Olduvaiblog: Musings on the coming collapse

Home » Posts tagged 'Real estate'

Tag Archives: Real estate

Are You Crazy To Continue Believing In Collapse?: James Howards Kunstler | Peak Prosperity

Are You Crazy To Continue Believing In Collapse?: James Howards Kunstler | Peak Prosperity.

BLOG

Sandra Cunningham/Shutterstock

Are You Crazy To Continue Believing In Collapse?

That it hasn’t happened yet doesn’t mean you’re wrong
by James H. Kunstler
Wednesday, March 5, 2014, 4:16 AM

It’s nerve-wracking to live in the historical moment of an epic turning point, especially when the great groaning garbage barge of late industrial civilization doesn’t turn quickly where you know it must, and you are left feeling naked and ashamed with your dark worldview, your careful preparations for a difficult future, and your scornful or tittering relatives reminding you each day what a ninny you are to worry about the tendings of events.

Persevere. There are worse things in this life than not being right exactly on schedule.

Two simple words explain why more robust signs of an economic collapse have hung fire since the tremors of 2008: inertia and fraud. Never in human history has there been such a matrix of complex systems so vast, dense, weighty, and powerful for running everyday life (nor a larger population engaged in it). That much stuff in motion takes a while to slow down. The embodied energy has kept enough of it running to give the appearance of continuity. For instance, agri-biz still sends its amber waves of grain and tankers of corn-syrup to the Pepsico snack-food factories, and the WalMart trucks still faithfully convey the pallets of Cheetos, Fritos, Funyons, and Tostitos from the Pepsico loading dock to the big box aisles of glory. The freeways still hum with traffic even though oil is pricey at $100 a barrel. The lights stay on. The gabble and blabber of Cable TV continues remorselessly in the background of life. All of that is due to inertia. It gives the superficial impression of the old normal carrying on. Things go on until they can’t, in the immortal words of Herb Stein

The fraud is present in the abuse and misrepresentation of official statistics used as metrics in government policy, in the pervasive accounting chicanery of that same government in its fiscal dealings, as well as in our leading financial institutions and corporations, including control fraud in banking, interest rate rigging, mortgage and title fraud, front-running, naked shorting, re-hypothecation, money laundering, pumping-and-dumping, channel stuffing, the endless innovation of swindles, and, most importantly, the fundamental mispricing of the cost of money, which reverberates through everything else, most particularly real estate, stocks, and bonds. Beyond that, in the shadows of the shadowland known as shadow banking, a liminal realm of secrets and intrigues, only a few are privileged to know what is going on, and you can be sure they only know their end of the trade — while immense sums of ever more abstract “money” slosh through the derivative sewers on their way to oblivion in the ocean of failed trust.

So, don’t feel bad if this colossal armature of folly still stands, and have faith that the blinding light of God’s judgment will eventually shine even unto the watery depths where failed trust has sunk. Sooner or later the relationship between reality and truth re-sets to the calculus of what is actually happening.

Meanwhile, the big questions worth reflecting upon are: What is the shape of the future? How might we conduct ourselves in it and on our way to it; and how will we think and feel about all that? It’s very likely that the journey to where we’re going will be rougher than the actual destination, once we get there. There is a hearty consensus outside the mainstream financial media and the thickets of academia that the models we have been using to understand the economy look more broken each month, and this surely adds to the difficulty of constructing our own mental models for how the everyday world of the years ahead will operate.

Some of the commentators in blogville and elsewhere like to blame capitalism. Capitalism is a phantom adversary. It isn’t an economic system. It isn’t an ideology, really, or a belief system. If the word means anything, it describes the behavior of accumulated surplus wealth in concert with the known laws of physics — the movement of energy through time and space — and the choices we make organizing society in relation to that.  The energy is embodied as capital, represented in money for convenience. Interest expresses the cost of money over time and the risks associated with lending it. By the way, interest rates work the same way under all political systems, despite attempts in some societies to criminalize it.

During the high tide of the industrial expansion, when fossil fuels were cheap and we accumulated the greatest wealth surplus ever in history, humanity made some very bad choices, squandering this possibly one-time bonanza. We fought two world wars, and lots of wasteful lesser ones. Russia and its imitators attempted to collectivize wealth under gangster government and only succeeded in impoverishing everyone but the gangsters. America built suburbia and Las Vegas. The one thing that no “modern” culture did was plan for a future when the fossil fuel orgy and the techno-industrial fiesta might wind down, which is exactly the case now. Instead, we opted for the Julian Simon folly of crossing our fingers and hoping that some unnamed band ofgenius wizard innovators would mitigate the problems of resource scarcity and population overshoot just in time.

The demonizers of capitalism propose to remedy our compound predicament by just getting rid of money. But the idea of a human society without money leaves you either up a baobab tree on the paleolithic savannah, or in some sort of Ray Kurzweil techno-narcissistic masturbation fantasy multiverse with no relation to the organic doings on planet earth. I suspect as long as there are human societies there will be things to exchange that have a quality we call “money,” and as long as that’s the case, some individuals will have more of it than others, and they will lend some of their surplus to others on terms. What most people call capitalism was a model of economy derived from a particular transitory moment in history. It seemed to describe reality, but after a while it didn’t because reality changed and it was, finally, just a model. Nothing lasts forever. Boo-hoo, Karl Marx, J.M Keynes, and Paul Krugman.

What’s cracking up first is the complexity and abstraction of our current money operations, sometimes loosely called the financialized economy. If we blame anything for our problems with money, blame our half-baked attempts to mitigate the wind-down of the techno-industrial cavalcade of progress by issuing ersatz surplus wealth in the form of debt — that is, promises to fork over hypothetical not- yet-accumulated wealth at some future date. There are too many promises now, and too few trustworthy promisors, and poor prospects for generating the volumes of wealth as we did in the recent past.

The hidden (or ignored) truth of this quandary expresses itself inevitably in the degenerate culture of the day, the freak show of pornified criminal avarice that the USA has become. It only shows how demoralizing our recent history has been that the collective national attention is focused on such vulgar stupidities as twerking, or the Kanye-Kardashian porno romance, the doings of the Duck Dynasty, and the partying wolves of Wall Street. By slow increments since about the time John F. Kennedy was shot in the head, we’ve become a land where anything goes and nothing matters. The political blame for that can be distributed equally between Boomer progressives (e.g., inventors of political correctness) and the knuckle-dragging “free-market” conservatives (e.g.,money is free speech). The catch is, some things do matter, for instance whether the human race can continue to be civilized in some fashion when the techno-industrial orgy draws to a close.

In Part 2: How Life Will Change, we sort out the new operating principles that will matter more in the future than the trash heap of current cultural norms. The society that emerges from the post-growth economy will surely require a new moral compass, a set of values based on qualities of behavior and things worth caring about — as opposed to coolness, snobbery, menace, or power, the current lodestars of human aspiration.

Click here to access Part 2 of this report (free executive summary; enrollment required for full access).

Are You Crazy To Continue Believing In Collapse?: James Howards Kunstler | Peak Prosperity

Are You Crazy To Continue Believing In Collapse?: James Howards Kunstler | Peak Prosperity.

BLOG

Sandra Cunningham/Shutterstock

Are You Crazy To Continue Believing In Collapse?

That it hasn’t happened yet doesn’t mean you’re wrong
by James H. Kunstler
Wednesday, March 5, 2014, 4:16 AM

It’s nerve-wracking to live in the historical moment of an epic turning point, especially when the great groaning garbage barge of late industrial civilization doesn’t turn quickly where you know it must, and you are left feeling naked and ashamed with your dark worldview, your careful preparations for a difficult future, and your scornful or tittering relatives reminding you each day what a ninny you are to worry about the tendings of events.

Persevere. There are worse things in this life than not being right exactly on schedule.

Two simple words explain why more robust signs of an economic collapse have hung fire since the tremors of 2008: inertia and fraud. Never in human history has there been such a matrix of complex systems so vast, dense, weighty, and powerful for running everyday life (nor a larger population engaged in it). That much stuff in motion takes a while to slow down. The embodied energy has kept enough of it running to give the appearance of continuity. For instance, agri-biz still sends its amber waves of grain and tankers of corn-syrup to the Pepsico snack-food factories, and the WalMart trucks still faithfully convey the pallets of Cheetos, Fritos, Funyons, and Tostitos from the Pepsico loading dock to the big box aisles of glory. The freeways still hum with traffic even though oil is pricey at $100 a barrel. The lights stay on. The gabble and blabber of Cable TV continues remorselessly in the background of life. All of that is due to inertia. It gives the superficial impression of the old normal carrying on. Things go on until they can’t, in the immortal words of Herb Stein

The fraud is present in the abuse and misrepresentation of official statistics used as metrics in government policy, in the pervasive accounting chicanery of that same government in its fiscal dealings, as well as in our leading financial institutions and corporations, including control fraud in banking, interest rate rigging, mortgage and title fraud, front-running, naked shorting, re-hypothecation, money laundering, pumping-and-dumping, channel stuffing, the endless innovation of swindles, and, most importantly, the fundamental mispricing of the cost of money, which reverberates through everything else, most particularly real estate, stocks, and bonds. Beyond that, in the shadows of the shadowland known as shadow banking, a liminal realm of secrets and intrigues, only a few are privileged to know what is going on, and you can be sure they only know their end of the trade — while immense sums of ever more abstract “money” slosh through the derivative sewers on their way to oblivion in the ocean of failed trust.

So, don’t feel bad if this colossal armature of folly still stands, and have faith that the blinding light of God’s judgment will eventually shine even unto the watery depths where failed trust has sunk. Sooner or later the relationship between reality and truth re-sets to the calculus of what is actually happening.

Meanwhile, the big questions worth reflecting upon are: What is the shape of the future? How might we conduct ourselves in it and on our way to it; and how will we think and feel about all that? It’s very likely that the journey to where we’re going will be rougher than the actual destination, once we get there. There is a hearty consensus outside the mainstream financial media and the thickets of academia that the models we have been using to understand the economy look more broken each month, and this surely adds to the difficulty of constructing our own mental models for how the everyday world of the years ahead will operate.

Some of the commentators in blogville and elsewhere like to blame capitalism. Capitalism is a phantom adversary. It isn’t an economic system. It isn’t an ideology, really, or a belief system. If the word means anything, it describes the behavior of accumulated surplus wealth in concert with the known laws of physics — the movement of energy through time and space — and the choices we make organizing society in relation to that.  The energy is embodied as capital, represented in money for convenience. Interest expresses the cost of money over time and the risks associated with lending it. By the way, interest rates work the same way under all political systems, despite attempts in some societies to criminalize it.

During the high tide of the industrial expansion, when fossil fuels were cheap and we accumulated the greatest wealth surplus ever in history, humanity made some very bad choices, squandering this possibly one-time bonanza. We fought two world wars, and lots of wasteful lesser ones. Russia and its imitators attempted to collectivize wealth under gangster government and only succeeded in impoverishing everyone but the gangsters. America built suburbia and Las Vegas. The one thing that no “modern” culture did was plan for a future when the fossil fuel orgy and the techno-industrial fiesta might wind down, which is exactly the case now. Instead, we opted for the Julian Simon folly of crossing our fingers and hoping that some unnamed band ofgenius wizard innovators would mitigate the problems of resource scarcity and population overshoot just in time.

The demonizers of capitalism propose to remedy our compound predicament by just getting rid of money. But the idea of a human society without money leaves you either up a baobab tree on the paleolithic savannah, or in some sort of Ray Kurzweil techno-narcissistic masturbation fantasy multiverse with no relation to the organic doings on planet earth. I suspect as long as there are human societies there will be things to exchange that have a quality we call “money,” and as long as that’s the case, some individuals will have more of it than others, and they will lend some of their surplus to others on terms. What most people call capitalism was a model of economy derived from a particular transitory moment in history. It seemed to describe reality, but after a while it didn’t because reality changed and it was, finally, just a model. Nothing lasts forever. Boo-hoo, Karl Marx, J.M Keynes, and Paul Krugman.

What’s cracking up first is the complexity and abstraction of our current money operations, sometimes loosely called the financialized economy. If we blame anything for our problems with money, blame our half-baked attempts to mitigate the wind-down of the techno-industrial cavalcade of progress by issuing ersatz surplus wealth in the form of debt — that is, promises to fork over hypothetical not- yet-accumulated wealth at some future date. There are too many promises now, and too few trustworthy promisors, and poor prospects for generating the volumes of wealth as we did in the recent past.

The hidden (or ignored) truth of this quandary expresses itself inevitably in the degenerate culture of the day, the freak show of pornified criminal avarice that the USA has become. It only shows how demoralizing our recent history has been that the collective national attention is focused on such vulgar stupidities as twerking, or the Kanye-Kardashian porno romance, the doings of the Duck Dynasty, and the partying wolves of Wall Street. By slow increments since about the time John F. Kennedy was shot in the head, we’ve become a land where anything goes and nothing matters. The political blame for that can be distributed equally between Boomer progressives (e.g., inventors of political correctness) and the knuckle-dragging “free-market” conservatives (e.g.,money is free speech). The catch is, some things do matter, for instance whether the human race can continue to be civilized in some fashion when the techno-industrial orgy draws to a close.

In Part 2: How Life Will Change, we sort out the new operating principles that will matter more in the future than the trash heap of current cultural norms. The society that emerges from the post-growth economy will surely require a new moral compass, a set of values based on qualities of behavior and things worth caring about — as opposed to coolness, snobbery, menace, or power, the current lodestars of human aspiration.

Click here to access Part 2 of this report (free executive summary; enrollment required for full access).

Near-Bankrupt Rome Bailed Out As Italy Unemployment Rises To All Time High, Grows By Most On Record In 2013 | Zero Hedge

Near-Bankrupt Rome Bailed Out As Italy Unemployment Rises To All Time High, Grows By Most On Record In 2013 | Zero Hedge.

A few days ago, we reported that, seemingly out of the blue, the city of Rome was on the verge of a “Detroit-style bankruptcy.” In the article, Guido Guidesi, a parliamentarian from the Northern League, was quoted as saying “It’s time to stop the accounting tricks and declare Rome’s default.” Of course, that would be unthinkable: we said that if “if one stops the accounting tricks, not only Rome, but all of Europe, as well as the US and China would all be swept under a global bankruptcy tsunami. So it is safe to assume that the tricks will continue. Especially when one considers that as Mirko Coratti, head of Rome’s city council said on Wednesday, “A default of Italy’s capital city would trigger a chain reaction that could sweep across the national economy.” Well we can’t have that, especially not with everyone in Europe living with their head stuck in the sand of universal denial, assisted by the soothing lies of Mario Draghi and all the other European spin masters.” And just as expected, yesterday Rome was bailed out.

As Reuters reported, Matteo Renzi’s new Italian government on Friday approved an emergency decree to bail out Rome city council whose mayor had warned the capital would have to halt essential services unless it got financial help.

The decree transfers 570 million euros ($787 million) to the city to pay the salaries of municipal workers and ensure services such as public transport and garbage collection. Renzi, under pressure from critics who say Rome is getting favorable treatment, attached conditions to the bailout.

Rome must spell out how it will rein in its debt, justify its current levels of staff, seek more efficient ways of running its public services and sell off some of its real estate, the government decree said. Rome’s finances have been in a parlous state for years and it has debts of almost 14 billion euros which it plans to pay off gradually by 2048.

The city has around 25,000 employees of its own with another 30,000 or so working for some 20 municipal companies providing services running from electricity to garbage collection. ATAC, which runs the city’s loss-making buses and metros, employs more than 12,000 staff, almost as many as national airline Alitalia. Rome’s administrators say it needs help with extra costs associated with housing the central government, such as ensuring public order for political demonstrations, and to provide services for millions of tourists.

Here is the punchline, about Rome’s viability, not to mention Italy’s and Europe’s solvency:

The city of some 2.6 million people has been bailed out by the central government each year since 2008.

What is certain is that this year will not be the last one Rome is bailed out either. In fact, it will continue getting rescued for years to come because contrary to the propaganda, the Italian economy continues to get worse with every passing month, yields on Italian bonds notwithstanding.

Ansa reports that in January the Italian unemployment rate rose to a record 12.9%, and that “reducing Italy’s “shocking” rate of unemployment must be the government’s highest priority, Premier Matteo Renzi said Friday.” How, by pretending everything is ok, kicking the Roman can and hoping things improve by bailing out anyone that is insolvent?

Youth unemployment is particularly vicious, with an average rate of 42.4% in January for people aged 15-24, the highest since 1977, Istat reported on Friday. Reflecting the hard times, Istat also reported that the number of people in Italy who have given up the search for work is still growing. The so-called “discouraged”, who have surrendered to the idea that there is no hope of finding employment, reached an average of 1.79 million people in 2013, growing by 11.6% over the previous year.

Putting 2013 in perspective, this is the year when according to national statistical agency Istat, some 478,000 jobs were lost in Italy in 2013, the worst year since the global financial crisis of 2008-2009, with an average annual jobless rate of 12.2% last year. The new year got off to an even more dismal start, with the January jobless rate up 0.2 percentage points over December, Istat said.

Between 2008 and 2013, a total of 984,000 jobs in Italy were lost to the economic crisis – something that is “shocking,” Renzi posted on his Twitter account during a meeting of his cabinet.

“Unemployment is at 12.9%. Shocking numbers, the highest for 35 years,” tweeted Renzi, who has previously described Italy’s unemployment rates as “merciless and devastating”.

And then comes the hope and prayer of change:

“That’s why the first measure will be the Jobs Act,” which Renzi, who formed his executive only one week ago, proposed last month before the leader of the Democratic Party (PD) became premier. Earlier this week, Renzi said he would have his labour reforms and job-boosting measures, based on the Jobs Act, ready before a bilateral summit with German Chancellor Angela Merkel next month.

Fast action is needed promote business investment, improve labour market efficiency while cutting relevant taxes, Labour Minister Giuliano Poletti said after Friday’s cabinet meeting.

One of the main aims of Renzi’s Jobs Act would be to simplify Italy’s labour system, eliminating many parts of the current myriad of work contracts and lay-off benefits. A key proposal of the package Renzi announced last month, before unseating his PD colleague Enrico Letta as premier and taking the helm of government, is to have a single employment contract with job protection measures growing with seniority.

At present, older workers with regular contracts tend to enjoy extremely high levels of job protection, while young people are often forced to accept temporary contracts or other forms of freelance employment that guarantee them few rights and little job security. The current system has been blamed for making firms reluctant to hire, as it is so hard to dismiss workers once they are on the books, and contributing to the high levels of joblessness, especially among the young. Making the task for Renzi’s government more difficult are grim economic forecasts.

Earlier this week, the European Commission forecast growth in the Italian economy will be weaker this year than previously forecast and the country’s debt as a percentage of gross domestic product will rise in 2014. The EC revised down Italy’s 2014 growth forecast to 0.60% but said 2015 looks brighter, as stronger consumer confidence and external demand boost the economy. It also warned that the jobless rate this year will likely be worse than expected, lowering its forecast to an average 12.6% unemployment for 2014 due to weak labour market conditions and still sluggish demand.

Finally, if all of that fails, there is always war to grow insolvent economies in a Keynesian world. Such as the now annual attempt to stir conflit in the middla east, and, as of this week, Ukraine. Fingers crossed for Italy, and the rest of the “developed world” the Keynesian priests get what they have so long been hoping for.

Near-Bankrupt Rome Bailed Out As Italy Unemployment Rises To All Time High, Grows By Most On Record In 2013 | Zero Hedge

Near-Bankrupt Rome Bailed Out As Italy Unemployment Rises To All Time High, Grows By Most On Record In 2013 | Zero Hedge.

A few days ago, we reported that, seemingly out of the blue, the city of Rome was on the verge of a “Detroit-style bankruptcy.” In the article, Guido Guidesi, a parliamentarian from the Northern League, was quoted as saying “It’s time to stop the accounting tricks and declare Rome’s default.” Of course, that would be unthinkable: we said that if “if one stops the accounting tricks, not only Rome, but all of Europe, as well as the US and China would all be swept under a global bankruptcy tsunami. So it is safe to assume that the tricks will continue. Especially when one considers that as Mirko Coratti, head of Rome’s city council said on Wednesday, “A default of Italy’s capital city would trigger a chain reaction that could sweep across the national economy.” Well we can’t have that, especially not with everyone in Europe living with their head stuck in the sand of universal denial, assisted by the soothing lies of Mario Draghi and all the other European spin masters.” And just as expected, yesterday Rome was bailed out.

As Reuters reported, Matteo Renzi’s new Italian government on Friday approved an emergency decree to bail out Rome city council whose mayor had warned the capital would have to halt essential services unless it got financial help.

The decree transfers 570 million euros ($787 million) to the city to pay the salaries of municipal workers and ensure services such as public transport and garbage collection. Renzi, under pressure from critics who say Rome is getting favorable treatment, attached conditions to the bailout.

Rome must spell out how it will rein in its debt, justify its current levels of staff, seek more efficient ways of running its public services and sell off some of its real estate, the government decree said. Rome’s finances have been in a parlous state for years and it has debts of almost 14 billion euros which it plans to pay off gradually by 2048.

The city has around 25,000 employees of its own with another 30,000 or so working for some 20 municipal companies providing services running from electricity to garbage collection. ATAC, which runs the city’s loss-making buses and metros, employs more than 12,000 staff, almost as many as national airline Alitalia. Rome’s administrators say it needs help with extra costs associated with housing the central government, such as ensuring public order for political demonstrations, and to provide services for millions of tourists.

Here is the punchline, about Rome’s viability, not to mention Italy’s and Europe’s solvency:

The city of some 2.6 million people has been bailed out by the central government each year since 2008.

What is certain is that this year will not be the last one Rome is bailed out either. In fact, it will continue getting rescued for years to come because contrary to the propaganda, the Italian economy continues to get worse with every passing month, yields on Italian bonds notwithstanding.

Ansa reports that in January the Italian unemployment rate rose to a record 12.9%, and that “reducing Italy’s “shocking” rate of unemployment must be the government’s highest priority, Premier Matteo Renzi said Friday.” How, by pretending everything is ok, kicking the Roman can and hoping things improve by bailing out anyone that is insolvent?

Youth unemployment is particularly vicious, with an average rate of 42.4% in January for people aged 15-24, the highest since 1977, Istat reported on Friday. Reflecting the hard times, Istat also reported that the number of people in Italy who have given up the search for work is still growing. The so-called “discouraged”, who have surrendered to the idea that there is no hope of finding employment, reached an average of 1.79 million people in 2013, growing by 11.6% over the previous year.

Putting 2013 in perspective, this is the year when according to national statistical agency Istat, some 478,000 jobs were lost in Italy in 2013, the worst year since the global financial crisis of 2008-2009, with an average annual jobless rate of 12.2% last year. The new year got off to an even more dismal start, with the January jobless rate up 0.2 percentage points over December, Istat said.

Between 2008 and 2013, a total of 984,000 jobs in Italy were lost to the economic crisis – something that is “shocking,” Renzi posted on his Twitter account during a meeting of his cabinet.

“Unemployment is at 12.9%. Shocking numbers, the highest for 35 years,” tweeted Renzi, who has previously described Italy’s unemployment rates as “merciless and devastating”.

And then comes the hope and prayer of change:

“That’s why the first measure will be the Jobs Act,” which Renzi, who formed his executive only one week ago, proposed last month before the leader of the Democratic Party (PD) became premier. Earlier this week, Renzi said he would have his labour reforms and job-boosting measures, based on the Jobs Act, ready before a bilateral summit with German Chancellor Angela Merkel next month.

Fast action is needed promote business investment, improve labour market efficiency while cutting relevant taxes, Labour Minister Giuliano Poletti said after Friday’s cabinet meeting.

One of the main aims of Renzi’s Jobs Act would be to simplify Italy’s labour system, eliminating many parts of the current myriad of work contracts and lay-off benefits. A key proposal of the package Renzi announced last month, before unseating his PD colleague Enrico Letta as premier and taking the helm of government, is to have a single employment contract with job protection measures growing with seniority.

At present, older workers with regular contracts tend to enjoy extremely high levels of job protection, while young people are often forced to accept temporary contracts or other forms of freelance employment that guarantee them few rights and little job security. The current system has been blamed for making firms reluctant to hire, as it is so hard to dismiss workers once they are on the books, and contributing to the high levels of joblessness, especially among the young. Making the task for Renzi’s government more difficult are grim economic forecasts.

Earlier this week, the European Commission forecast growth in the Italian economy will be weaker this year than previously forecast and the country’s debt as a percentage of gross domestic product will rise in 2014. The EC revised down Italy’s 2014 growth forecast to 0.60% but said 2015 looks brighter, as stronger consumer confidence and external demand boost the economy. It also warned that the jobless rate this year will likely be worse than expected, lowering its forecast to an average 12.6% unemployment for 2014 due to weak labour market conditions and still sluggish demand.

Finally, if all of that fails, there is always war to grow insolvent economies in a Keynesian world. Such as the now annual attempt to stir conflit in the middla east, and, as of this week, Ukraine. Fingers crossed for Italy, and the rest of the “developed world” the Keynesian priests get what they have so long been hoping for.

The True State Of The Economy: Record Number Of College Graduates Live In Their Parents’ Basement | Zero Hedge

The True State Of The Economy: Record Number Of College Graduates Live In Their Parents’ Basement | Zero Hedge.

Scratch one more bullish thesis for the housing recovery, and the economic recovery in general.

Over the past several years, optimists had often cited household formation as a key component of pent up demand for home purchases. So much for that.

Recall that last August, the WSJ noted that in a report on the status of families, “the Census Bureau said 13.6% of Americans ages 25 to 34 were living with their parents in 2012, up slightly from 13.4% in 2011. Though the trend began before the recession, it accelerated sharply during the downturn. In the early 2000s, about 10% of people in this age group lived at home.” It concluded, quite logically, that “the share of young adults living with their parents edged up last year despite improvements in the economy—a sign that the effects of the recession are lingering.”

Of course, the “improvements in the economy” were once again confused with the ongoing Fed- and corporate buyback-driven surge in the stock market, which has since been refuted to have any relationship to underlying economic conditions, and instead is merely the key factor leading to record class disparity – a very heated topic among both politicians and economists in recent months.

But going back to the topic of Americans living with their parents, today Gallup reported that 14% percent of adults between the ages of 24 and 34 – those in the post-college years when most young adults are trying to establish independence — report living at home with their parents. By contrast, roughly half of 18- to 23-year-olds, many of whom are still finishing their education, are currently living at home.

While this is an approximation of the Census Bureau’s own results which should be released in a few months, a 14% print in the critical 24-34 age group means that the percentage of college grads (or those otherwise falling into this age group even if uneducated) living in their parents basement has hit a fresh all time high.

As a reminder, this was the most recent visual update from the WSJ as of last year:

Here is what Gallup had to say about this distrubing result:

An important milestone in adulthood is establishing independence from one’s parents, including finding a job, a place to live and, for most, a spouse or partner, and starting one’s own family. However, there are potential roadblocks on the path to independence that may force young adults to live with their parents longer, including a weak job market, the high cost of living, significant college debt, and helping care for an elderly or disabled parent.

A statistical model that takes into account a variety of demographic characteristics indicates that three situational factors are most likely to distinguish the group of 24- to 34-year-olds living at home from their peers:

  •     They are much less likely to be married.
  •     They are less likely to be working full time and more likely to be unemployed or underemployed.
  •     They are less likely to have graduated from college.

Being married may better explain why young adults move out of their parents’ home than why single adults live at home. For those living at home, their situation may have more to do with their job or income status than their marital status. Being single, however, may make living with parents a more feasible option for young adults than it would be if they were married.

Employment status ranks as the second-most-important predictor of young adults’ living situation once they are beyond college age. Specifically, 67% of those living on their own are employed full time, compared with 50% of those living with their parents.

The unemployment rate, as calculated by Gallup, among those in the workforce is twice as high for post-college-aged adults living with their parents as it is for their counterparts who are not living with their parents, 14.6% vs. 7.1%.

The underemployment rate, which combines the percentage unemployed with the percentage working part time but wanting full-time work, is 32.8% among those living at home and 15.4% among those living on their own. In other words, among young adults who live with their parents and are working or actively looking for work, nearly one in three are in a substandard employment situation.

The employment observations are not surprising: after all, one would never voluntarily live with their parents into their thirties, unless one was pathologically lazy and unwilling to branch out on their own of course, if the labor situtation in the economy permitted getting a job which allowed one to at least afford rent.

Neither is it surprising that college grads, saddled with a record amounts of student debt, now well over $1 trillion, or more than the total US credit card debt outstanding, is also crushing college graduate confidence about being able to be cash flow positive once they seek to start lives on their own with the associated cash needs.

However, the marriage observation is more disturbing, and goes to the argument of incremental household formation: namely there is none. In other words, that missing link that at least superficially would provide for some semblance of justification for the rise in house prices that had nothing to do with investor demand and offshore illicit cash laundry using US real estate, is gone.

And while this conforms with Gallup’s own implications of these data, there is more bad news:

A 2012 report from Ohio State University sociologists showed that it is increasingly common for young adults to live at home with their parents. The high costs of housing and a relatively weak job market are key factors that may force, or encourage, young adults to stay at home.… The biggest impetus for leaving home seems to be marriage, easily the strongest predictor of one’s living arrangement among those between the ages of 24 and 34. This indicates that if the marriage rate increases in the future, the percentage living with their parents may decline. Earlier Gallup research suggests that most unmarried Americans do have a goal of getting married someday.

Also, those who have secured full-time employment or have earned college degrees are more likely to have gotten a place of their own to live. An improving job market and economy should lead to a decrease in the percentage of young adults living with their parents.

To sum it up: a record number of college grads are optin not to start a household and instead live with their parents, and just as relevant:

An improving job market and economy should lead to a decrease in the percentage of young adults living with their parents.

Considering that the percentage of young adults living with their parents is now an all time high, what does that say about the true state of the job market?

He knows the answer.

Update: just hours after we posted this, Gallup released a follow up report that was largely as expected, and confirms the desolate picture beneath the glitzy surface:

Young Adults Living at Home Less Likely to Be “Thriving”

Young adults between the ages of 24 and 34 who live at home with their parents are significantly less likely to be “thriving” than those in the same age group who don’t live with their parents.

These results are based on Gallup Daily tracking interviews conducted from Aug. 7-Dec. 29, 2013, in which adults younger than 35 were asked about their current living arrangements. Fourteen percent of those between the ages of 24 and 34 report that they live at home with their parents.

Gallup classifies Americans as “thriving,” “struggling,” or “suffering,” according to how they rate their current and future lives on a ladder scale with steps numbered from 0 to 10, based on the Cantril Self-Anchoring Striving Scale. People are considered thriving if they rate their current lives a 7 or higher and their lives in five years an 8 or higher.

… even after accounting for marital status, employment, education, and a number of other demographic variables, those living at home between the ages of 24 and 34 still are less likely to be thriving. This suggests that while living with one’s parents may have some benefits for young people who have not yet found their full footing in society, the net effect of living at home lowers young adults’ perceptions of where they stand in life. In other words, even among young adults who have equal status in terms of being single, not being employed full time, and not having a college education, those who do not live at home are more likely to be thriving than those living at home. Something about living at home appears to drive down young adults’ overall life evaluations.

Bottom Line

This research on the well-being of young adults living at home with their parents is the first of its kind at Gallup, although research conducted at Ohio State and elsewhere suggests that living at home is increasingly common among those younger than 35 today.

The data show that those between the ages of 24 and 34 who live at home tend to be unattached — in the sense that they are not married and less likely to have a full-time job — and also to be less well-educated. The research reviewed in this report underscores the idea that living at home may have some emotional costs for young adults — particularly in terms of their perceptions that they are not enjoying the best possible life, beyond those associated with being unemployed or unmarried.

Times may change. If marriage rates rebound, if the job market for young adults improves, and if more young Americans go to college, then living at home may be less common in the years ahead, and if that happens, the overall well-being of young Americans may improve.

Yes indeed: times may change if… Then again, when times change they may get far, far worse.

charles hugh smith-In a Typhoon, Even Pigs Can Fly (for a while)

charles hugh smith-In a Typhoon, Even Pigs Can Fly (for a while).

Here’s the global financial crisis in a nutshell: access to easy credit can solve a temporary liquidity problem, but it can’t increase the value of collateral or generate income.


The Chinese culture has a wonderful vocabulary of colorful analogies and metaphors, and today’s title refers to the typhoon of liquidity (freely available credit) that has flooded the global economy for the past five years.

The source of the phrase is Liu Chuanzhi, the Chairman of Lenovo and the iconic figure of Chinese manufacturing. When asked a few years ago why 60% of Lenovo Group’s profit came from asset investment and only 40% came from manufacturing. He said “when the typhoons come, even a pig can fly in the sky. Everybody is profiteering from this. Why can’t we?”

The typhoon in this case is China’s credit/liquidity-driven real estate speculative frenzy, in which the only losers are those who don’t borrow to the hilt in the shadow banking system and buy, buy, buy empty flats in vacant buildings.

The critical distinction to make about typhoons of credit-driven speculation (in China, Japan, the U.S., Europe, etc.) is between liquidity and valuation.

Let’s take a household as an example to explain the difference. Say the household owns a $300,000 house with a $150,000 mortgage. The household has home equity of $150,000.

Let’s say one of the household loses their job and the sole remaining income is not enough to pay the monthly bills. This is a liquidity crisis. The household could borrow money based on the collateral of the home equity to tide them over until the second worker finds a new job.

A valuation crisis is different: let’s say the household decides to sell the house and discovers the market value is only $150,000–the same as the mortgage. After deducting the real estate transaction costs, the household has negative equity. So instead, the owners claim the house is worth $250,000 and try to get a home equity line of credit to solve their income/liquidity crisis.

Here’s the global financial crisis in a nutshell: access to easy credit can solve a temporary liquidity problem, but it can’t increase the value of collateral or generate income. The owner can misrepresent the value of the asset to borrow money based on phantom collateral, but that doesn’t change the market value of the underlying asset or increase the income needed to make loan payments.

Simply put, credit/liquidity cannot solve valuation/collateral crises. Correspondent J.B. recently addressed this issue:

 

“RE: accounting and real life. Sometimes they differ but over the long run they always synch up. For instance let’s say a bank has a lot of quality assets but a liquidity issue. It will take that good paper to the Fed to get liquidity for the bank to get through the hard time (no write down required and it works out). On the other hand if the bank has a bunch of bad assets, it now has a solvency issue and not a liquidity issue (i.e. not marking to market does not agree with reality). Sure if CRE goes bad it can postpone marking it to market for a while but soon it has no cashflow and accounting does not matter because it cannot pay its bills, payroll or redeem demand deposits. The failure to properly mark assets to market will not save it and ultimately accounting and reality will re-synch.”

The world’s central banks and governments have tried for the past five years to fix a valuation/collateral/income crisis with liquidity. No wonder they’ve failed–enabling insolvent owners to borrow more money doesn’t make the borrowers any less insolvent.

Once the liquidity typhoon dies down, the insolvent pigs will plummet back to earth. That’s what we’re seeing in the periphery economies and shadow banking systems around the world.

China’s Households “Massively” Exposed To Housing Bubble “That Has To Burst” | Zero Hedge

China’s Households “Massively” Exposed To Housing Bubble “That Has To Burst” | Zero Hedge.

The topic of China’s real estate bubble, its ghost cities, and its emerging middle class – who now have enough money to invest and have piled into houses not stocks – and have been dubbed “fang nu” orhousing slaves (a reference to the lifetime of work needed to pay off their debts); is not a new one here but, as Bloomberg reports, the latest report from economist Gan Li shows China’s households are massively exposed to an oversupplied property market.

 

The Chinese have piled their savings into real estate…

 

not stocks (like Americans)…

 

 

But the inevitable bursting of the bubble is a problem the PBOC can’t run from forever…

Via Bloomberg’s Tom Orlik,

China’s households are massively exposed to an oversupplied property market according to a new survey by economist Gan Li, professor at Southwestern University of Finance and Economics in Chengdu, Sichuan and at Texas A&M University in College Station, Texas.

 

A 2013 survey of 28,000 households and 100,000 individuals provides striking insights on the level and distribution of household income and wealth, with far reaching implications for the economy.About 65 percent of China’s household wealth is invested in real estate, said Gan. Ninety percent of households already own homes, and 42 percent of demand in the first half of 2012 came from buyers who already owned at least one property.

 

“The Chinese housing market is clearly oversupplied,” said Gan. “Existing housing stock is sufficient for every household to own one home, and we are supplying about 15 million new units a year. The housing bubble has to burst. No one knows when.” When it does, the hit to household wealth will have a long term negative impact on consumption, he said.

China’s household income is significantly higher than the official data suggest. Average urban disposable income was 30,600 yuan in 2012, according to the survey. That’s 24 percent higher than in the National Bureau of Statistics’ data. These results suggest official statistics may overstate China’s structural imbalances, which shows household income as an extremely low share of GDP.

Many wealthy households understate their income in the official data. China’s richest 10 percent of urban households enjoy an average disposable income of 128,000 yuan per capita a year, according to Gan’s survey. That’s twice as high as the same measure in the NBS report. The poorest 20 percent get by on about 3,000 yuan, pointing to significantly greater wealth inequality than in the U.S. or other OECD countries.

The wealth disparity helps explain China’s imbalance between high savings and investment and low consumption. Rich households have a significantly higher savings rate than poor households. The wealthiest 5 percent save 72 percent of their income, compared with the national average of 36 percent and 40 percent of households with no savings at all in 2012.

The solution to boosting consumption is income redistribution,” said Gan. “Compared to the U.S. and other OECD countries, China has done very little in this area.” The survey also provides insights into China’s widespread informal lending. A third of households are involved in peer-to-peer lending, according to Gan.

Zero-interest loans between friends make up the majority. Interest, when charged, is typically high, averaging a 34 percent annual rate. That underscores the usurious cost of credit for businesses and households excluded from the formal banking sector.

 

And yet the bailout of one trust product has the world declaring that China is fixed again!??

Peter Schiff Destroys The “Deflation Is An Ogre” Myth | Zero Hedge

Peter Schiff Destroys The “Deflation Is An Ogre” Myth | Zero Hedge.

Submitted by Peter Schiff via Euro Pacific Capital,

Dedicated readers of The Wall Street Journal have recently been offered many dire warnings about a clear and present danger that is stalking the global economy. They are not referring to a possible looming stock or real estate bubble (which you can find more on in my latest newsletter). Nor are they talking about other usual suspects such as global warming, peak oil, the Arab Spring, sovereign defaults, the breakup of the euro, Miley Cyrus, a nuclear Iran, or Obamacare. Instead they are warning about the horror that could result from falling prices, otherwise known as deflation. Get the kids into the basement Mom… they just marked down Cheerios!

In order to justify our current monetary and fiscal policies, in which governments refuse to reign in runaway deficits while central banks furiously expand the money supply, economists must convince us that inflation, which results in rising prices, is vital for economic growth.

Simultaneously they make the case that falling prices are bad. This is a difficult proposition to make because most people have long suspected that inflation is a sign of economic distress and that high prices qualify as a problem not a solution. But the absurdity of the position has not stopped our top economists, and their acolytes in the media, from making the case.

A January 5th article in The Wall Street Journal described the economic situation in Europe by saying “Anxieties are rising in the euro zone that deflation-the phenomenon of persistent falling prices across the economy that blighted the lives of millions in the 1930s-may be starting to take root as it did in Japan in the mid-1990s.” Really, blighted the lives of millions? When was the last time you were “blighted” by a store’s mark down? If you own a business, are you “blighted” when your suppliers drop their prices? Read more about Europe’s economy in my latest newsletter.

The Journal is advancing a classic “wet sidewalks cause rain” argument, confusing and inverting cause and effect. It suggests that falling prices caused the Great Depression and in turn the widespread consumer suffering that went along with it. But this puts the cart way in front of the horse.  The Great Depression was triggered by the bursting of a speculative bubble (resulted from too much easy money in the latter half of the 1920s). The resulting economic contraction, prolonged unnecessarily by the anti-market policies of Hoover and Roosevelt, was part of a necessary re-balancing.A bad economy encourages people to reduce current consumption and save for the future. The resulting drop in demand brings down prices.

But lower prices function as a counterweight to a contracting economy by cushioning the blow of the downturn. I would argue that those who lived through the Great Depression were grateful that they were able to buy more with what little money they had. Imagine how much worse it would have been if they had to contend with rising consumer prices as well. Consumers always want to buy, but sometimes they forego or defer purchases because they can’t afford a desired good or service. Higher prices will only compound the problem. It may surprise many Nobel Prize-winning economists, but discounts often motivate consumers to buy – -try the experiment yourself the next time you walk past the sale rack.

Economists will argue that expectations for future prices are a much bigger motivation than current prices themselves. But those economists concerned with deflation expect there to be, at most, a one or two percent decrease in prices. Can consumers be expected not to buy something today because they expect it to be one percent cheaper in a year? Bear in mind that something that a consumer can buy and use today is more valuable to the purchaser than the same item that is not bought until next year. The costs of going without a desired purchase are overlooked by those warning about the danger of deflation

In another article two days later, the Journal hit readers with the same message: “Annual euro-zone inflation weakened further below the European Central Bank’s target in December, rekindling fears that too little inflation or outright consumer-price declines may threaten the currency area’s fragile economy.” In this case, the paper adds “too little inflation” to the list of woes that needs to be avoided. Apparently, if prices don’t rise briskly enough, the wheels of an economy stop turning

Neither article mentions some very important historical context. For the first 120 years of the existence of the United States (before the establishment of the Federal Reserve), general prices trended downward. According to the Department of Commerce’s Statistical Abstract of the United States, the “General Price Index” declined by 19% from 1801 to 1900. This stands in contrast to the 2,280% increase of the CPI between 1913 and 2013

While the 19th century had plenty of well-documented ups and downs, people tend to forget that the country experienced tremendous economic growth during that time. Living standards for the average American at the end of the century were leaps and bounds higher than they were at the beginning. The 19th Century turned a formerly inconsequential agricultural nation into the richest, most productive, and economically dynamic nation on Earth. Immigrants could not come here fast enough. But all this happened against a backdrop of consistently falling prices.

Thomas Edison once said that his goal was to make electricity so cheap that only the rich would burn candles. He was fortunate to have no Nobel economists on his marketing team.They certainly would have advised him to raise prices to increase sales. But Edison’s strategy of driving sales volume through lower prices is clearly visible today in industries all over the world. By lowering prices, companies not only grow their customer base, but they tend to increase profits as well. Most visibly, consumer electronics has seen chronic deflation for years without crimping demand or hurting profits. According to the Wall Street Journal, this should be impossible.

The truth is the media is merely helping the government to spread propaganda. It is highly indebted governments that need inflation, not consumers. But before government can lead a self-serving crusade to create inflation, they must first convince the public that higher prices is a goal worth pursuing. Since inflation also helps sustain asset bubbles and prop up banks, in this instance The Wall Street Journal and the Government seem to be perfectly aligned.

The $23 Trillion Credit Bubble In China Is Starting To Collapse – Global Financial Crisis Next?

The $23 Trillion Credit Bubble In China Is Starting To Collapse – Global Financial Crisis Next?.

Bubble - Photo by Jeff KubinaDid you know that financial institutions all over the world are warning that we could see a “mega default” on a very prominent high-yield investment product in China on January 31st?  We are being told that this could lead to a cascading collapse of the shadow banking system in China which could potentially result in “sky-high interest rates” and “a precipitous plunge in credit“.  In other words, it could be a “Lehman Brothers moment” for Asia.  And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well.  Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion.  That is an increase of $14 trillion in just a little bit more than 5 years.  Much of that “hot money” has flowed into stocks, bonds and real estate in the United States.  So what do you think is going to happen when that bubble collapses?

The bubble of private debt that we have seen inflate in China since the Lehman crisis is unlike anything that the world has ever seen.  Never before has so much private debt been accumulated in such a short period of time.  All of this debt has helped fuel tremendous economic growth in China, but now a whole bunch of Chinese companies are realizing that they have gotten in way, way over their heads.  In fact, it is being projected that Chinese companies will pay out the equivalent ofapproximately a trillion dollars in interest payments this year alone.  That is more than twice the amount that the U.S. government will pay in interest in 2014.

Over the past several years, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all been criticized for creating too much money.  But the truth is that what has been happening in China surpasses all of their efforts combined.  You can see an incredible chart which graphically illustrates this point right here.  As the Telegraph pointed out a while back, the Chinese have essentially “replicated the entire U.S. commercial banking system” in just five years…

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. “They have replicated the entire U.S. commercial banking system in five years,” she said.

The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.

As with all other things in the financial world, what goes up must eventually come down.

And right now January 31st is shaping up to be a particularly important day for the Chinese financial system.  The following is from a Reuters article

The trust firm responsible for a troubled high-yield investment product sold through China’s largest banks has warned investors they may not be repaid when the 3 billion-yuan ($496 million)product matures on Jan. 31, state media reported on Friday.

Investors are closely watching the case to see if it will shatter assumptions that the government and state-owned banks will always protect investors from losses on risky off-balance-sheet investment products sold through a murky shadow banking system.

If there is a major default on January 31st, the effects could ripple throughout the entire Chinese financial system very rapidly.  A recent Forbes article explained why this is the case…

A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well.  In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk.  Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both.  The result?  The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.

The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China.  According to Forbes, M2 in China increased by 13.6 percent last year…

And at the same time China’s money supply and credit are still expanding.  Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth.  Optimists say China is getting its credit addiction under control, but that’s not correct.  In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics.

Overall, M2 in China is up by about 1000 percent since 1999.  That is absolutely insane.

And of course China is not the only place in the world where financial trouble signs are erupting.  Things in Europe just keep getting worse, and we have just learned that the largest bank in Germany just suffered ” a surprise fourth-quarter loss”

Deutsche Bank shares tumbled on Monday following a surprise fourth-quarter loss due to a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014.

Germany’s biggest bank said revenue at its important debt-trading division, fell 31 percent in the quarter, a much bigger drop than at U.S. rivals, which have also suffered from sluggish fixed-income trading.

If current trends continue, many other big banks will soon be experiencing a “bond headache” as well.  At this point, Treasury Bond sentiment is about the lowest that it has been in about 20 years.  Investors overwhelmingly believe that yields are heading higher.

If that does indeed turn out to be the case, interest rates throughout our economy are going to be rising, economic activity will start slowing down significantly and it could set up the “nightmare scenario” that I keep talking about.

But I am not the only one talking about it.

In fact, the World Economic Forum is warning about the exact same thing…

Fiscal crises triggered by ballooning debt levels in advanced economies pose the biggest threat to the global economy in 2014, a report by the World Economic Forum has warned.

Ahead of next week’s WEF annual meeting in Davos, Switzerland, the forum’s annual assessment of global dangers said high levels of debt in advanced economies, including Japan and America, could lead to an investor backlash.

This would create a “vicious cycle” of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further.

So will a default event in China on January 31st be the next “Lehman Brothers moment” or will it be something else?

In the end, it doesn’t really matter.  The truth is that what has been going on in the global financial system is completely and totally unsustainable, and it is inevitable that it is all going to come horribly crashing down at some point during the next few years.

It is just a matter of time.

oftwominds-Charles Hugh Smith: After Seven Lean Years, Part 2: US Commercial Real Estate: The Present Position and Future Prospects

oftwominds-Charles Hugh Smith: After Seven Lean Years, Part 2: US Commercial Real Estate: The Present Position and Future Prospects.

The fundamentals of demographics, stagnant household income and an overbuilt retail sector eroded by eCommerce support only one conclusion: commercial real estate in the U.S. will implode as retail sales and profits weaken.

 
The first installment of our series on U.S. real estate by correspondent Mark G.focused on residential real estate. In Part 2, Mark explains why the commercial real estate (CRE) market is set to implode.
 

In the early stages of the sub-prime mortgage crisis it was widely believed that US commercial real estate (CRE) would manage to dodge the bullets. In the end CRE was found to be as vulnerable as anything else.
© 2014 Real Capital Analytics, Inc. All rights reserved. Source: Real Capital Analytics and Moody’s Investors Service. http://www.rcanalytics.com Used by permission.

These three graphs of relative prices show that in CRE the “core” is doing better than the “periphery”. The gap in relative price performance of major metro CRE over smaller cities and towns has approximately doubled from where it was in 2008.

And as with residential real estate, some CRE sub-sectors and cities are obtaining far greater benefit from bailout, stimulus and quantitative easing programs than other areas:


© 2014 Real Capital Analytics, Inc. All rights reserved. Source: Real Capital Analytics and Moody’s Investors Service. http://www.rcanalytics.com Used by permission.

Commercial real estate has a more complex structure than residential real estate. There is greater specialization in function. For instance strip shopping centers and indoor malls are generally not exchangeable with warehouse facilities.

We can simplify this a bit by classifying CRE by consumer sector and function. Industrial real estate will not be considered in detail. Current industrial construction spending is near a record high. But the value of current industrial CRE can still be depressed due to existing plant obsolescence and rapid shifts in activity location.

This leaves us to consider consumer retail and consumer service CRE.

Consumer Retail Spending & Retail CRE

The value of commercial real estate is driven by the revenues and profits earned by the businesses occupying CRE. This relationship is similar to the relationship between residential real estate prices and average household income.

The Two Drivers of Consumer Spending: Population Size and Average Household Income:

These two parameters show continuously increasing population size and declining average household incomes. The subsequent data shows this is resulting in a small increase in total consumer spending and also large shifts in spending patterns.

Real inflation adjusted total retail spending has increased slightly over its peak in 2007.



Essentially all of this increase has occurred in food spending. (A smaller portion has gone into clothing). And this is the only reasonable expectation given the twin conditions of an increasing total population and a declining average income per consumer. We can also note that “food” is a minuscule part of eCommerce. The retail food trade occurs almost entirely in neighborhood groceries, markets and convenience stores. The other non-food retail sectors are flat to declining. But within these sectors there is a large zero-sum game being played out between eCommerce and local bricks ‘n mortar stores:

The Rise of eCommerce

Since 2008 eCommerce retail sales have nearly doubled. But as we just saw, the entire increase in total consumer spending since 2008 is accounted for by the increased food sales which occur at local markets. “eCommerce” is therefore taking sales away from other local retail sectors. And the biggest single loser is:

Local Retail Department Stores

This macroeconomic data is well-supported by the current financials of both Sears and JC Penney. Sears’ trailing twelve month (ttm) earnings per share are – $14.11. This loss will increase once Sears reports its fourth quarter earnings at the end of February, 2014. Sears is widely expected to lose one billion dollars in 2014. J.C. Penney meanwhile is currently reporting ttm losses of -$7.32 per share.

One or both of these chains will be in bankruptcy by 2015 even if the current “recovery” continues. And outright liquidation of one or both companies is at least as likely as reorganization. There is little reason to believe either of these companies would be more viable following mere debt reduction.

The third major department store chain is Macy’s, which is still reporting profits. Oddly enough Macy’s management celebrated their 2013 holiday season by announcing 2,500 permanent layoffs from their local retail department stores. This was paired with a mid-December announcement of an increase of 1,500 employees in a new eCommerce fulfillment center in Oklahoma.

In these circumstances it is unsurprising that retail CRE prices are showing weak recovery.


© 2014 Real Capital Analytics, Inc. All rights reserved. Source: Real Capital Analytics and Moody’s Investors Service. http://www.rcanalytics.com Used by permission.

The Coming Implosion of the Regional Indoor Shopping Mall
(and adjacent strip shopping centers)


There are approximately 1,100 indoor shopping malls in the USA. Sears has about 2,000 stores. JC Penney’s has almost exactly 1,100 stores. There are very few malls that don’t have at least one of these chains. The vast majority of malls have both as major anchor stores. Macy’s is typically the third major anchor now. A regional department store chain or two round out the large anchor stores.

A virtual stroll down the typical mall concourse will reveal plenty of other money losing chain retailers with names like Radio Shack et al. Adjacent strip shopping centers
This should not be surprising. The regional indoor mall is a middle class income institution. It grew up with the post-WWII rise in average incomes. As middle class incomes now disappear so are the former favorite shopping venues of the middle class.

Every time a mall store closes shoppers lose another reason to go to the mall. “Dead mall” syndrome will soon afflict most of this sector.

In addition to decaying tenant revenues the mall owning Real Estate Investment Trusts are dangerously overleveraged with low-cost to free ZIRP and QE funding. Now that the Federal Reserve is tapering QE their financing costs will be rising as commercial balloon mortgages come due and have to be rolled over. And since the typical commercial mall mortgage does carry a large balloon payment at the end they have to be refinanced. Assuming honest loan underwriting a higher risk premium will also be attached due to the deteriorating retail fundamentals of the tenants.

General Growth Properties (GGP) is probably in the best condition. This is because GGP just exited a Chapter 11 reorganization in 2010. It was placed into involuntary bankruptcy in 2009 by two mortgagors holding matured recourse balloon mortgages. GGP was understandably unable to refinance these balloons in the spring of 2009.

This entire sector will collapse when the next recession appears.

And since history hasn’t ended, the next recession will appear at some point. It may be appearing already. At the beginning of October, 2013 the analyst consensus for retail profit growth for the strongest October – December holiday quarter was 5.5%. At the beginning of the reporting cycle in January expectations were down to 0.5% profit growth. That is a 90% reduction in analyst expectations in just three months.

Barring a turnaround, many retail chains still reporting profits will be reporting quarter-on-quarter profit declines in April. And by the end of the third quarter more will start reporting outright losses.

Part 3 will examine the other major part of local consumer oriented CRE. These are consumer services like neighborhood banking, investment, insurance and other services. Experience to date demonstrates that in the next few years the internet, expert software systems and robotics/automation will eliminate 50% and more of the jobs formerly associated with these businesses. These same trends will also shift most of the surviving positions away from the traditional storefront strip center and local office park locations.


 
Thank you, Mark, for this comprehensive analysis. We look forward to reading Part 3.
<span>%d</span> bloggers like this: