That’s the worst Bloomie headline I’ve seen in a long while. Let’s review some things that, according to this headline writer, are note very relevant. Examples of what the equity retreat is apparently not based on include:
• An Equity market that has rallied 65% in seven months;
• $80 plus Oil;
• Overhead resistance at 1100
The Tax credit, whose expiration date was well-known to just about everyone since it was conceived, is the cause of the reversal, and not these other factors. (Thanks for the heads up!)
The demand for inflation protection was evident in the Treasury 5 year TIPS auction as while the yield was about in line with expectations, the bid to cover of 3.10 is the highest since they were reintroduced in 2004 and is well above the average seen since ’04 of 2.12. The implied inflation rate in the 5 year TIPS today is rising a large 13 bps to 1.71%, the highest since June.
Marc Faber, publisher of the Gloom, Boom & Doom Report, talks with Bloomberg’s Deirdre Bolton and Erik Schatzker about the performance of the dollar and U.S. economic outlook.
A hedge fund friend, located in the greater San Francisco area, decided to respond to the Merc and Calculated Risk discussions of this issue in greater detail:
Ahh, the real issue in commercial RE: Too many sq ft.
Even in “leased up” buildings. The sub-lease market on the whole West Coast (and East Coast too most likely) is wide open. Deals are getting done at 35-40% of 2005-7 lease rates.
ROI is a beneficiary. We are one of 3 hedge funds in a space formerly occupied by a now defunct VC firm. This is an Equity Office Property building right on the water. My guess is that the total space used – including an EOP management group (8 folks in a space for 40) is about 70% and falling. We got a 50% discount last year for a 5 year deal. Local rates have fallen another 20% since then. There is another 1+mm ft about to hit the market in a building that is in default before in got finished – a real nice one too.
Everybody I talk too here in N.Cal is looking to shrink sq ft taken and hammer lease rates over the next 2 years. Law firms, money managers, etc. – even growing firms are downsizing space.
I should also note we got a great deal from Comcast. High speed internet and unlimited phone service (VOIP) at 70% off what we had been paying. Small fight with landlord about access to cable room aside – better service for 30% of cost. I don’t think the local telcos are going to like this trend.
At some point in the nest few years, the loan amounts and economic value of this space will have to come more into balance. Between now and 2013 it might make sense to purchase RE.
Currently, rates being negotiated at the sub-lease level I have seen don’t cover the wholesale cost of replacing a building – if land were free. I’m guessing prices have a ways to fall.
And, I see no private sector growth here in California that would even remotely start to fill existing space – let alone what is still coming on the market.
None of this analysis takes the public sector into account. State and local governments use alot of space in CA – they are all broke BEFORE taking the pension issue into account. If, over the next 5 years, the public sector disgorges sq. ft. onto the market, things could get even worse.
Of course RE fees and taxes are a large part of the state and local budgets so there is a potential for a death spiral at some point. Full disclosure – I’m not long CA munis.
Could any of this have something to do with Capmark Financial going chapter? Inquiring minds want to know. It seems that, like virginity, sometimes losing is wining.
I expect this one will be a blockbuster — its huge and looks great.
JP also created a free digital version of this chart; you can download it here. Finally, he is selling limited edition collectors prints, these are available here.
Nice work JP! Count me in for a collectors version!
Central banks around the world have released massive amounts of money in response to the current financial crisis. How to exit from the current super-loose monetary environment has become a popular discussion. The central bankers are talking down the prospect of raising interest rates, arguing that the weak economy keeps inflation in check. But the proposition that a weak economy means low inflation is false. The stagflation of the 1970s proves it.
This round of monetary growth has mainly fed speculation, not credit demand for consumption or investment. Speculation has reached a dangerous point with the oil price threatening to reach triple digits again. Its implications for inflation may spook the central banks to raise interest rates quickly and trigger another crash.The excess money supply has created a new liquidity bubble.
The resulting asset inflation (stocks and bonds in developed markets and everything in emerging markets) has stabilised the global economy. The current equilibrium is one on a pinhead. The hope for strong economic recovery led by emerging economies raises investor optimism – and asset prices. This eases pressure on corporate balance sheets, spurs property production and boosts consumption through the wealth effect, making the hope self-fulfilling in the short term.
A rising oil price threatens to derail this recovery. It can trigger a surge in inflation expectation and a major crash of bond markets. The resulting high bond yields may force the central banks to raise interest rates to cool inflation fears. Another major downturn in asset prices would reignite fears about the balance sheets of global financial institutions, leading to new chaos.
The last two times the oil price surged above US$100, it wreaked havoc on the financial markets and global economy. The runaway oil prices of 2006 were the final straw that tipped the US property market. The oil price fell sharply amid the subprime crisis as the market feared a demand collapse. Then, the Fed came to the rescue and began cutting interest rates aggressively in the summer of 2007 in the name of combating the recessionary impact of the subprime crisis.
The oil price rose sharply afterwards on the optimism that the Fed would rescue the economy, and with it, oil demand. It worked to offset the Fed’s stimulus, accelerated the economic decline, and pulled the rug out from under the derivatives bubble. The ensuing demand fear again caused the oil price to collapse.
"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." -Thomas Jefferson (letter to John Taylor in 1816)
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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