The Situation Room

When the Founder convened Dirtlease staff at a bunker in an undisclosed location recently, DEI protested that women had been underrepresented in the process of fortifying the walls.

‘Fuck off’, Operations explained.  ‘The contract was awarded to the lowest bidder.  Anyhow, I was drunk and the wench is dead’.

‘I am going to flee Gilead’, DEI said.  ‘I hear Uruguay is good.’

‘Take me with you’. Operations said.

‘Eugh’, DEI said.  ‘Not with a ten-foot pole.’

‘People’, the Founder said.  ‘Knock it off.’

‘Why are we here’, Legal said.  ‘What’s going on?’

‘There was an ICE raid on the chicken hatchery last night’, Operations said. 

‘Holy crap’, Legal said.  ‘A lot of our residents work there.  Are they OK?’

‘Most of those residents are from Puerto Rico.  They are American citizens.’

The Founder remembered a college roommate, a math prodigy from Puerto Rico.  When the Founder had told the roommate that Puerto Rico was part of the United States, the roommate had replied, ‘Yes, but only by inbaysion’.  The roommate had been younger than the Founder, sixteen years old when he started college.  He had a nasty habit of wanking, loudly, uninhibitedly and often, after he thought the Founder was asleep.  The Founder wished he could close his eyes and make that memory go away, but the back of his eyelids only made it more vivid.

‘At least one of the families who live in the park in northern New York is from Mexico’, the Founder said.  ‘Have you checked with them?’

‘We have been in touch with them’, Operations said.  ‘They said that ICE was at the facility but they are OK.’

Operations had a flat-head haircut, a thick neck and a strong nose.  He usually wore golf shirts with the gold Dirt Lease logo embossed on them.  He had served for twenty years in the Coast Guard before he entered the private sector.  The Founder thought that he had Ghibelline sympathies.  That made the Founder uncomfortable, but in times like this, he thought, you had to work with all kinds.  DEI and Legal, the Founder knew, were hard-core Guelfs.  Economics was slippery.

‘Twelve of the twenty-two workers at the plant were taken away’, Operations continued.  ‘That’s bad for the chickens.   Without those workers, the chickens won’t be able to lay their eggs.  If they don’t lay, they die within forty-eight hours.’

‘It’s not good for the people, either’, DEI said.

‘Wasn’t there another raid in the North Country recently’, the Founder asked.

‘ICE raided a school in Sackets Harbor recently’, Operations said.  ‘They took away three kids whose parents work in the nearby dairy farm.’

‘Why did they apprehend them’, the Founder asked. ‘Just, like, because?’

‘They were picked up in an unrelated raid.  A South African national who was living in the same house was suspected of child sexual abuse.  When they arrested the accused sex offender, they saw people who they thought looked undocumented, so they took them in, too.’

‘No warrant?’

‘For the accused sex offender, yes.  For everyone else, no.’

‘Are the kids and their mother OK’, the Founder asked.

‘They were taken to Texas and held for more than a week.  There was a demonstration in Sackets Harbor and political push-back.  They have been returned’, Operations said.

‘Isn’t Tom Homan from Sackets Harbor’, the Founder asked.  ‘The head of ICE?’

‘Yes, he is’, Operations said.  ‘He’s detaining his neighbors.’

.

‘What would happen to North Country businesses if all the immigrants vaporized’, the Founder asked.  He was still trying to forget his old roommate. 

‘It would tank the local economy’, Economics said.  ‘The chickens would die and the cows wouldn’t produce milk.  And we wouldn’t be able to pay our mortgage, because nobody would pay lot rent.’

‘What is our cost of funds now?’

‘Seven and a quarter on the park in central New York’, Economics said.  ‘Six and a half on the park in the North Country.  The loan for the park in central New York reset earlier this year.’

‘What had it been before then’, the Founder asked.

‘Four and a half.’

‘Ouch.’

‘They reset every five years, but the rat bastards keep the prepayment penalties for a year after the reset.’

‘When is the North Country park due to reset?’

‘2028, but the prepayment penalty has lapsed.’

‘What do you see as the future for interest rates?’

‘Crap.’

‘Elaborate.’

‘Short-term interest rates are linked, inter alia, to the fed funds rate.  That is the rate at which banks lend money to each other.  That is set by the Federal Reserve Bank.’

‘We have discussed this before, haven’t we’, the Founder said. 

‘We have, but I mis-spoke about bond yields’, Economics said.  ‘I said that bond yields have compressed because of recent volatility in the equity markets.’

When the Founder googled the old roommate recently, he found that the roommate had gotten a PhD in math and taught at a college in Philadelphia.  In 2011, he had died.  The Founder had never discussed the roommate’s habits with anyone.  When the Founder died, the secret of the roommate’s nasty habit would die with him.  ‘You did’, he said.

‘Well, that is what usually happens.  When stocks get whacked, people dump equities and put money into bonds.  When demand increases, price increases.  Bond yields move inversely to bond prices, so when stocks go down, bond prices go up but bond yields go down.’

‘And when bond yields go down, interest rates go down.’

‘Correct, Grasshopper.’

‘And when yields on longer-term Treasurys go down, yields on mortgages go down.’

‘Correct again, but bond yields did not go down during last week’s sell-off in the equity market.’

‘Ah?’

‘Investors dumped both equities and bonds this time.  They did this because the way in which the tariffs were imposed by the current administration.  The way in which the current administration has decoupled Gilead from the rest of the world has destroyed the world’s trust in us.  That has indicated to investors that US Treasury bonds are no longer a safe haven. In college, we used to refer to the Treasury rate as the ‘risk free rate’. That is no longer the case. This is a once-in-a-lifetime event.’

‘Holy crap’, the Founder said.

‘It gets worse’, Economics said.  ‘Until recently, the US dollar was the reserve currency for the world.  Iran and Saudi Arabia might hate our guts, but when they trade between themselves, they denominate their transactions in US dollars.  So long as overseas investors hold dollars, they need to park them somewhere.  That somewhere is US Treasury debt.’

‘But when the dollar stops being the default reserve currency –‘

‘People dump Treasury bonds.  When people sell, prices go down.  When bond prices go down, yields –‘

‘Rise.’

‘And that makes mortgage rates go up, but it gets even worse.  Since Bush cut taxes and invaded Iraq, the US government has funded itself through deficit spending.  To borrow, the government issues bonds.  And so long as the world buys Treasury debt to park the US dollars they use as their reserve currency, that keeps yields on aforesaid debt low.  But once people start dumping those bonds, yields rise.  And that means that the interest the government has to pay to service its debt will go up.  And that means the government will go deeper into debt, in order to service its current debt.  To do that, it will flood the market with bonds.  That will increase supply, which will depress price and increase yield.  Worst case scenario, we get a vicious cycle.’

‘Where’s Necker when you need him?’

‘Necker died of natural causes.’

‘People close to him were not so lucky.’

‘Couldn’t the Ghibelline administration just raise taxes for pay off the debt’, the Founder said.  ‘I mean, when you need money, you raise revenue.’

‘That would be politically difficult’, Economics said.  ‘People who voted Ghibelline wouldn’t go for it.’

The Founder wondered what it would be like to live out the last third of his life in Uruguay.  He understood that the climate was temperate, it was the most politically stable country in Latin America, and there is a boardwalk in Monevideo that runs along the coast for thirteen miles that is, everyone says, a pleasant place to walk.  He didn’t speak any Spanish, but it couldn’t be hard to learn. He remembered a few swear words that the roommate had taught him.

‘What did you tell me cash-flow real estate was’, the Founder asked.

‘It’s interest rate arbitrage.  You borrow at x and you rent at x + y.  So long as your cash-on-cash return is greater than your cost of funds, you make money.’

‘And what do you call it if interest rates go up because of an incompetent administration but revenue is restricted by, say, rent control laws?’

Economics looked at DEI and a few other women in the group.  ‘There’s no polite term for it’, he said.  ‘I would not feel comfortable saying the word in mixed company.’