TBL Thinks: Student loan forgiveness, REITs trouble, and the chip war
Dear Readers,
It’s time to put our thinking caps back on as we deep dive into student debt forgiveness and what it means for the US economy, a potential cash crunch in a real estate fund, and the race to dominate the semiconductor market.
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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What did we read this week?
Biden Widens Student Loan Relief to More than 10% of Borrowers (BBG)
What does this mean? The Biden administration announced its latest package valued at $7.7 billion as part of its student debt relief measure, making it so that now more than 1 in 10 Americans with federal student loans have been approved for some measure of debt relief.
Why is this important? After the Supreme Court canceled Biden’s $400 billion plan to cancel or reduce debt for millions of Americans in June 2023, the Department of Education began consistently unveiling changes to regulations of existing federal programs to allow more Americans to qualify for debt relief. Student loan debt currently stands at $1.75 trillion, with federal student loans accounting for almost 92% of the total amount of $1.6 trillion, owed by 43 million borrowers.
Why are we watching this? TBL is closely watching the news around student loan forgiveness because of its many implications on the economy—debt forgiveness would worsen inflation in theory as lessening a financial burden for consumers could have the welcome effect of increased spending ability. Student loan forgiveness also means higher budget deficits. Finally, we believe that student loan forgiveness could affect certain pockets of the securitized sector within fixed income.
A $10 Billion Real-Estate Fund is Bleeding Cash and Running Out of Options (WSJ)
What does this mean? Starwood Capital Group, owner to some of your favorite hotels around the world (St. Regis, Westin, Sheraton, Le Meridian to name a few) is scrambling as it faces the daunting line of investors wanting their money back. A $10 billion fund from the private investment firm, called the Starwood Real Estate Income Trust (SREIT), has been trying to preserve its available cash and credit by gating investors—SREIT received requests to fulfill $1.3 billion in withdrawal requests but was able to honor less than $500 million of them. With its $1.6 billion line of credit nearly exhausted, the company stares down a barrel full of unappealing choices: take on more debt, sell properties in a tough market, or completely halt or limit further redemptions, thereby also impairing its ability to raise new money.
Why is this important? SREIT is second in size only to BREIT (Blackrock Real Estate Income Trust). These funds give small investors the opportunity to invest in the commercial property market and gained popularity when rates were low due to the dividends they paid. However, as rates increased and commercial real estate property values decreased, investors got spooked and redemptions began escalating. SREIT is not the only fund being inundated with redemptions, BRIET was able to fulfill redemption requests in February and March for the first time since late 2022, when a flurry of withdrawals compelled it to limit how much it could pay out. Both funds are in a situation where withdrawals continue to exceed new money coming in.
Why are we watching this? TBL always has our eyes on investor liquidity into private funds, because these types of vehicles are often an early indicator to risk aversion in the public markets. If these REITS are forced to sell buildings, it could affect the banking system—we are seeing a wave of office buildings face enormous losses in market value. Commercial real estate crisis? We’ve been nervous about one, and this doesn’t make us feel any better.
Why Making Computer Chips Has Become Such a Big Deal (BBG)
What does this mean? Computer chips are the engine driving the digital economy and also the focus of intense competition between the world’s economic superpowers. The race to dominate this industry intensified as both the Trump and now the Biden administration ratcheted up pressure on China’s tech industry with export controls and tariffs. The power struggle between the two countries can be attributed to the increasing capabilities of semiconductors and their strategic importance across industries, including supercomputing and military technology.
Why is this important? Although most of the world’s elite semiconductor technology comes from the US, it is Taiwan and South Korea that dominate chip manufacturing. Reliance on these chips was felt deeply when the pandemic disrupted chip production in Asia and sent global technology supply chains into a tizzy. Due to the scale and cutting-edge technology required to produce chips, only three companies dominate the supply and manufacturing of chips around the world: Taiwan Semiconductor Manufacturing (TSMC), South Korea’s Samsung Electronics, and Intel of the US. The US is doing everything in its power to try and curtail China’s dominance on chip production while redoubling its efforts to reduce reliance on a few facilities in East Asia and bring back home the physical production of chips. The US has imposed sanctions and export controls on some chips and chip-making equipment, encouraged allies to limit China’s access to chip technology, and restricted its own import of chips from China. Leading Chinese technology companies, including Huawei, have been placed on a US entity list making it so that American chip technology suppliers would have to get approval from the government to sell to companies on the list. Furthermore, the 2022 Chips and Science Act set aside $39 billion for direct grants, as well as loans and loan guarantees worth $75 billion, to revitalize American chipmaking. It is not just the US that is trying to gain back control of chip manufacturing, but the world—the European Union, India, Saudi Arabia and Japan have all set the ball rolling to increase domestic chip production. Meanwhile, China is not taking all of this lying down—Huawei is building a collection of semiconductor facilities across the country that could potentially allow the company to circumvent the restrictions and sanctions imposed by the US.
Why are we watching this? TBL realizes that the fight over semiconductors will be a driver of fiscal policy and geopolitics. US manufacturing of chips will affect the economy in a positive way, and we expect the government to be very supportive of this industry while China continues to catch up, even though TSMC-level manufacturing is still years away.
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Until next time,
TBL Thinks
River is our Bitcoin exchange of choice.
Securely buy Bitcoin with zero fees on recurring orders, have peace of mind thanks to their 1:1 full reserve multisig cold storage custody, and withdraw at any time. Need help? They have US-based phone support for all clients.
Now introducing River Link 🔗allowing you to send Bitcoin over a text message that can be claimed to any wallet. Give a gift, pay a friend for dinner, or orange pill your friends, completely hassle-free.
Use River.com/TBL to get up to $100 when you sign up and buy Bitcoin.
Definitely worrisome about Starwood's REIT and if commercial real estate crashes like the housing MBS did in 2007, could BTC holdup at these levels or will it crash also????