Best of the Week
Most Popular
1.Spain Ignores Scotland Lesson as Catalan Independence Referendum Could Spark Civil War - Nadeem_Walayat
2.Used Car Buying From UK Dealer Top Tips, CarMotion.co.uk Real Customer Experience - N_Walayat
3.Spanish New Civil War Begins as Madrid Regime Storm Troopers Quell Catalan Independence Rebellion - Nadeem_Walayat
4.Virgin Media Broadband Down, Catastrophic UK Wide Failure! - Nadeem_Walayat
5.Are the US Markets setting up for an Early October Surprise? - Chris_Vermeulen
6.The Pension Storm Is Coming To Europe—It May Be The End Of Europe As We Know It -John_Mauldin
7.Stock Market Crash 2018; Will it Prove to be Another Buying Opportunity - Sol_Palha
8.The Profoundly Personal Impact Of The National Debt On Our Retirements - Dan_Amerman
9.Stock Market as Good as it Gets; Like 2000 With a Twist -Gary_Tanashian
10.1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - Nadeem_Walayat
Last 7 days
Bitcoin Hits $6,000, $100 Billion Market Cap As Helicopter Ben and Jamie Demon Warn The End Is Near! - 22nd Oct 17
Time for Caution in Gold Miners - 22nd Oct 17
“Great Rotation” Ahead; Will it Be Inflationary or Deflationary? - 21st Oct 17
The Trigger for Volatility, Rates and the Next Crisis - 21st Oct 17
Perks to Consider an Agent for Auto Insurance - 21st Oct 17
Emerging Megatrends Hurting Consumers - 21st Oct 17
A Catalyst of the Stock Market Bubble Bust - 21st Oct 17
Silver Stocks Comatose - 21st Oct 17
Stock Investors Ignore What May Be The Biggest Policy Error In History - 20th Oct 17
Gold Up 74% Since Last Stock Market Peak 10 Years Ago - 20th Oct 17
Labour Sheffield City Council Employs Army of Spy's to Track Down Tree Campaigners / Felling's Watchers - 20th Oct 17
Stock Market Calm Before The Storm - 20th Oct 17
GOLD Price Creates Bullish Higher Low - 20th Oct 17
Here’s the US’s Biggest Vulnerability in NAFTA Negotiations - 20th Oct 17
The Greatest Investing Lesson Learned from the 1987 Stock Market Crash - 20th Oct 17
Stock Market Time to Go All-in. Short, That Is - 19th Oct 17
How Gold Bullion Protects From Conflict And War - 19th Oct 17
Stock Market Super Cycle Wave C May Have Started - 19th Oct 17
Negative Expectations, Will the Stock Market Correct? - 19th Oct 17
Knowing the Factors Affect your Car Insurance Premium - 19th Oct 17
Getting Your Feet Wet In Crypto Currencies - 19th Oct 17
10 Years Ago Today a Stocks Bear Market Started - 19th Oct 17
1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - 19th Oct 17
Virgin Media Broadband Down, Catastrophic UK Wide Failure! - 19th Oct 17
The Passive Investing Bubble May Trigger A Massive Exodus from Stocks - 18th Oct 17
Gold Is In A Dangerous Spot - 18th Oct 17
History Says Global Debt Levels Will Lead to Another Crisis - 18th Oct 17
Deflation Basics Series: The Quantity Theory of Money - 18th Oct 17
Attractive European Countries for Foreign Investors - 18th Oct 17
Financial Transcription Services – What investors should know about them - 18th Oct 17
Brexit UK Vulnerable As Gold Bar Exports Distort UK Trade Figures - 18th Oct 17
Surge in UK Race Hate Crimes, Micro-Racism, Sheffield, Millhouses Park, Black on Asian - 18th Oct 17
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

The Next Financial Implosion Is Not Going To Be About The Banks!

Stock-Markets / Financial Crisis 2017 Mar 03, 2017 - 01:50 PM GMT

By: Gordon_T_Long

Stock-Markets

The Global Real Estate market dwarfs all financial markets by any comparison.

The Global Real Estate market being so large, it has always been stable and as such it is the favorite of institutions for long term investing - specifically Insurance companies, pensions, trusts endowments, small banks & credit unions etc. However, if it were to be destabilized only slightly it would have profound consequences globally, as well as in the US. The US Commercial Real Estate market presently approximates $13T or about one fifth the annual Global GDP.


A number of paradigms shifts currently underway and beginning to emerge could be just such catalysts.

The Us Commercial Real Estate market is so large it needs to be considered by sectors - Industrial, Office, Rental / Apartment and Retail. Through financing, regulations & codes, securitization products etc they are inexplicably linked. A shock wave in one will have consequences across the entire industry that can alter credit terms, financing availability, collateral requirements, rollover funding etc. In our new world of globalization, factors such as changes in foreign capital flows have a profound impact on any of the above variables.

Few may appreciate that the US is a dominate destination for such foreign capital.

Banking problems abroad, such as the EU which would require repatriation of capital, could impact prices and rollover financing quickly since commercial real estate is typically financed on 5 and 10 years terms so that supporting collateral values are maintained. This is a requirement because owners can and do simply "walk" away when they fail and collateral is the only protection for investors. The collateral being solely the value of the remaining real estate asset.

In the US,though banks are both financiers and owners, it is important to realize that the 8-12,000 small banks & credit unions along with Insurance companies, Pension Funds, Endowments, Trusts, Foundations etc are actually the ones "on the hook" for the bulk of US Commercial Real Estate.

WHAT COULD GO WRONG?

Because of the securitization complexity of the industry financed through MBSs, Leveraged Loans, Collateralized Loan Obligations, Synthetic CLOs etc., the risk exposures are immense. The US housing industry imploded via comparably simple securitization product structures such as CDS's, CDO and ABSs. Few professionals would claim they have a grasp or understanding of all the creative and secretive means used to finance these modern multi-billion dollar commercial real estate projects. These projects are based on underlying assumptions of growth, rates, prices, sustained trends etc..

Let's focus as an example on just one of several Paradigm Shift occurring presently, and in just one of the retail commercial real estate spaces, that is US Retailing.

This Paradigm is about the massive technological advancement of the overlapping of the internet, online shopping and robotic kiosks. This change alone is monumental but not yet fully accounted for by those sitting on the trillions of dollars of investment assets who cannot react as fast as the technology adoption is occurring.

  • Since 1995, the number of shopping centers in the U.S. has grown by more than 23% and GLA (total gross leasable area) by almost 30%, while the population has grown by less than 14%
  • According to Forbes , currently there is close to 25 square feet of retail space per capita (roughly 50 square feet, if small shopping centers and independent retailers are added). In contrast, Europe has about 2.5 square feet per capita. (10-20 times)
  • According to the real estate consulting firm of J. Rogers Kniffen Worldwide Enterprises, about 400 of America's 1,100 enclosed malls will fail in the coming years. Of the survivors, about 250 will thrive and the rest will struggle. Likewise as an example, "Macy's probably needs 500 of its roughly 800 existing stores" -  Jan Kniffen ,

Over-storing can be traced back to the 1990s when the likes of Walmart, Kohls (KSS), Gap (GPS) and Target (TGT​) were expanding rapidly and opening new divisions, according to Ken Perkins, the head of Retail Metrics, a research firm that advises institutional investors on the sector.

“In my opinion, the housing bubble of the mid 2000s allowed consumers to take out tons of cash from their homes and spend robustly even though incomes were stagnant. This masked the over-stored nature of the retail landscape“.

AMERICAN REALITY IN PICTURES

I recently produced a video for MATASII subscribers documenting a trip to a well established local mall in my area. The video is called "A Rapidly Rupturing Retail Reality!" It brings home the stark reality of the above statistics.

If you haven't been to a mall in a while it will shock you. The retail landscape is changing rapidly and dramatically.

The recent closure of all 140 Sports Authority stores in the US is part of a trend showing no sign of letting up any time soon. Consumers continue to shop online like never before, as traffic dwindles in brick and mortar stores.

Long-term store closing plans have already been announced by a slew of major brick and mortar retailers, including The Gap (NYSE:GPS), Barnes & Noble (NYSE:BKS), Office Depot (NASDAQ:ODP), Walgreens (NASDAQ:WBA), American Eagle Outfitters (NYSE:AEO), and Aeropostale (OTCPK:ARO). Furthermore, Wal-Mart's (NYSE:WMT) plans include closing 154 US stores, while they currently operate 4,627 US stores as of June 30, 2016. Kohl's (NYSE:KSS) has closed 18 locations with Macy's (NYSE:M) shuttering another 40. The chart below shows an idea of the sheer amount of closures occurring in recent years, as well as the upcoming.

TSUNAMI OF PROBLEMS ON THE HORIZON

Despite all the current market euphoria based on the Trump administration's promises of "dramatically" reduced taxes, fiscal spending and massive regulatory reduction - the stark reality is still:

  • The US Credit Cycle shows clear signs of having turned,
  • The US Business Cycle is mature and in the Final Stage for this cycle,
  • There is a strong chance of a US Recession in late 2017 or 2018 which is historically long overdue,
  • There is a Coming "Property Tax Wave" based on city and local fiscal requirements,
  • Interest Rates Rising,
    • Part of what’s been driving the recovery in property investment sales, in addition to improving fundamentals, has been the availability of cheap debt, as the Federal Reserve has kept interest rates at historically low levels. But the era of cheap money can’t last forever and if interest rates begin to climb up, especially if they shoot up quickly and unexpectedly, that can put a damper on investors’ interest in commercial real estate assets.
  • 10-Year Loans Coming Due,
    • The industry will also be facing a timing issue as approximately $188 billion in commercial mortgage loans reach maturity between 2015 and 2017. Researchers at ratings firm Fitch estimate that unless interest rates rise at a quicker-than-expected pace, borrowers on most of those loans will be able to refinance. But in some cases, especially with under-performing assets or assets in tertiary markets, borrowers may be forced to come up with extra equity to cover valuation gaps.
  • CMBS Underwriting Deteriorating,
    • After several years of minimal CMBS issuance, everyone is happy to see conduit lenders back in the market. But with the competition heating up between banks, life insurers and conduit shops to lend money to real estate borrowers, underwriting standards have started to loosen. A little of that dynamic may be healthy, but if underwriting quality deteriorates more and more the industry may find itself back where it started, in 2007/2008. After all, this is a cyclical business.
  • TRIA Extension,
    • The Terrorism Risk Insurance Act (TRIA), which was signed into law following the destruction of the World Trade Center on September 11, is set to expire at the end of this year. If it’s not extended it will force property owners to seek terrorism insurance in the private market, where insurance companies have not been especially keen to agree to cover losses for events that are truly unforeseeable and that can result in billions of dollars’ worth of damage.

THREE WAVES

Those who live close to the ocean know that waves often come in sets. Many things come in sets of three with the third wave being the biggest and worst.

This is likely what lies ahead as the US Retail Commercial Real Estate (CRE) wave soon washes ashore!

Most fundamentally, the reason for this occurring is:

  1. The De-Industrialized of America and a resulting "gutted middle class" that is now economically "tapped out",
  2. Demographics have a older generation that historically starts spending less as well as an overall shrinking working age population,
  3. The impact of the internet and robotics on job destruction.

THE COMING FINANCIAL IMPLOSION IS NOT GOING TO BE ABOUT THE BANKS!

The coming financial implosion is not going to be about the large international banks. It is going to be dominated by Insurance Companies, Pensions Plans, Trusts & Endowments and small banks & credit unions. These are the institutions with the bulk of their invested assets in some form of US commercial real estate!

The potential for this Third Wave is much different and more profound than any previous financial crisis we have yet (or likely to ever) experience!

Signup for notification of the next MACRO INSIGHTS

Gordon T. Long
Publisher - LONGWave

Request your FREE TWO MONTH TRIAL subscription of the Market Analytics and Technical Analysis (MATA) Report. No Obligations. No Credit Card.

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that you are encouraged to confirm the facts on your own before making important investment commitments. © Copyright 2013 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or suggestions you receive from him.

Copyright © 2010-2017 Gordon T. Long

Gordon T Long Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

HarrisD
04 Mar 17, 23:33
The Next Crash and its correlation to US presidents

Hi Gordon,

Great article, thoroughly enjoyed reading it. As many suspect a serious market correction is coming soon but what could be the catalyst? You have provided a very clear line of argument to explain the mechanism that could bring about the next major correction.

Incidentally, I have been working on some analysis that correlates US recessions (as defined by NBER) with US presidents. Going back to 1828 (over 180 years ago), EVERY Republican president that has entered office for their first term has had a recession occur at some point during their 4 years in office. All but one of those Republican presidents, who went on to a second term, had a recession in their second term also. The only US Republican president to spend 4 years in office without a recession since 1828 was Ronald Reagan, during his second term. Imagine that!

In terms of Democratic US presidents, the statistics are much more favorable with quite a number of presidents spending all 4 years in office without a recession and several others who had a recession handed over to them from a previous Republican president, but no recession that was self created by their own policy.

Moreover, counting up the total number of months that US recessions last, the recessions under Republican presidents last much longer than recessions under Democratic presidents. Also, Republican presidents handover recessions to the following president more often that Democratic presidents tend to handover recessions.

Finally, with a likelihood of 90%, US recessions tend to occur in the first 2 years of office, with only 10% occurring during years 3 and 4. This is true for both Republican and Democratic presidents leading to the conclusion that US recessions are purposely induced by policy to ensure weakness during the first 2 years and growth during the second 2 years prior to the next election. This provides reinforcement to the 4 year US presidential cycle of economic growth.

All that said, there is a high probability that a US recession will begin sometime before December 2018, following the recent election of Republican US president Donald Trump. The question remains can Trump buck the trend and be the FIRST Republican US president in over 180 years to evade a recession during his first 4 years in office. We shall see.

Cheers,

David


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife