More CRE Warning Signs, China’s New No. 1, A Maddening Debt Detail and More!

by Addison Wiggin & Ian Mathias

  • More sirens sound for commercial real estate… Dan Amoss on why it’s even worse than it seems
  • Oil back to $82 on economic optimism… J.H. Kunstler asks, since when are high oil prices a good sign?
  • Yet another “world’s greatest” goes to China: High-speed rail races through the Red Nation
  • Plus, Treasury madness: Not only are foreigners buying our debt, they’re buying it with our own money


The recession forces us to ask ourselves some hard questions… like, what kind of lifestyles can we truly afford? Yet some dilemmas born of this mess don’t require much deliberation. We’ll start today with an example: Does America REALLY need a strip mall on every corner? 

  A record 8-10% of all available space in U.S. shopping malls sat vacant in the fourth quarter, real estate research company Reis claims today. That’s up almost two percentage points from the same time a year before, even despite asking rents falling 3.6% (another record) over the last year. Effective rents are down in all 77 markets Reis covers — you guessed it, yet another record.

“Although it appears that we have reached the end of the technical recession,” read a statement from the firm, “continuing high unemployment and inconsistent consumer spending patterns will weigh on retail properties for at least another 18-24 months.”

  Construction spending on malls, hotels and office buildings will fall 13% this year, the American Institute of Architects forecast this morning. That’s a higher estimate than the group’s previous forecast back in July.

“Even a 13% decline is too optimistic,” forecasts Dan Amoss. “Through several examples, we can see that the Treasury Department’s unofficial policy for dealing with underwater commercial real estate loans is ‘extend and pretend.’ This means that as long as underwater borrowers are making monthly payments, most bank examiners will look the other way and allow banks to maintain commercial real estate (CRE) loans at artificially high values and look the other way if banks roll over maturing loans that are underwater on a mark-to-market appraisal basis. This will only make the ultimate credit losses even larger, but it’s the politically expedient thing to do.

“One consequence of the current practice of dealing with CRE loans: The bid/ask spread for commercial properties will remain wide. The market will not clear at lower prices, as it should. Rather than a sharp fall followed by a ‘V-shaped’ recovery in property values financed by capital from new owners, we’ll see a slow decline in values for perhaps a decade (like Japan). Since banks are delaying foreclosure auctions, the asking prices for most commercial properties have not yet fallen far enough to meet low bid prices. We’re hearing this from distressed commercial real estate funds that were set up to buy bargains. They’re frustrated at the lack of deal flow.


“This is bad news for CRE construction companies because low property turnover translates into idle construction activity. With an extended overhang in supply of commercial property, which will be slowly released from bank balance sheets, demand for new commercial construction will remain weak.”

Dan has his Strategic Short Report readers well prepared for more pain in the commercial real estate sector, and we suggest you do the same. For his favorite ways to protect your portfolio, look here.

  The U.S. construction sector shed 52,000 jobs in December, ADP guesstimated this morning. That is the 35th monthly fall in a row. Some 1.77 million jobs in the sector have been lost since the recession began. Of course, ADP’s employment numbers are about as trustworthy as Tiger Woods in a Vegas strip joint… but we suspect they are on the right track.

  One more word on ADP: The payroll service company estimates the American private sector shed 84,000 jobs in December. That’s better than the Street expected and, by ADP’s count, the best month since March 2008. Again, all the jobs reports have a shady history of miscalculations, but it sets the stage for Friday, nonetheless… we’ll see what the guv’ment has to say about American employment at the end of the week.

  Oy, and even those with a job aren’t happy. A record low 45% of Americans say they are “satisfied with their work,” says a study from the Conference Board. Only 51% can even muster enough glee to declare their jobs “interesting.” Ouch. For perspective, back in 1987, when the Conference Board started this poll, 61% of employees were satisfied and 70% thought they had an interesting gig.

"It says something troubling about work in America,” astutely noted the Conference Board’s Linda Barrington. “It is not about the business cycle or one grumpy generation."

  Two more items in the data cupboard to crack open today:

The service sector in America is now just barely clinging to a state of growth, the Institute for Supply Management said today. Their nonmanufacturing index moved from 48.7 to 50.1 in December, just a tenth of a point (dare we say statistically irrelevant) over the line that separates growth and contraction.

Also, despite all the government’s attempts to maintain the status quo, the free market seems to be sorting out the auto fiasco: GM and Chrysler reported 3-5% declines in December year-over-year sales yesterday, while Ford enjoyed a 33% jump — a growth in market share second only to Hyundai’s.

  Markets in the U.S. were a drag yesterday. After Monday’s big rally in stocks and most commodities, most indexes ended yesterday right about where they started. So far today, the Dow and S&P are still flat, while gold and oil are up just a bit, to $1,134 an ounce and $82 a barrel.

  Now that oil is back above $80, it has “re-entered the danger zone where it can crush industrial economies,” opines James Howard Kunstler in the latest Whiskey & Gunpowder. “This is a central element of the predicament we find ourselves in. The U.S. economy is essentially a Happy Motoring economy. During the whole nervous period since the collapse of Lehman Bros., American gasoline consumption hardly went down at all, though so many other activities collapsed, from house building to trucking. Yesterday, The Seattle Times published a story with the idiotic headline ‘Oil Touches $80 on US Economy, Demand Optimism.’ Apparently, they think high oil prices are ‘a good sign’…

“How much can a nation not get it? Would $100 oil ignite a new orgy of “consumer” spending and another round of investment in commercial real estate?”

  “China is literally speeding into 2010,” reports Frank Holmes, the man behind U.S. Global Funds and a perennial-favorite speaker at our Investment Symposium.

“A brand-new high-speed rail system now connects the important cities of Guangzhou in the southeast with Wuhan in the interior. Trains running the 655 miles of new rails will average more than 200 miles an hour, cutting what had been a trip of more than seven hours down to about three hours.

Another “world’s greatest” for China… fastest train on the planet

“Wuhan, on the Yangtze River, is the largest city in China’s interior (about 9 million people) and is also the region’s political, economic and financial center. Guangzhou, once known as Canton, has about the same population. It is a major port and manufacturing center near Hong Kong…

“Linking Guangzhou and Wuhan is just the beginning of an ambitious high-speed rail network planned for China — more than 40 new lines and 1,000 trains are envisioned by 2012, at a cost of $730 billion. The key hookup will be the 925 miles separating the political capital Beijing and the business capital Shanghai — work is well along on that project.

“Bottom line: China is committed to infrastructure to a degree and on a scale beyond any other country. It’s a key reason why we believe so deeply in the long-term global growth theme.”

And speaking of China…

  “With all the record Treasury debt being ‘snatched up,’ as you mentioned last week,” a reader writes referring to record U.S. government debt sales in 2009, “you need to have someone follow up on and research WHO is buying all that debt — and publish that list. That would be interesting to see.”

The 5: The Treasury keeps some of this data on a public site, hidden under enough nerdy language to discourage layman comprehension.

But that’s just one layer of this stinking onion. Your editor was paging through the latest issue of The Richebacher Letter yesterday and found this — which takes your question to the next level: Not only who is buying it, but how are they paying for it?

“Foreign investors, U.S. households and the Federal Reserve are the most aggressive purchasers of Treasury debt in recent quarters,” writes editor Rob Parenteau. “Most of the purchases of U.S. Treasuries came from foreign official investors, namely foreign central banks.

“During the year ending in Q3 2009, the U.S. current account deficit shrank to $465 billion. That represents $465 billion of foreign net saving that could be used to purchase U.S. assets, yet we find foreign central banks purchased $546 billion in Treasuries, which means they absorbed nearly a third of the net issuance…

“We believe this increased foreign exposure to Treasuries in part reflects a recycling of proceeds from sales of agency and government-sponsored enterprises (GSEs) to the Fed. As the Fed purchased $809 billion of agency and GSE debt (on a trailing four-quarter average) through 2009 Q3, $282 billion of that total was acquired from foreign investors, of which $197 billion was bought off the balance sheet of foreign central banks… In other words, over a third of foreign central bank Treasury purchases are likely to have been financed with dollars that the Fed provided.

“We return to your original question: Who is buying Treasuries? The answer is the Fed, and households and foreign central banks that received money from selling agency and GSE debt to the Fed. Remove the Fed from the picture, as is currently planned by the end of Q1 2010, and placing all the new Treasury issuance may not be such a cakewalk in 2010 as it appeared to be in 2009.”

What a trip, eh? Best regards,

Ian Mathias

The 5 Min. Forecast

P.S. If you’re not a member of The Richebacher Society, you should really check it out. True, you won’t get any stock picks or options plays. But what you will find is deep, critical economic commentary — the kind that forces you to expand your understanding and think for yourself. And you’ll do so amid the company of like-minded investors from all over the world, each interested in preserving their wealth and preparing for the future. It’s a very unique group for our industry… don’t miss out.



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