Wednesday, January 6, 2021

On the Verge of Economic Collapse

If the election numbers hold-- not self-evident-- it is all going to come down to Sen. Joe Manchin. A moderate Democrat from a very Republican state, Manchin has it within his power to switch parties, thus placing Republicans in charge of the United States Senate. Unless, of course, a Republican decides to switch to the Democratic Party.

Anyway, as I write, Rev. Warnock seems to have defeated Sen. Kelly Loeffler. A stone cold anti-Semite, an America-hater, a great fan of Rev. Jeremiah Wright, a man who has been accused of abusing his wife,  has won a senate seat in Georgia. It is not a good sign for America.


Obviously, Loeffler, a woman who seems to be competing against Michigan governor Gretchen Whitmer to see who uses more Botox, should probably never have been appointed in the first place. And yet, she was and she lost.


Of course, the biggest loser in this will be those Republicans who told their constituents not to bother to vote. Speak about shooting yourself in the head. And, of course, President Trump, who could not find enough self-control and presence of mind to rally Georgia Republicans to win the Senate. Rather than rally the troops, Trump continued to take shots at Republican officials. For all we know, he may have been right about a rigged election. And yet, no court anywhere in the country has granted any credence to his claims.


Anyway, Trump failed. Perhaps David Perdue will pull out a victory, but still, these elections will be Trump’s last act on the political stage. Those who imagined that he will return in 2024 will be disappointed. 


In a strange way, Trump’s recent behavior, in relation to the Georgia elections, lend credence to those who hated him from the beginning. He should have known better. On this occasion, he should have done better.


So, he leaves a fractured Republican Party, though one suspects, as the pundit class declares that the party is fractured forever, that it will soon be back on its feet.


Anyway, now that we are facing the prospect of Democratic Party rule, we can express a suitable pessimism. The Democrats are within a few votes of turning the rest of the country into downtown Portland. 


One might well say that the coronavirus pandemic has produced an economic mess that is very close to a depression. The stock market, as of yet, has not really gotten the news, but one major market strategist respectfully demurs.


First, from one Michael Snyder, a brief analysis of the state of commercial real estate in places like New York City. Snyder begins with the wholesale and apparently mindless destruction of the restaurant business. He continues, making a point I have occasionally made, that the condition of commercial and residential real estate will eventually impact the banking system.


Snyder begins with restaurants, destroyed by local Democratic politicians like Gov. Andrew Cuomo:


In fact, in a recent article that he penned for Fox Business, Adam Piper lamented the fact that more than 100,000 U.S. restaurants have gone out of business during this pandemic…


State and local governments have wielded the coronavirus pandemic as license to steal freedom and opportunity in pursuit of unprecedented omnipotence. Unreasonable, unnecessary and hypocritical actions have forced over 100,000 restaurants to close and endanger countless others.


And according to Bloomberg, the true number of dead restaurants is now over 110,000…


More than 110,000 restaurants have closed permanently or long-term across the country as the industry grapples with the devastating impact of the Covid-19 pandemic.


Just think about that.


More than one out of every six restaurants in the U.S. is already gone, and the National Restaurant Association is warning that there will be more carnage in the months ahead because the industry is in “an economic free fall”


“The restaurant industry simply cannot wait for relief any longer,” Sean Kennedy, executive vice president of public affairs at the association, said in a letter to Congress. “What these findings make clear is that more than 500,000 restaurants of every business type — franchise, chain and independent — are in an economic free fall.”


This is what an economic depression looks like.


And then there is the problem with commercial real estate.


With tens of thousands of restaurants sitting empty, and with tens of thousands of others not paying rent, the stage has been set for a commercial real estate disaster of unprecedented scope and size.


Of course there are millions of square feet of office space and retail space that are not being productive right now as well.  In a recent article, Lee Adler referred to this looming commercial real estate nightmare as “a monster in the room”…


I think that if there’s anything that illustrates the head in the sand problem of the banks, it’s this. Commercial real estate (CRE) finance. There’s a monster in the room. All that empty space. No longer income producing.


He continues:


For now, big financial institutions are doing their best to hide their coming losses, but according to Adler for certain sectors the losses will simply be unavoidable


Multifamily will take a haircut but will survive. My guess is that industrial, while overpriced and overvalued, will produce enough income to get by. Office and retail? Kiss it goodbye.


It’s done. Over. Kaput.


Sadly, he is right on target.


The coming commercial real estate crisis is going to make the subprime mortgage meltdown of 2008 and 2009 look like a Sunday picnic.


And the longer this pandemic stretches on, the larger the losses will ultimately become.


For residential real estate, the big story is that hordes of Americans are fleeing both coasts and are moving to smaller communities in the middle of the country.


And yet, hope gleams eternal. And most players are persuaded that the government will bail them out. With a Biden administration and a Democratic Congress, it becomes more likely. And yet, one still feels that they are whistling past the graveyard.


Snyder concludes:


And we are going to continue to see more Americans migrate away from the large cities on both coasts, and more businesses in those core urban areas will continue to fail.


As the commercial real estate crash unfolds, a lot of financial institutions simply won’t be able to make it without government help.


So will the federal government bail them out?


Apparently, the stock market has not yet gotten the message. Market maven Jeremy Grantham concludes that the bull market has now reached an epic bubble stage. It may not be for tomorrow. It may not be for months. But, Grantham is a highly respected investment guru and we should not ignore his views.


The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.


These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.


There it is, human psychology. Bubbles suck in inexperienced investors. When your neighbors are getting rich you are going to be tempted to do the same.


But, since everyone believes that the Federal Reserve will save us all, Grantham includes a cautionary note:


But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time.


Bubbles arrive when individual investors go crazy:


This summer, I said it was likely that we were in the later stages of a bubble, with some doubt created by the unique features of the COVID crash. The single most dependable feature of the late stages of the great bubbles of history has been really crazy investor behavior, especially on the part of individuals. For the first 10 years of this bull market, which is the longest in history, we lacked such wild speculation. But now we have it. In record amounts. 


Forewarned is forearmed.

9 comments:

  1. I object to the term "bubble" used in this context. I think the term "exploding cigar" captures the moment much better.

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  2. No court, anywhere in the country, has looked at the evidence. They've all rejected the suits based on legal cop-outs like "standing" or procedural deficiencies, never on the merits of the charges.

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  3. Midwest Chicago indicator: Macy's has just announced they are closing their flagship store on North Michigan Ave at the Water Tower.

    “After careful consideration, Macy’s has decided to close our Water Tower Place location,” Macy’s said in a statement. “This closure is part of the company’s strategy to right-size its store fleet, announced in early 2020. The decision to close a store is always a difficult one, and Macy’s Water Tower Place has been honored to serve its customers on the Magnificent Mile for 45 years.”

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  4. Covid-19.1.2.3.4.5.6.7.8.9.10 is EVERYWHEREeeeeeeeeeeeeee. We're all gonna DIEeeeeeee.
    Or maybe not all of us.

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  5. Hard to tell whether the bull market will decide to switch precipitously into a nasty bear market or simply grind down slowly over a decade or so as in the 70's. Either way, it is not likely to be pretty.

    What happens to our society when what's left of the middle class finds out their 401 K's are not nearly what they were assumed to be after the market corrects?

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  6. "Multifamily will take a haircut but survive"....big difference between apartment buildings in NYC or SF area and those in Sunbelt and other areas that people are moving *to* rather than *from..*

    People have to live somewhere.

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  7. @trigger warning

    How true. With your permission, I'm going to cite (with full credit) your analogy elsewhere.


    @David Foster

    Yes, people have to live somewhere, but they also have to be able to pay the rent or mortgage. If large enough numbers can't (especially if given amnesty by leftwing state and local governments) those places in the middle might take hits as well.

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  8. 110,000 thousand restaurants did not close permanently due to Covid19 but due to state and local governments issuing unconstitutional shutdown orders - after declaring them 'non-essentials'. The socialists pushing this are quite happy with the resulting destruction. They can make even more people dependent upon, and subservient to, government. And tell the children how capitalism failed, but 'we're all in this together' for decades.

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  9. I agree everything is overvalued, propped up by easy money. I thought that before covid-19. If you didn't sell everything in March 2020, this looks like a good time.

    Did you see Tesla share values? $94/share 1 year ago, $756 today, 8x increase! Musk's 170 million shares went from $16B to $128B! He could sell 75%, extract $96B and still have $32B left to do whatever bubble stock does.

    What would you do with $96B cash on the brink of economic collapse? Maybe go to Mars and start a new Libertarian society of 1 million settlers, based on freedom of choice, individualism and voluntary association in a land where you have to pay for your daily oxygen and radiation pills where "The Company" owns the supplies.

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