I have been telling subscribers for, oh gosh, something like a year or longer, that we ought to have one more major blow-off in 2016 – with continuation into 2017 – before the market hits a new all-time high and from which we will plunge into the Depression to End Depressions.
We have been working on the mechanics of how the various gears will mess. But there are two important pieces of the engine of prosperity that are about to break.
One is explained in this comment (from a fellow who writes suspiciously like my consigliere) who shares our total concern with what interest rate increases (likely starting in 2-weeks with the Fed rate decision) will mean for commercial property:
“Real Estate Bubble II … the BIG ONE … Explosion coming up??!!
While Residential Real Estate is up up up and away and grabbing the headlines, because of WAY below market interest rates reducing everybody’s payments, COMMERCIAL Real Estate has also been on a solid, just short of vertical, climb.
The two markets while related because of artificially low interest rates are actually driven by different underlying dynamics.
Residential Real Estate is a CONSUMPTION item (generally – except for the speculator class) where NO economic return is expected.
Commercial Real Estate is an INVESTMENT item where an economic return IS expected
Investment items exist in order to generate a “Return” on the investment and do to this tend to react much quicker to changes in the investment climate than do consumption items. Because of this the Commercial Property situation can be more easily categorized as being nearer a BUBBLE state now than can residential real estate.
There is a good article that lays out the situation wrt Commercial real estate over at WolfStreet.Com (link below) but basically it shows that in the Commercial Real Estate PEAK was in Sept 2007 (nominal peak height set at “100”) after which it fell quite dramatically until May 2009 (nominal bottom at 61.2% of the peak height), at which time the bottom feeders came in and it began it’s climb. “
Today, Oct 2016, that Commercial Property Index stands at 126.3, or 26% HIGHER than at it’s peak in 2007, and up 107% from it’s bottom in May 2009!!
This is NOT a small asset class either … somewhere in the 11 TRILLION dollar range currently!!
Once interest rates tick up to a more normalized level, say up 2.5- 3 points higher than today, or MORE THAN doubling of where they were the day before Trump was elected, suddenly a LOT of the Commercial Real Estate will have a quick and dramatic value loss from their current peak levels. Maybe even one could say CURRENT BUBBLE LEVELS!!
As Keynes once said: “Markets can remain irrational longer than one (most) can remain solvent” so I am not saying one should go out and try to short this bubble … but clearly we have what looks like a bubble in the Commercial Real Estate arena, one which when it bursts will hurt a LOT of Insurance Companies, Pension Plans, and Investment Trusts if they have mark to market their now greatly price reduced real estate.”
The only additional item my consigliere might have added would be the notion that when complex financial systems collapse, it is never a one-sided equation.
It’s like f = MA in physics. Change any part of the equation and the outcome changes.
Or, more directly, for every bond that fails and for every real estate contract that is broken, someone – somewhere – loses their savings.
In the Great Depression of the 1930’s, the institutions that failed, wiping out assets of the Middle Class, were the community banks. This time around, the problem seems much more likely to be upstream. In places like major insurance companies and pension funds.
The specific issue being that all of these SIFI’s (systemically important financial institutions) claim Too Big To Fail status. But the fact is, that is what makes Depressions unique: Nothing, it turns out, is above failure.
The other problem – and the focus piece in our Peoplenomics report this coming weekend – is summarized by a simple fact of crony capitalism:
Robots don’t pay income taxes.
When the Tech’s Scream, We Listen
We may be hard of thinking, but not hard of hearing.
The Wednesday market session was particularly worrisome. The tech sector was down more than 1% as measured by the NASDAQ Composite. The Dow, meantime, put on a “show” of being up a whole two points.
It’s an article of faith that Techs Lead the Way, and since we are due for another pretty good decline before we climb to the final All-Time-High in 2017, we are in very good field position for a sharp decline through year-end, or so, and then a high in Spring or Summer of 2017.
Well…the Big Picture looks a lot to us like the collapse of private pension funds, spurred in party by the collapse of commercial property, and this – as we’ve already suggested – will be what drives the Trumpedency to take antitrust actions against highly successful companies (think Amazon) that interfere with the “manifest destiny” of real estate operators (mall owners).
And while all this puts the economy through the grinder (and should I mention the Courts?) there will be the New Nationalism that will attempt on-shoring of jobs.
On this last, there is a critical problem in that once spooked, the public is likely to dial back spending more than expected, such that by 2018, the new dynamic of disappearing job creation will be coming apparent to all.
It will be the return of the Vicious Cycle. The Virtuous Cycle ends when the Fed puts the silver stake of rate hikes through the heart of the currently made-up prosperity.
I don’t mean to worry you with our projections for the future, but it is a kind of “six month warning gun” that the clock still ticks and if you are planning to “Get Rich” a better strategy to us seems to be a renewed focus on “Getting Secure.”
Prepping – which is where our core is – is not such a binary deal after all. It’s really a three-legged milk stool.
Sure, the prepping for natural hazards (quakes, tornados, floods, hurricanes and yada yada) makes sense.
And one of these days the profits of doom who have been over-selling EMP and other systemic soft-underbellies of hypercomplexity will be correct.
But what we’re talking about in this “third leg” of the stool is the one that get’s ‘em every time. It’s the sand in the gearbox that breaks things and that sand has a name.
And just so’s to be clear on the present dynamic that leads to the All-Time-High, the reason we will have one more wash-out and then scream to the top is that investment managers will be looking at retail, mall properties, and the growing number of companies based in apartments and Starbucks locations and begin to worry.
As rates go up, initially stock will benefit, as they have since the Trumpendency became obvious. And it should continue for a while, until it doesn’t.
They you’ll want to have a hot line to Chicken Little because the sky really will be falling in on us and that little bit of pain in 2009? Well, that will be like a pimple.
What’s coming will be financial amputations.
There. Cheery enough outlook for you?
Challenger Job Cut Report
Challenger, Gray, & Christmas report is out…on the heels of a strong-than-expected ADP hiring report Wednesday. The Graphic, please:
The pace of downsizing fell to the lowest level of the year in November, as U.S.-based employers announced plans to shed 26,936 workers from payrolls during the month, according to the report released Thursday by global outplacement consultancy Challenger, Gray & Christmas, Inc.
November job cuts were 12 percent lower than the 30,740 cuts announced in October…”
“Ah, THAT is so cool!” you’re thinking.
Well, er, no, not really.
Ever read up on the Roaring Twenties?
This is what the Roar sounds like.
The Slow Learning Democrats
The headline over at The Hill that “Pelosi fends off challenge to leadership” is evidence of two things to us.
First, is that all the money spent on education in this country is not making brighter politicians.
And secondly, democrats apparently missed the Bernie surge.
This is nothing less than thinking Back to the Future. Progress doesn’t really work that-a-way.
Pelosi needed to go because she’s part of the same old political machinery that hasn’t ended proverty because (to borrow from Fox Piven’s concept here) there isn’t enough money in the world to keep buying off the poor.
Fortunately for Pelosi, et all, the poor aren’t getting a good edjumacation, either, so they keep buying the “party of the working man” lies and so we go, as a nation, merrily swirling down the Coriolis effect of the great flush on the horizon…
Hopefully, you know that and are planning accordingly.
Another Cop Killing
Purported perp was killed after a 12-hour stand=off.
The Never-ending Election
We read in the NY Times that President-elect Trump is off to Indiana to do the Carrier victory dance as the NY Times tosses in that “Clinton’s lead in popular vote breaks 2.5 million.”
So? Can’t these people ever give it a rest?
At least, insofar as the Clinton angle, it’s really a non-story when you think about it.
If we were a direct democracy, rather than a democratic republic, it would matter. But America’s Founders were bright enough to ensure that direct presidential elections were not included. Otherwise, the promisor of the most “free lunch” would be elected every time. And you-know-who was very good at that. Come to think of it, where are the stories on how little progress (basically none) has been made fighting poverty in America under 8-years of President Useless, Breaker of Borders?
I shake my head wondering how people can be so stupid…and that explains why the Electoral College is there, I guess.
Since Johnson, we have spent untold trillions on items like education, healthcare and welfare and yet these problems are as pernicious today as they were when the misnamed Great Society was kicked off in ’64.
The Day Ahead: Caution
No point rehashing the obvious, so looking toward tomorrow, we have auto and chain store sales later on today.
Tomorrow is the biggie data-wise for the week. I expect the Employment Situation report will claim a further improvement in the jobless picture, as long as you don’t look at the alternative measures of labor underutilization (U-6) report because that is where the 94-million discouraged workers are stashed.
45-minutes ahead of the open, the futures were about flat, except for the techs, which were weaker.
Still, closing down 50 today would be an interesting bet since the UK and Germany are down one percent and France is down about 2/3rds of a percent already.
A one percent decline in the Dow would shave off almost 200 points, but you know me: Ever the optimist.
Which reminds me I have an eye doctor appointment this morning, so time to hit the shower and see what we shall see…drop by tomorrow because things may be clearer by then.
Coffee’s on you.