Most Popular
1. THE INFLATION MONSTER is Forecasting RECESSION - Nadeem_Walayat
2.Why APPLE Could CRASH the Stock Market! - Nadeem_Walayat
3.The Stocks Stealth BEAR Market - Nadeem_Walayat
4.Inflation, Commodities and Interest Rates : Paradigm Shifts in Macrotrends - Rambus_Chartology
5.Stock Market in the Eye of the Storm, Visualising AI Tech Stocks Buying Levels - Nadeem_Walayat
6.AI Tech Stocks Earnings BloodBath Buying Opportunity - Nadeem_Walayat
7.PPT HALTS STOCK MARKET CRASH ahead of Fed May Interest Rate Hike Meeting - Nadeem_Walayat
8.50 Small Cap Growth Stocks Analysis to CAPITALISE on the Stock Market Inflation -Nadeem_Walayat
10.Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - Nadeem_Walayat
Last 7 days
Qualcom Stock Market Harbinger - 12th Aug 22
Apple Exec Gets World's 1st iPhone 14 for Daughters 14th Birthday Surprise Present Unboxing! - 12th Aug 22
Steps to remember while playing live roulette online - 12th Aug 22
China Bank Run Protests - Another Potential Tiananmen Square Massacre? - 11th Aug 22
Silver Coin Premiums – Another Collapse? - 11th Aug 22
Gold-to-Silver Ratio Heading Lower – Setup Like 1989-03 - 11th Aug 22
Severe Stocks Bear Market: Will You Be Among the Prepared 1.5%? - 11th Aug 22
There's a Hole in My Bucket Dear Liza, UK Summer Heatwave Plants Watering Problem Song - 11th Aug 22
Why PEAK INFLATION is a RED HERRING! Prepare for a Decade Long Cost of Living Crisis - 9th Aug 22
FREETRADE Want to LEND My Shares to Short Sellers! - 8th Aug 22
Stock Market Unclosed Gap - 8th Aug 22
The End Game for Silver Shenanigans... - 8th Aug 22er
WARNING Corsair MP600 NVME2 M2 SSD Are Prone to Failure Can Prevent Systems From Booting - 8th Aug 22
Elliott Waves: Your "Rhyme & Reason" to Mainstream Stock Market Opinions - 6th Aug 22
COST OF LIVING CRISIS NIGHTMARE - Expect High INFLATION for whole of this DECADE! - 6th Aug 22
Recession Is Good for Gold, but a Crisis Would Be Even Better - 5th Aug 22
Stock Market Rallying On Slowly Thinning Air - 5th Aug 22
Stock Market Trend Pattren 2022 Forecast Current State - 4th Aug 22
Should We Be Prepared For An Aggressive U.S. Fed In The Future? - 4th Aug 22
Will the S&P 500 Stock Market Index Go the Way of Meme Stocks? - 4th Aug 22
Stock Market Another Upswing Attempt - 4th Aug 22
What is our Real Economic and Financial Prognosis? - 4th Aug 22
The REAL Stocks Bear Market of 2022 - 3rd Aug 22
The ‘Wishful Thinking’ Fed Is Anything But ‘Neutral’ - 3rd Aug 22
Don’t Be Misled by Gold’s Recent Upswing - 3rd Aug 22
Aluminum, Copper, Zinc: The 3 Horsemen of the Upcoming "Econocalypse" - 31st July 22
Gold Stocks’ Rally Autumn 2022 - 31st July 22
US Fed Is Battling Excess Global Capital – Which Is Creating Inflation - 31st July 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Tale of Two Shopping Malls

Economics / US Economy Sep 02, 2008 - 06:01 PM GMT

By: Paul_Tustain


"...Overcapacity – first of credit, then of real estate – drove the price of renting sharply lower, bankrupting cautious investors along with big borrowers..."

A TEXAN CUSTOMER who came to see me a few months ago told me a story which illustrates the fine mess we're in.

In the 1980s boom his neighborhood boasted not one but two commercial real-estate developers, both of whom were building shopping malls.

The one developer was cautious. He'd already built two malls successfully, and by re-investing some of his profits as equity in his new project he'd reduced his leverage and his risk.

Further along the avenue, however, was a more aggressive developer. He'd borrowed 98% of his construction costs on artificially cheap credit; money which had been pumped into the banking system by the Fed to keep the economy steaming along.

Anyway, the experienced developer was earlier into his construction project and completed it ahead of schedule – and he got his mall nearly fully occupied. His competitor, as well as being more highly geared, was slower to build and later to complete, so you can guess what happened next.

As the early '80s boom in Texan oil projects and real estate turned into bust, the new mall couldn't get any tenants, which meant there was no revenue to pay down the debt. The aggressive developer went bust, and with the local economy sagging, the near worthless debts on his empty mall were sold by the bank at just 18 cents on the dollar.

That allowed the new owners to slash the asking rents. They charged 4 cents on the original construction dollar, making a yield of 4/18 – a healthy 22% yield on their outlay. But that rent deeply undercut the other, more cautiously built shopping mall. It was charging 12 cents on its construction-cost dollar, fully three times as much.

Naturally, as the recession wore on, the cautious developer watched his tenants quit his mall for those cheaper rents down the freeway. So now the cautious developer failed too.

Why? Because overcapacity – first of credit, then of malls – had driven the local price of rented retail space down to third of its reasonable rate of return. The total rent that could be earned on two malls was significantly less than what could have been earned on one.

I have always found it difficult to make the logical step from cheap credit – which sounds so helpful – to financial collapse, which seems so regularly to follow it. This story shows how the route passes through overcapacity. Yet even overcapacity was not bad news for those investors who bought the distressed mall at 18% of its construction cost.

How were they able to get such a bargain? Simple. They could raise cash when almost no-one else could. That probably meant they were debt free at the end of the expansion, and had found a reliable store of ready value as the credit liquidation played itself out.

I like to think that lots of BullionVault users will one day be the opportunists in stories like this, though I also believe the credit crunch has a long way to go, which means it will not be for some considerable time. Gold certainly doesn't offer a 22% yield, but when other asset classes do, perhaps sellers of BullionVault gold will contribute the capital which kick-starts our economies from the bottom of the coming slump.

Until then debtors, politicians, and central bankers will call us hoarders, and accuse us of destroying the economy. It's not a label which makes me feel particularly proud, but I think I can live with it.

By Paul Tustain

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Paul Tustain Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

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