to re-constitute the property to suit the new tenant.  The problem that arises is when the anchor tenant closes up shop.  I will use the example of a shopping center located near my office; one this blog is familiar with.  The anchor tenant is a Target store. There used to be a OSH (Orchard Supply Hardware) but it closed and was rebuilt into a Ross, Ulta!, and something else.  When that happened, the food stores located near the OSH had about 3 turn overs into something else.  No real loss because Target is the store that drives business in that center.  There used to be a Save Mart grocer, it turned into a wine store, a baby store, and a surplus type store.  A couple of those have since changed over but again, the center is pretty much full.  The issue is what happens if the Target leaves?  No chance you say.  But what if it did?  The car traffic would decrease by at least 50%.  Other food stores would close.  The boutique shops would re-locate. It will be hard to sell burgers at Smash Burger when the parking lot is empty.  The mall would be a ghost town.

If you think this scenario is a fantasy land, tin foil hat idea, check this out. 

Park Hotels own(ed) two very upscale hotels in San Francisco. In May, they decided to stop paying the loans and give the keys back to the lender.  Yup they walked away.  The hotels were not Motel 6 where Troll has told me you can pay by the minute or some “extended stay bull shoot” they were the Pac 55 and the Hilton Union Square.  Think tourist areas.  Combined, both hotels had about a 3,000 room capacity.  These are very nice hotels, rooms are about $250 a night at a minimum.  The parent company walked away.  These were two crown jewel hotels.  Now the lender is stuck because a hotel is not easily convertible into something else.  San Francisco will likely house their illegals or criminals there since it makes sense to make them comfortable on the taxpayer’s dime.  But I digress.

For Park Hotels, there is not much repercussion for them. They get out of a couple of underwater loans but have to give up the revenue (loss) each month of these properties.  The ones holding the bag are the banks.  You may ask why you should feel bad for a bank? They got a property, banked the interest all these years, and now they can sell it.  The reason is banks do not use a mark to market accounting rule, they value the asset based on the appraisal from when the loan was issued/refinanced.  That could be from a decade or so ago.  A good example would be the Aon Center Tower in LA.  In 2014 it was bought for 269 million, for a 1.1 million square foot building on Wilshire Blvd, an icon in LA.  In 2023, it sold for 148 million.  Over 100 million evaporated in 10 years.  Sad!  In these cases, the bank has to write off the loss on its balance sheet. 

Just this past week, New York Community Bank, a highly respected conservative bank as far as lending goes, took a major loss and had a massive write off of bad commercial loans, such as the above.  While you may not recognize the name, the regional banks will be the ones to suffer from this crisis.  The reason being, regional banks have to take more risk, their larger peers, think Bank of America, Wells Fargo, JP Morgan Chase, etc., have large credit card portfolios, deposit accounts, and home lending to fall back on.  The regional banks must take on risk, this comes with commercial loans which were typically very lucrative.  New York Community bank is not the first and will not be the last.  A tip to watch is this; when a bank fails, watch the price movement of Bitcoin, we do not endorse that here, but the price will shoot up as a hedge against the dollar/bank failures.

A word of advice “when you have a short-term loan (car loan) you are at the mercy of the bank, loan could be refused to be refinanced/underwater etc. If you have a large long-term loan (mortgage, commercial) the bank is at your mercy.” 

Good luck

The Chief

The minimum wage for fast food workers in California will increase on April 1^st, 2024.  Since most of the blog staff live out here, we witnessed the masses cheering this revelation on.  They will finally be able to get their own apartments, buy nicer things, and not have the massive credit card/overdraft debt.  While this sounded great, the joke was on the workers once again.  Yesterday the big news out of southern California was several major Pizza Hut chains fired all their delivery drivers.  Yup, every single driver at these franchised stores got a nice New Year’s gift.

Rather than pay delivery drivers $20 an hour — under a new California law set to go into effect in April 1, 2024 — Pizza Hut franchisees in Sacramento and elsewhere in the state are laying them all off.

The franchisees, one of which operates restaurants in the Sacramento area, are letting go more than 1,200 delivery drivers across the state, according to Business Insider, which reviewed a federal Worker Adjustment and Retraining Notification Act document filed with the state Employment Development Department.

Pizza Huts in California, including Sacramento, laying off drivers rather than pay $20 minimum wage

So, are the stores going to be takeout only?  I don’t think so, pizza is synonymous with a delivery driver, so they will all likely be contracting through Uber Eats, Door Dash or Grub hub.  In all three cases they will not be fast food employees and as such not subject to the $20 an hour wage. 

This is the problem with liberal, hive mind, groupthink.  Let’s give everyone a raise and all will be well in the world, folks will not be in poverty.  It is going to have the opposite effect.  These workers laid off will be making a low wage, plus a possibility of a tip as a delivery driver for a third-party company.  They will be responsible for the wear and tear, insurance, and gas, while hoping for tips to balance it out.  More on this in a moment.

The prices will increase, so sticking with Pizza Hut; your $12 pizza will now be $17.  This makes you less likely to tip your delivery driver, who as pointed out above won’t be partaking in the increase in wages.  Sticking with this theme, do you think the franchisee will eat the increased costs?  No chance.  There will be a headcount reduction in workers as well.  What may take 4 to cover a dinner shift, will likely be reduced to three.  There will be increased ordering off an app or self-serve kiosk, as this will help reduce head count as well.  No one needing to work the till means a savings.

The price increases elsewhere will more than offset the increase in the minimum wage.  Folks a sandwich I got at Jersey Mikes today is listed on the menu board for $11.85, this is prior to any real minimum wage effect on the sub.  There will be increased costs at gas stations, grocery stores, and you better bet rent will be going up.  The rising tide doesn’t lift the boats, it just shows which ones are taking on water.

Some of the employees in the store will be flushed out of society.  It’s sad but inside you know it’s true as well.  At the local Burger King I visit when I make bad life decisions, like forgetting lunch at work, the majority of the employees appear to not give a rip.  No chance those folks are kept around making $20 an hour, along with the increased menu prices.  The consumer will demand more, and the franchisee will expect it.  Those in this group will be part of the unemployable class.  Same goes for folks who didn’t finish high school, you will be deemed not worth the cost of employability.  Looking to make some extra cash over the summer or winter during your school break?  Not going to happen, as the cost of onboarding and off boarding you will be too much.

The cold-hearted truth is these positions were created for high school and college aged kids, a resume builder for someone who didn’t want to go to college, criminals exiting the “system” and folks who may be a little on the spectrum.  Those people will now have no chance.  Wait and watch as this will raise wages at all other jobs too; the health club, the spa, the grocer, the gas station.  Again, the workers at the lowest level will be frozen out.

This is called Liberalism 101.  Do the thing that feels good, ignore any chance it could backfire and when it does, double and triple down hoping for a different outcome.

It’s a nice sentiment, but wow, they didn’t foresee the consequences.

The Chief

Credit cards, they are a polarizing thing.  Some will tell you never to obtain one, others will declare you need one, or you won’t be able to rent a car/house/apartment, buy a house or car, or what if some emergency comes up.  I will examine both ways in this blog. 

Personally I have 3 credit cards.  I use all 3 for different things, one is all my auto-payment bills (utilities, internet) one for work expenses (reimbursement), and another for literally emergency/pleasure use (think going out etc.)  I track all purchases when statements come in monthly.  I receive a paper bill each month… never auto pay with a credit card.  I do not open or use a card simply for earning “points” or “miles” as I think and believe both are a scam.  I cash in my “earnings” each year and do something with them, usually buying items off Amazon as that tends to be the best use.  I tried to use it for airfare, and quickly found out the price of a ticket in points was unreal compared to just booking as usual.  With my method I am able to track my expenses by category and find out exactly where I spend too much, and adjust as necessary.  I always pay the bill in full, and have never paid a fee or interest.  Don’t feel good for me as the credit card company still makes money off me, as the swipe and usage fees charged to the merchant on each swipe are not avoidable. 

I bought my house in large part due to my 820 credit score and got a lower interest rate to boot.  I was also able to lease a brand new Toyota Tacoma after my old vehicle finally kicked out again due to said credit score.  (I have since paid it in full, and owe nothing on it.)

This isn’t to say you should go get a credit card, many get by without, quite a few by choice, and you can still buy houses/cars and rent houses/cars without a credit card.  It’s just a longer, tougher, nerve wracking process.  The point of this blog isn’t to whack anyone without a card, it’s a choice, I live my way, you are free to live yours.

Now for the folks who need/needed or understand Dave Ramsey’s advice. 

Some do not need a credit card, nor should they own one.  Credit cards create a false euphoria when used, you simply swipe it, and are worry and carefree until the bill is due.  Even then they offer a convenient “minimum payment option” of a nominal amount say $40.  In addition each time you log into the website to view/pay bill you get a prompt saying sign up for paperless billing, quite literally every time, there is no way to opt out.  Mess up and click on the link, well good luck getting taken off paperless billing.  They bill it as a “green initiative….you are doing right by the environment.”  Give me a break; a paper statement of roughly 3 pages, and a mailed envelope?  That isn’t causing the ice caps to melt Al Gore.  These are corporations and while they make money each time you swipe the plastic they make even more when you opt out of a monthly paper statement.  But wait there is more…

You forgot to pay the bill this month…. just by a day darn it!  Well, you get hit with a late fee, your interest rate goes from probably 17% or so to about 38% which, oh by the way, they can do since that is the agreement you agreed to when you applied.  Of course, you didn’t read the fine print, you needed the card to earn miles or points.  Oh, they also report that missed payment to the 3 credit bureaus, watch what happens to the interest rate on your other cards, suddenly that 17% turns into about 30%  But that’s ok, you only missed one payment and you will make it up next month.

It not just fees and extra interest, it’s your entire buying pattern that changes.  Suddenly you find yourself going down each aisle at the grocery store, you only went there for 8 things, but your basket turned into a cart full, which turned a $25 total into about $175.  But you had to get 3 more bags of chips because they are on sale, and you earned “points.”  Ditto for those spices in the spice aisle that will migrate to the back of the pantry, but hey you earned a few points, and they were on sale… the cool red tag said so.  Now you are swiping so freely you lose track and forget how much you spent… hello, surprise bill.  You make the minimum payment but keep spending, you do so because, well you always get a bonus in December, so you will pay it off then.  You don’t get the bonus, or even if you do the interest compounds daily, and is on your bill monthly.  All of a sudden that 1-3% cash back doesn’t look so great on 19% interest charges now does it?

The last and most worrisome is deferred interest charges.  And yours truly almost got caught in this.  I had just bought a house, and my down payment took every dollar that was not in my retirement account.  I know cry me a river!  At my house I had no washer, dryer or fridge.  The dishwasher was quite literally on its last leg, and the oven/stove and microwave had been through a lot.  In fairness the family I bought it from had moved out 3 years prior and let their grandson live there rent free.  Everything else was fine, but I needed appliances, using my parent’s wasn’t going to cut it.  Enter Pacific Sales, conveniently located inside the local Best Buy.  They had a big sale going as it was a three day weekend, and to be fair I shopped around and for all seven appliances I needed it was the best deal by far.  The total came to about $3,500 I reckon, then after the installation and “other” parts required for said appliances we were at about $4,000.  Obviously I didn’t have the kind of coin, and right on cue they had a financing offer.  No interest for 1 year!  Just get the store branded credit card.  Even better I was told 3 months of no payments applies as well…. how great 1 year and 3 months of zero interest!  There’s a catch, I will get to it later.  2 months later, the tires needed to be replaced on my Explorer, about $1,100 worth.  Of course, they have you by the proverbial balls, since they can pull the “your car isn’t road worthy so we cannot let it leave card.”  Again, they pulled a great offer, 1 year no interest, and $200 off.  I didn’t want to do it, but hey… why not right? If you are keeping score at home, I now have 2 store cards, and about $4,800 in monies owed.  I was making minimum payments on the balances each month, $100 on the appliances, $50 in the tires… because…. Well, time value of money, right?  I was going to pay them off later, but had other things to worry about. 

Well at the bottom corner of the statement, there is/was a box, it stated deferred interest.  This box was the way the store makes money.  You see the store likely is losing on the deal offered up front, but they stand to gain a large amount from these deferred charges.  Luckily for me, in both cases I caught this before it became a problem at all.  To give you an idea, had I been a month late on the tires, the interest would have been $350, on top of the $900 I would have paid.  Had I had just paid in full that day, $1,100 would have been the damage, instead I would have paid about $1,250.  The appliances would have been far worse, deferred interest would have been about $1,500.  Again, look at the deal upfront, and the deal had I not paid in full in the “promo-time.”

Don’t believe me?  Check out these quotes from the earnings reports of Macy’s and Nordstrom

Macy’s executives disclosed on Tuesday that rising delinquencies cut credit card revenues to $120 million in the second quarter, down $84 million from the previous quarter. While Nordstrom’s credit card revenues rose 10% in the first half of this year, company executives said Tuesday that delinquencies are now above pre-pandemic levels and could “result in higher credit losses in the second half and into 2024.”

US department stores see higher credit delinquencies amid strained spending

Credit cards are big $$$ for these corporations, and a large part of the earnings numbers.  Keep in mind interest earned is basically “free money” to these groups.  They only have to mail out a statement each month.

The last item I wish to address is when you pay with plastic it truly is “buy now, pay later.”  Items purchased may or may not show up on the next bill.  Take this for example, I paid for a tank of gas Tuesday this week, in the amount of $80, I used my trusted cash back card.  Well, my statement closed Monday night, so the gas I bought will not be on Septembers bill, it will be on Octobers.  Let’s just say in September I owe my house insurance, in addition to my other utility/recurring expenses, well my October bill will be higher thea I likely budgeted.  This is another trick the credit card companies do not want you to know.

In closing I do not hate credit card companies, nor do I completely agree with Dave Ramsey that you should not have one.  I will agree with him on the fact it creates bad buying habits, and unsafe financial practices. 

Use my example, if you are not careful, those appliances, or tires quickly become very expensive.  Dave doesn’t need me shilling for him, he offers and does good things, especially for folks who find themselves not realizing the pitfalls of “2% cash back.”  If you don’t carry a card… more power to you. I don’t judge, if you messed up previously… I don’t care, just don’t do it again.

As far as renting a car goes, yes, if you have no credit card it may be tougher, may even need to check a couple of companies to rent you one, but you will find one.  As for buying a house/car, sure there will be more hoops to jump through and you may need to shop around for a bank who will “manually underwrite you” but if you qualify for the loan, you get it.  Federal law. 

Johnnie Does

PS check out the value of those “points” thepointsguy.com I think is a good site, it will show you the best/worst uses for them, and you can see firsthand how some banks…cough…Citi… cough, devalue points if you use them certain ways.

You may be confused by the title of this blog, and you should be.  William pointed out in his most recent writing that most in CA love big government; specifically, being told what to do by government.  However, what if they knew the government was guaranteeing loans to business owners who are already successful?

Enter the City of Elk Grove.  The City Fathers have decided to pick losers and winners in the local economy using your tax dollars for the wager. The remainder of this blog documents this very socialist behavior in our once very Republican community.

Old Town Elk Grove’s future barbecue restaurant and bar took a large step closer to its completion thanks to the Elk Grove City Council’s recent approval of a $500,000 loan deal.

LowBrau’s Slow and Low Smokehouse, a project of restauranteur Michael Hargis’ Slow and Low, LLC, is currently slated to open at 9700 Railroad St. in the next one and a half to two months, Hargis told the Citizen on June 29.He also owns Sacramento dining establishments such a Beast + Bounty, a Michelin-rated restaurant; and the LowBrau Bierhall.

During their June 28 regular meeting, the Elk Grove City Council unanimously approved an agreement for that loan, which is a commitment from River City Bank to Slow and Low, LLC to fund the costs of final tenant improvements, opening and initial operations of the new restaurant and bar.  The vote was unanimous.

Because the loan was contingent upon a third party agreeing to provide a repayment guarantee as security, if Slow and Low, LLC defaults on its loan, the business’s owner, Michael Hargis, asked the city if it would serve as that third party.

Yes, folks, a Michelin Star restaurant is a big deal. Think Gordon Ramsey or Wolfgang Puck… It is one of those places where frog legs cost $125 a plate, and you get 1 leg …I though frogs had 2 legs, but I digress.  Low Brau I have been to before, it’s a German sausage/food themed place where you guessed it, the beer flows freely.  It is a cool place; I do not have a gripe with either restaurant.  Where I have a gripe is why are we, the taxpayers, guaranteeing a loan to a guy who runs not 1 but 2 very successful places to eat?  Can’t someone else lend him the cash?  Specifically, the Small Business Administration (SBA) or Chamber of Commerce or maybe a bank?  I thought when you wanted a business loan that you had to have a business plan, profit/loss projections, costs, and a plan to pay it back?  Maybe times have changed?

Slow and Low, LLC is responsible for the loan that must be paid in full within five years.

As a guarantee that the bank would be reimbursed if the business defaulted on its agreement to pay off the loan, the city has pledged a collateral cash deposit in funds that were already deposited by the city at that bank.

Another element of this contract includes the use of a security agreement, in which the city will place a lien on the business’s restaurant equipment, if the loan is not paid in full prior to the deadline to do so.

In a worse-case scenario, a defaulted loan would result in the city losing some or all of its pledged deposit with River City Bank.

However, the city’s potential loss of $500,000 would be less impactful, considering that the restaurant equipment and Hargis’ 7001 Garden Highway, Sacramento property is relatively equal in value, noted Darrell Doan, the city’s economic development director.

“We have that first deed of trust in Mr. Hargis’ personal property (on the Garden Highway), and we also have the lien on the restaurant equipment (for the Railroad Street restaurant project),” he said. “We could foreclose both of those interests – in theory take title to his personal property, take title to the restaurant equipment.”

Although Doan mentioned that he does not foresee the worse-case scenario occurring, he presented that possibility for the purpose of providing full disclosure.

Doan noted that if Hargis is able to pay off the loan, the city will “experience no loss.”

“During that time, (those funds) would have earned the same interest on that deposit as we would have had we not created this security arrangement,” he said.

This Doan fella seems like a real piece of work, but his actions are on point for a government official.  Let me make a bet with taxpayer money and if it goes wrong, we will seize the man’s house and the equipment in the bar.  If it goes well, I can parade around calling myself an economic growth genius and apply for a job in a bigger City.  It’s literally heads I win, tails you lose.

Just to make things clear here, I do not know this Hargis guy who owns the restaurants, nor do I know his finances, or business acumen.  But I will make an assumption, he is quite good at his craft, a Michelin Star is not given out like candy on Halloween, they are quite rare.  Keeping it is even harder.  I have never had a bad meal at Low Brau. 

But why is he privatizing the profit, while socializing the loss?

Opinion of blogger:

This deal reeks.  Sorry I’ll say it.  The idea that the City will have a lien on his house tells me he may be mortgaged to the hilt.  His agreement should be between the bank, the landlord of the building he will occupy, and himself.  Why is the City involved at all?  This smells like Darrell Doan wanted to see a BBQ joint in Elk Grove and talked this guy into starting one and guaranteed his loan. In addition, I think the bank didn’t like his business plan or profit/loss estimates moving forward so they balked at the loan. 

Also pay attention to this statement:

Hargis, who has already spent about $750,000 on this restaurant and bar project, told the Citizen that he feels confident that his barbecue business will open on Railroad Street and the loan will be paid in full.

Why is the tenant making all the improvements to the building?  Typically, the landlord does this in exchange for higher rent/increases in rent annually.  I have not seen many of these arrangements lately.  It gives me pause.  Especially since the Dust Bowl Brewery that went in directly next to this proposed site made a lot of improvements, then ripped them out and put other ones in.  (Note, the buildings are old brick train station type buildings that got a ton of updating). 

Continuing my concerns, the location is in Old Town. It’s far away from the city center and is not easy to get to.  Think of one lane in each direction street, stop lights/neighborhood homes/very scarce parking.  Simply put, not many work in the area, and most who live there work far away so locals likely will not be partaking.  The BBQ business is also very fickle, either folks like it or not, and usually the owner finds out his BBQ is not as great as he thinks it is.  I watched as “The Rib Shack” near my office bit the dust in a bout a year’s time.  The location is also very set back from the road, and visibility will be little as it will be behind the Dust Bowl Brewery and a couple of housing units being built.  I would be remiss not to add that the neighborhood directly to the east of this is known for its meth heads and crack cocaine deals.  Just ask a local, one told me any Amazon package left on the porch longer than about 30 minutes is stolen.

In closing I will say this is the new America.  It used to be you took a chance, and if you hit it, you could hit it big, or even hit it to where you made a good living working in your own business.  Now the profit is enjoyed by the owner, and the loss is shared by the citizens.  It is sad, but it’s what it has come to.  Frankly you would be foolish not to get into it if you can.  This town is playing with house money quite literally as we built a casino.  One has to wonder if it will decide to have a BBQ joint inside or nearby their casino?  The plans are to build a hotel and amphitheater.  Most in central or west Elk Grove likely have never heard of Old Town Elk Grove or really care.  Quite frankly, if you live in either area its likely quicker and easier to go downtown than to travel to East Elk Grove and deal with the aforementioned parking and logistics issues getting to the area.

We are spending 1.25 million on something that is so far from a sure thing the owner (of 2 restaurants) has to personally put up his house and kitchen equipment as collateral?  Huh?  Also, the kitchen equipment, may seem like it’s worth a lot, no one buys that stuff second hand.  It’s likely useless, and only has scrap value.  Also, they say this guy’s house is worth 500k?  How can that be possible?  They claim he lives on Garden highway, for those of you not familiar Garden Highway (essentially the levee road in most of Sacramento County) which means he has a view/close proximity to water, so his home value is bunk.  My small 1700 square foot house in aforementioned East Elk Grove in a tract home neighborhood is worth north of $650k according to Zillow.  A lot is not adding up here.  I think he does not own his house free and clear; he likely has a large note payable on it via a bank, backed by the house as collateral.  No bank is letting the City of Elk Grove foreclose on it if they are owed money.

Again, folks here we are privatizing the profit, socializing the loss.

The Chief