alarm-clock-public-domain-460x306By Michael Snyder

Economic activity is slowing down all over the planet, and a whole host of signs are indicating that we are essentially exactly where we were just prior to the great stock market crash of 2008.  Yesterday, I explained that the economies of Japan, Brazil, Canada and Russia are all in recession.  Today, I am mainly going to focus on the United States.  We are seeing so many things happen right now that we have not seen since 2008 and 2009.  In so many ways, it is almost as if we are watching an eerie replay of what happened the last time around, and yet most of the “experts” still appear to be oblivious to what is going on.  If you were to make up a checklist of all of the things that you would expect to see just before a major stock market crash, virtually all of them are happening right now.  The following are 11 critical indicators that are absolutely screaming that the global economic crisis is getting deeper… Continue reading “ALARM BELLS GO OFF AS 11 CRITICAL INDICATORS SCREAM THE GLOBAL ECONOMIC CRISIS IS GETTING DEEPER”

The Recovery Will Be Bifurcated

Big Lenders and Big Borrowers Will Be the First in Line as Credit Returns to the Economy
By Mark Heschmeyer

These are the best of times for cash-rich borrowers and lenders, but they continue to be tough times for less well-funded borrowers and lenders. Just as the investment markets are bifurcated with top-notch properties in top-tier cities commanding escalating prices and lower tier properties and cities still fighting uphill climbs, so too does it appear that the capital markets are split between the haves and have-nots.

“There seems to be a dam that is keeping the flood of capital provided by the Federal Reserve from flowing to smaller real estate borrowers and properties,” said Chris Macke, senior real estate strategist for CoStar Group. “Expanding the recovery in commercial real estate hinges on breaking this dam.”

The split between cash-rich businesses and those in need of capital has set the stage for a bifurcated economy, with growing challenges for small- and medium-sized companies.

“Depending on where you stand, the debt maturity crunch ahead could either look like a crack in the pavement or the entrance to the Grand Canyon,” Deloitte LLP reported in a new paper this week entitled: A Tale of Two Capital Markets.

In it, lead researcher Dr. Ajit Kambil, research director, CFO Program, Deloitte United States, reported that cash is also unevenly distributed across industries, not just among companies within a particular sector. Unless the financial services industry lends or invests its cash in varied industries, companies outside of financial services could face potentially severe credit constraints.

Deloitte said the convergence of growing demand for debt with supply constraints has created a new normal in the capital markets. A more accurate descriptor would be two new normals – reflecting dramatic differences between cash-rich and cash-challenged companies. Competition for capital will most likely favor investment grade companies over non-investment grade companies as both seek to refinance debt obligations.

What is true across industries is also true within the commercial real estate industry, according to CoStar Group. Last September, CoStar’s Property & Portfolio Research (PPR) subsidiary “delved into how larger banks are much better positioned than smaller banks to “earn their way out” of the current cycle,” said Mark Fitzgerald, a CoStar debt strategist. “And as they recover, with life insurers in better shape as well, this contributes to the bifurcated market, as both of these sources of capital tend to lend on larger, coastal assets, whereas small banks are in worse shape, and this will hurt the recovery in secondary and tertiary markets.”

Since the downturn began, earnings for larger banks, while far from strong, have outperformed their smaller counterparts, CoStar reported. Perhaps the most important reason why this is so is the portfolio composition for larger institutions. The 20 largest banks hold 61% of all bank assets but are underexposed to commercial real estate loans. The bigger banks also have been more aggressive in taking write-downs.

CoStar’s Fitzgerald projected that large banks will “earn their way out” of the Recession in about two years, while regional and community banks could take two to four times as long.

As the economic recovery develops, CoStar Group projects that it will bring mixed blessings to CRE investors.

On the one hand, economic recovery enables banks to earn their way out faster, achieve better execution on poorly underwritten or nonperforming loans, and therefore sell distressed CRE assets at a faster pace.

On the other hand, such economic recovery minimizes the attractiveness of the distressed asset opportunity, as pricing is firmer and disposition of assets is likely to be at a controlled pace.

Furthermore, the modest pace at which banks return to health will minimize the amount of “fuel” (leverage) available to propel a robust rebound in asset values.

With limited leverage, borrower liquidity now also matters. And in that regard, big firms hold the edge. The 9,000 largest companies hold $9 trillion in cash reserves and that level of liquidity makes them more fundable.

An analysis of non-investment grade debt and changing credit spreads finds smaller companies are especially vulnerable to increasing spreads and volatility in credit markets. Differences in cost or difficulties in access to capital can be a key source of competitive disadvantage.

Deloitte research said that most non-investment grade debt is generally concentrated among small companies with market capitalization of less than $5 billion while larger companies’ debt is almost completely investment grade. For the most part, smaller companies tend to have lower credit ratings and company size is a key variable in credit ratings.

Deloitte research found that prior to the recession, companies in the aggregate were accumulating cash in excess of what they needed to grow. This was fortunate as many companies entered the recent recession with unprecedented amounts of cash on their balance sheets – allowing them the flexibility to navigate the worst of the credit crisis.

These cash reserves are unevenly distributed and mainly reside in the financial services industry, with about $2 trillion of cash outside financial services. Unless this cash is deployed to refinance companies, there is a potential deficit in refinancing non-financial service industry debt.

Ryan Severino: Office Cap Rates Down to 7.4% In Limited Transaction Market

Ryan Severino: Office Cap Rates Down to 7.4% In Limited Transaction Market

Ryan Severino: Office Cap Rates Down to 7.4% In Limited Transaction Market.

(The following is adapted from from a portion of Reis’s latest quarterly Capital Markets Briefing, originally delivered by Ryan Severino, PhD, on 8/25/2010.)


As the slide above illustrates, the mean cap rate for office properties decreased dramatically in the second quarter, from 8.2% in the first quarter to 7.4% in the second quarter.  Mean office cap rates had been steadily increasing since the third quarter of 2008, before fluctuating a bit throughout 2009. Much like apartment, the limited and selective transaction market causes quarterly changes in mean cap rates to be somewhat unpredictable and volatile.  This quarter’s 80 basis point decline, while not unwelcome, epitomizes this ongoing phenomenon. The average price per square foot and the mean sales price increased also increased versus last quarter, even though the number of buildings transacted declined. Therefore, we can conclude that this quarter’s rather steep decline in cap rates is likely due to an increase in the quality of buildings that traded this quarter versus the quality of those traded in recent quarters past. Sentiment in the marketplace is improving, but it is important to understand that a changing mix of buildings from quarter to quarter can have a significant impact on the mean cap rate and we should not confuse this with a change in sentiment in the market.

For better guidance, it is instructive to examine the trend in the 12-month rolling cap rate, which shows that cap rates for the office market might–emphasis on might–have peaked last quarter. It is still too early to tell for certain if we have reached the peak in cap rates for office, especially because of the effect that this quarter’s decline in cap rates is having on the 12-month rolling rate. Nonetheless, this quarter’s decline in the 12-month rolling cap rate is the first time that we have observed a decline in almost two years, since the third quarter of 2008. Although it only represents a slight decline, it is the first indication of stabilization in pricing that we have observed in the office transaction market. The trajectory of cap rates for the remainder of the year will largely depend upon the trend in fundamentals and their impact on sentiment in the market throughout the latter half of the year. Office fundamentals have not yet begun to improve, but if they do during the remainder of the year that could provide support and enthusiasm for office transactions.

How Hyperinflation will Happen

First of all, I want to ask my readers to please excuse the fact that I haven’t posted here for awhile.  Various activities have kept me quite busy, leaving me little time to write.

I was sent a link to the following post today, and think it is an exceedingly important bit of information that investors need to read and assimilate, so I am passing it on to you.

Writing in, a site which I have found consistently has valuable financial information, Gonzalo Lira proposes a scenario, the inevitable result of which is hyperinflation in America, and the world.  He distinguishes between Inflation, and Hyperinflation:

But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same—because in both cases, the currency loses its purchasing power—but they are not the same.

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency.

He gives the likely scenario that will signal the start of hyperinflation and concludes that the only likely result of the massive deficits this administration is creating, as it seeks to prop up aggregate demand levels by way of fiscal “stimulus” spending—the classic Keynesian move, is hyperinflation.

But this Fed policy—call it “money-printing”, call it “liquidity injections”, call it “asset price stabilization”—has been overwhelmed by the credit contraction. Just as the Federal government has been unable to fill in the fall in aggregate demand by way of stimulus, the Fed has expanded its balance sheet from some $900 billion in the Fall of ’08, to about $2.3 trillion today—but that additional $1.4 trillion has been no match for the loss of credit. At best, the Fed has been able to alleviate the worst effects of the deflation—it certainly has not turned the deflationary environment into anything resembling inflation.

Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative)—in short, everything screams “deflation”.

Therefore, the notion of talking about hyperinflation now, in this current macro-economic environment, would seem . . . well . . . crazy. Right?

Wrong: I would argue that the next step down in this world-historical Global Depression which we are experiencing will be hyperinflation.

I would highly recommend that you take 10 minutes and read the whole article. Being informed about what is likely to occur will enable you to take the necessary steps to be prepared for it. You don’t want to be the deer in the headlights when the car comes around the bend.

Felix Zulauf Gives Rare Interview

Most likely, you have not heard of Felix Zulauf.  He is one of the top money managers in the world.  He is the owner of Zulauf Asset Management in Switzerland.  Mr. Zulauf  manages money for some of the wealthiest people in the world.  He rarely gives interviews.  He did recently give an interview to King World News.

Mr. Zulauf confirms what I have believed, and often written about here, that the current debt of the US (and other countries) is not sustainable.  As a result, we are entering a deflationary period, and will likely experience a financial crisis greater than any we have experienced in the past.  He feels that our monetary system will break down and we will likely have to issue new currency.  He recommends owning gold, real estate and other hard assets rather than currency.

If you want to listen to what I consider a very enlightening and informative interview, please listen to this brief interview of Felix Zulauf.

Go here and then just click on the purple mp3 button just above his biography on the left hand side.

Is The United States Headed For A Commercial Real Estate Crash Of Unprecedented Magnitude?

Will commercial real estate be the next shoe to drop in the ongoing U.S. financial crisis?  While most eyes are on the continuing residential real estate disaster, the reality is that the state of the commercial real estate market in America could soon be even worse.  Very few financial pundits are talking about this looming disaster but they should be.  The truth is that U.S. commercial property values are down approximately 40 percent since the peak in 2007 and currently approximately 18 percent of all office space in the United States is now sitting vacant.  That qualifies as a complete and total mess, but the reality is that the commercial real estate crisis is just starting.

Continue reading “Is The United States Headed For A Commercial Real Estate Crash Of Unprecedented Magnitude?”

Limited Job Losses Despite Harsh Weather Encouraging Sign; Positive Territory on Horizon

According to the Marcus & Millichap blog the limited number of jobs lost in February, despite harsh weather, could signal better times ahead:

March 5, 2010

  • With multiple employment sectors recording growth in February, despite anticipated losses due to harsh weather, the economy has begun to generate limited employment traction. Employers cut an unexpectedly low 36,000 jobs during the month, suggesting hiring may turn positive in the second quarter. The professional and business services sector reiterated employers’ need for additional staff by hiring 51,000 workers in February, but, as in previous months, caution reigned, with 47,500 of the added jobs being temporary. Steady increases in temporary employment often foreshadow the creation of full-time jobs as the economy emerges from recession. With five consecutive months of additions through February, temporary employment has signaled the economy is making continued headway in its choppy recovery.
  • Among other sectors, education and health services and leisure and hospitality added an aggregate 39,000 workers last month. Manufacturers created jobs for the second month in a row, adding 1,000 positions to payrolls and marking the first time since 2006 that manufacturing employment has expanded in successive months. These positive contributions to total employment, however, were more than offset by the losses in other sectors, including the elimination of 64,000 construction jobs and 12,000 transportation and warehousing jobs that may largely be attributable to poor weather, particularly in the Northeast.
  • The addition of 342,000 people to the work force last month helped keep the unemployment rate at 9.7 percent. Though this figure could be partially related to a re-benchmarking of data in January, it may also signal increased confidence in the employment market. The household survey indicated that the number of employed rose by 308,000 individuals in February. This information suggests small businesses, which tend not to be captured in the broader BLS nonfarm employment figures, may have resumed hiring on a limited scale.
  • Impact on Commercial Real Estate

  • The unemployment rate among 20- to 34-year-olds, or the prime apartment renter cohort, remained unchanged last month at 11.7 percent but has improved from a recent high of 12.2 percent last fall. Strengthening employment opportunities and job growth should stimulate the apartment sector going forward, especially as younger individuals who delayed forming households during the recession enter the work force. Following an increase of 130 basis points in 2009, national apartment vacancy will decline 30 basis points this year to 7.7 percent as more than 89,000 units get absorbed. Rents will continue to lose traction, however, as effective rents will slip 3 percent.
  • The modest improvement in manufacturing employment and further strengthening in the ISM Manufacturing Index bode well for warehouse and distribution properties in the months ahead. Nationwide industrial vacancy surged 200 basis points last year to 12.6 percent on negative net absorption of 139 million square feet. Space demand will recover slightly this year, although vacancy will rise 20 basis points.

Warren Buffet Says U.S. Housing Market Will Recover In 2011

Billionaire Warren Buffett said the U.S. residential real estate slump will end by about 2011, predicting that’s how long it will take demand for homes to catch up with the supply.Calif and nationwide housing prices

“Within a year or so, residential housing problems should largely be behind us,” Buffett wrote Feb. 27 in his annual letter to shareholders of his Berkshire Hathaway Inc. “Prices will remain far below ‘bubble’ levels, of course, but for every seller or lender hurt by this there will be a buyer who benefits.”

The worst housing decline since the Great Depression has left one in five U.S. mortgage holders owing more than their houses are worth. Record foreclosures last year flooded a real estate market already glutted with unsold property, causing new construction to fall to the lowest in at least 50 years. The fall in homebuilding is the only fix unless the U.S. decides to “blow up a lot of houses,” Buffett joked.

“People thought it was good news a few years back when housing starts — the supply side of the picture — were running about two million annually,” said Buffett, the chairman and chief executive officer of Omaha, Nebraska-based Berkshire. “But household formations — the demand side –only amounted to about 1.2 million.”

Berkshire, which owns a real-estate brokerage, a business that constructs pre-fabricated houses and units that make products used in homebuilding, has suffered amid the slump. Profit at Clayton Homes, the pre-fab housing business, fell about 9 percent to $187 million before taxes, while earnings at carpet manufacturer Shaw Industries fell 30 percent.

Read more.

The Coming Great Recession of 2011 – 2012

The American Spectator published an article written by James Srodes titled, “The Great Recession of 2011-2012”

Mr. Srodes hits the nail on the head.  He explains why, despite the rosy projections you read in the morning newspaper, we are headed for worse times in the next couple of years.  I don’t want to be a doomsayer, or create a sense of pessimism.  I just think the old adage that to be forewarned is to be forearmed is a good one.

I am not going to summarize the article here.  It is a very well-written and logically presented.  It is important to read it in its entirety.  I suggest you go here and do just that.  And then arrange your finances so that you will still be standing when we hit 2013.

While he writes about all the reasons 2011 and 2012 will be very difficult years financially for most Americans, he doesn’t mention one other factor that will contribute to the downturn.  There are billions of dollars of commercial mortgages that will mature in the next 18 months.  The borrowers will not be able to refinance those loans without contributing substantial cash equity.  As a hypothetical example, a borrower who borrowed $21 Million (70%) on a shopping center that was valued at $30 Million in 2006, will likely now find that he can only refinance 60% of a revalued asset now worth $25 Million.  That means he will only be able to get a new loan of $15 million to pay off a $21 Million loan.  He will either have to come up with $6 Million in additional equity, or run the risk of losing his property.  That bubble is still ahead of us and will make the bursting of the home mortgage bubble seem like a minor glitch.

All the signs are there.  You just have to read them.

Go to the American Spectator and read the whole article.