Return to Normal…Don’t Bank on it |
Tuesday, 24 October 2023 — Gold Coast, Australia | By Vern Gowdie | Editor, The Daily Reckoning Australia |
|
[11 min read] Quick summary: The risks posed by an imploding CRE market have been known for quite some time. But, while Wall Street still remains elevated, most have chosen to ignore the dangers hiding in plain sight. Are we witnessing the sequel to The Big Short? I think so… |
|
Dear Reader, There’s always calm before the storm Everything goes along just fine…until it doesn’t. In 2023, the narrative has been… Low unemployment. Inflation pressures easing. Damage from rising rates has been contained. Any troubles in the US banking sector will be short-lived thanks to the Fed and US Treasury. And, no price is too high for anything remotely related to AI. Repeated warnings about the US commercial property market going over a cliff have been largely dismissed (reminiscent of how concerns over subprime lending were batted away in 2007…we were assured any problems would be contained…yeah right). In July 2023, Business Insider reported (emphasis added)… ‘Commercial real estate is in for hefty price declines across six top US cities, according to a recent report from Capital Economics. ‘The research firm highlighted cities it dubbed "major markets": San Francisco, Chicago, New York City, Los Angeles, Boston, and Washington, DC. ‘San Francisco is expected to suffer the largest decline, with commercial property values in the city plummeting 40%-45% from 2023–2025. ‘Chicago and New York will see declines of 30%-35%, while LA and Washington will see 25%-30% drops. Boston is expected to see values slipping around 25%.’ So what? Who cares? Party on. The Fed will save us. Keep calm and party on. The Big Short sequel Last month, The Wall Street Journal warned the systemic risks from a deflating US commercial real estate (CRE) market are far greater than previously realised. To quote (emphasis added)… ‘The regional banking sector’s risk from distress in the commercial real estate industry appears to be larger than previously known, a new analysis found, posing a threat to the wider economy. ‘Banks in total have roughly $3.6T of exposure to commercial real estate, equivalent to 20% of their deposits, according to an analysis The Wall Street Journal… ‘Small and midsized banks — those with less than $250B in assets — held about three-quarters of all commercial real estate loans as of the second quarter, the WSJ found. ‘As fundamentals in some commercial real estate markets erode, banks could face a period of shocks as borrowers default in higher numbers, and the banking pain would further depress CRE — touching off a so-called doom loop scenario. ‘“The plumbing is clogged right now,” RXR Realty CEO Scott Rechler told the WSJ. “And that is going to create a backup that will eventually overflow on the commercial real estate markets and on the banking system.”’ Heavy losses are now being materialised. Overnight, David Hay, founder of US wealth management firm, Evergreen Gavekal, provided this insight (emphasis added)… ‘According to credible property experts in the Seattle area, apartment buildings have fallen 20% to 25% even on the affluent Eastside. More disturbing, one of Seattle’s most iconic office buildings is close to being sold at a 70% markdown from its 2019 sales price. ‘As you may have seen, there are numerous transactions of office properties selling, or being foreclosed upon, as much as 80% below their high-water marks of just a few years ago. ‘This feeds into one of my other dominant fears that the most recent banking crisis isn’t over. Small- and mid-sized banks are particularly vulnerable, as they hold roughly half of all commercial mortgages.’ This is what’s happening on the ground. The risks posed by an imploding CRE market have been known for quite some time. But, while Wall Street still remains elevated, most have chosen to ignore the dangers hiding in plain sight. Are we witnessing the sequel to The Big Short? I think so. Are US banks being true and honest? Small to midsized US banks — with about three-quarters of all commercial real estate loans on their books — are most at risk from defaulting borrowers. Back in March (when three US banks failed), US citizens were given these assurances… ‘Questioned closely, sometimes aggressively, [Janet] Yellen told senators at a Capitol hearing that the U.S. banking system “remains sound” and Americans “can feel confident” about the safety of their deposits.’ - AP News 10 March 2023 ‘Federal Reserve Chair Jerome Powell on Wednesday called the U.S. banking system "strong and resilient," voicing confidence in the nation's financial system and the safety of bank deposits less than two weeks after the failure of Silicon Valley Bank, the second-biggest bank collapse in U.S. history.’ - Yahoo Finance, 23 March 2023 But, what if the financial statements upon which these assurances are based, prove to be false? What if some US regional banks are engaging in questionable accounting practices to mask the extent of the problems in their books? It’s not without precedent…remember Enron? Under the non de plume of Zatoichigo, an analyst/curious investor has taken a thorough look at the financial statements of Western Alliance Bancorporation (WAL). They have published two reports — here and here. The reports — highlighting irregularities in the accounts — are quite detailed and raise serious questions…not just about the financial state of WAL but also the potential lack of oversight by market regulators. To quote from the latest report (emphasis added)… ‘WAL’s fraudulent activities included but were not limited to fraudulent fair value estimation of the loans transferred from held-for-investment (HFI) to held-for-sale (HFS), false statement on growth of core deposits, camouflaged figure of efficiency ratio, comparison with peer banks using distorted data, etc. ‘I also highlighted that the lack of reaction from market regulators, specifically, the U.S. Securities and Exchange Commission (SEC), may encourage such fraudulent accounting activities and consequently bring in negative effect to the integrity of financial market.’ It’s possible Zatoichigo may have interpreted the numbers wrongly and the analysis is flawed. Or, might this be similar to the three students from University of West Virginia who uncovered VW’s emissions fraud? Not sure, but one thing is for certain, the market (like it was in 2007) is harbouring concerns. Echoes of 2007 In 2007, the performance of the banking sector disconnected from the broader market (S&P 500)…then came the collapse of Lehman Brothers in September 2008 and the S&P 500 could no longer turn a blind eye to what was happening in the real world. KBW — is the index for major US banks. KRE — is the index for regional US banks. And, here we are again. Since the S&P 500 peaked in early 2022, the three indices were mostly in lockstep UNTIL the bank failures earlier this year…now there is a yawning gap between the banking indices and the broader market. Will this gap also be filled by a wave of bank failures? And, how much worse could that collapse be if ‘accounting irregularities’ are found to exist in the banking sector? Return to Normal? Not likely The ‘Return to Normal’ stage of this market cycle has been far more protracted than in previous cycles… With short AND long-term interest rates at and over 5%; record debt levels; US banks tightening lending standards; inflation pressures bubbling away (oil price, wage demands etc); China in a funk; CRE cratering and a host of other negatives, there is a ‘snowball in Hell’s chance’ of going back to the bubble-era ‘normal’. Get ready…Fear and Capitulation awaits… Until next week… Regards, Vern Gowdie, Editor, The Daily Reckoning Australia Advertisement: In our most controversial video yet, we make... The Case for Buying Oil and Gas Stocks You won’t get any Christmas cards from your green or teal friends... But my goodness this could be a smart move... LIMITED TIME: Stream the video here |
|
| By Bill Bonner | Editor, The Daily Reckoning Australia |
|
Dear Reader, Poor Zelenskyy! The actor got used to being centre stage. Practically every TV station used to carry pictures of him, dressed in his olive-green war-fighting costume — he was The Man! Fighting to protect Western Civilisation from the steppe barbarians, he was able to raise billions of dollars. Fame…fortune — it was all his. And then, all of a sudden…he’s yesterday’s news…a warm-up act…getting second billing. More about him later. Today….we write about France. We spent the summer there, as we’ve done for the last 27 years. We don’t write about it often; it has become too familiar. Is that true of other things? Do deficits become so habitual that they are scarcely worth mentioning? Are US politicians so preternaturally stupid and dishonest that there is no longer any point in saying so? Friction is painful to the tender, innocent hand. Later, after the calluses appear, the hand feels nothing. Nevertheless, we pass along this recollection of last weekend’s going away party…marking the end of our stay in France. It is a reminder of the ‘social challenges’ faced by outsiders in rural France. The main characters… Our gardener, a willing worker, Damien is more like an old-fashioned ‘retainer’ than an employee. He comes with the property. He keeps an eye on it. And treats it as if it were his own. Which is the problem. For a gardener, he has an amazing contempt for plants. Unless restrained, he will mow down the flowers, spray herbicide on the remainder…and salt the earth. ‘Damien, where did you get Round-Up,’ we asked. ‘Hasn’t it been banned?’ ‘Yes…but I have friends.’ A cigarette almost permanently affixed to his mouth…he is ready for any project, no matter how hard. But he likes company and much prefers to work with us, rather than for us. This summer, for example, we began building a modern (well insulated, heated) apartment in one of the outbuildings. In winter, our old, rambling house is almost impossible to heat. The windows rattle. The ceilings are high. There is no insulation, anywhere. And in the shoulder seasons, it is often uncomfortably cold, but not worth firing up the massive, whole-house furnace. So, Damien and your editor have spent many happy weekends on the apartment project — a little ‘pied a terre’ in the heart of La France Profonde. Damien is a master at local arts and crafts — such as making various forms of alcohol out of the native fruits. He is also a walking thesaurus of gallic curse words, which he puts together in lavish and original combinations. ‘Putain de merde!’ [we will not translate]…he blurts out when something doesn’t go exactly as planned. Unfortunately for Damien, but happily for the thesaurus, things often don’t go as planned. Because Damien lacks patience. He works fast and tries to solve all problems by increasing the amount of force. Is a nail crooked? Hit it harder! Is the tractor reluctant to pick up a trash bin? Give it more gas! Does a tree limb get in his way? Cut it down! ‘Why did you cut the tree down,’ we ask? ‘Ca m’a fait chier,’ he replies (again, no translation is needed). After so many years with such a gardener on the job, our property is practically a wasteland. But we can’t part with Damien’s colourful presence; he is as much a part of the place as the surviving oaks and old gables. Far from the Madding Crowd Along with Damien, at the dinner was his longtime friend and sidekick, Mickey (MeeKay). Both men are lifelong bachelors. Neither likes anything that gets in the way — neither of his work nor of his leisure. The friend is wiry…retired on disability from the post office. The ‘vacher’ — Patrice, 62 years old — tends the farm’s cattle. He has one bad knee already and another one going fast. He is on leave from his job. One knee took a year to fix. The other one will take the next year. Most likely, he will never come back to work. The owner of the cattle — Pierre — is the last of five generations to till the local soil; he can barely wait to retire and leave. There was also a woman of about our age, Chantal, who pays the bills when we are gone. Charming and friendly, she is our source of local intel — news, gossip, social knowhow…and it was she who connected us to the local fuddy-duddy set when we arrived. And Valerie — cheerful and attractive — comes in a couple times a week to tidy up. It was a jolly group…along with wives, children, husbands…and people of uncertain connection. We convened about 6pm near the old ‘orangerie’ (greenhouse) for an ‘apero’ — drinks and hors d’oeuvres — white wine, punch, champagne…along with pate on toast. The vacher brought us up to date on his knees. ‘Oh, his knees,’ said his wife. ‘You must be tired of hearing about them. The worst thing is that he is in the house all the time…driving himself…and me…both crazy.’ ‘Beautiful weather…warm…dry,’ said Pierre, looking on the bright side of a severe drought. ‘How was the hunt last week,’ we asked? A group of hunters had assembled outside the gates. They were gunning for ‘sanglier,’ (wild boar). Usually, when they get one or more, they put a substantial cut of meat in our freezer to thank us for letting them hunt on our land. We saw nothing in the freezer and guessed that the hunt hadn’t gone well. ‘Henri (a neighbour) got a shot,’ Pierre explained. ‘I think he wounded the animal, but we couldn’t find him.’ (The next day, Henri clarified: ‘I shot him in the jaw. Jean-Paul got off another shot that got him in the shoulder. But he didn’t fall. We looked for him…but there was no sign of him.’ ‘Then, almost unbelievably, I got a call late in the evening. It was my neighbour. He said there was a wounded sanglier in the field in front of my house. I went out with my rifle. I found him. Alive, but barely. I knew it was the same animal, because he had been shot in the mussel. This time, I shot him in the head to put him out of his misery. What a curious coincidence…that of all the thousands of acres nearby, he should find his way to my farm…me, the person who shot him in the first place.’) Dual Pitfalls After a half hour or so of polite conversation, the whole group moved into the orangerie where a long table had been set up. It was a ‘pot luck’ dinner with each household bringing a dish. Damien provided the main course — a beef bourguignon. That is probably a good place to begin our subject — dos and don’ts for a ‘diner campagnard.’ Because, if you’re having boeuf bourguignon you need to serve the right wine. Bordeaux wines are strong enough for the occasion, and to our tastes, quite satisfactory. But to be fully ‘en regle’ you need to serve a wine from Burgundy, the region where boeuf bourguignon comes from. Before you get to table, though, you encounter two linguistic pitfalls…and a protocolary challenge. As guests arrive, you need to greet them properly. In this case, we knew almost all of them. But there were some new wives and children in the mix. So, the first question….how do you address them? If you know the woman’s first name, you say it: Bonjour Christine…or Bonjour Odile. If you don’t know them, you say, Bonjour Madame or Bonjour Mademoiselle. Which? If you know the woman is married, it is always ‘Bonjour Madame.’ But, in the French countryside today it is very common for couples not to marry. Nevertheless, you use the ‘madame’ where and when it is obvious that the woman is no virgin. ‘Mademoiselle’ is reserved for young women, those unmarried, under the age of 50 or so. Next thing: as you are saying ‘hello’…you have a moment to decide whether you should reach for the woman’s hand or make a stab at her cheeks. A few years ago, it was rare to ‘faire la bise’ [kiss] with people out of your own family. But now, it is very common. Once a bond of friendship is established, you embrace the woman on both cheeks. In some places, further south, a pair of women might even do it twice on each cheek, the two heads bobbing back and forth like metronomes. But if you are meeting the woman for the first time, or you have a more distant or formal relationship with her, you simply shake her hand, as you do with all of the men present. Traditionally, French men kiss each other on the cheek. When Marechal Foche handed out medals in The First World War, he embraced the soldiers. But it is less common today, and it would make us uncomfortable. There is an exception for children. Typically, they are kissed on the cheeks — even in the very first meeting. A well-educated child will present both checks to every adult to whom he is introduced. After the initial greeting, there is another choice to make. Tu or Vous? Everyone who has ever taken a French lesson knows the general set-up. You say ‘tu’ [you] in an informal, familiar setting. Vous is formal. But there are nuances. When you address children, use the ‘tu’ form. When you address adults, use the ‘vous’ form…But, adults who know each other well will sometimes use the ‘tu’ form. Young people of equal social standing may refer to each other as ‘tu.’ Older people do too. The Traditional Program It varies with region, culture, and individual families. Some couples stick to ‘vous’ between husband and wife. But in any formal setting…or when you don’t know the people….or when you have doubts about how close you are, you’re better off sticking with ‘vous.’ And it doesn’t have to be symmetric. In many families, children ‘vous’ their parents…but ‘tu’ each other. Our gardener uses the ‘vous’ form when he talks to us. But we use ‘tu’ in response. With Elizabeth, who keeps more of a distance with him, it is ‘vous’ both going and coming. Damien was in charge of the dinner. He sticks with the traditional program… After the ‘apero’ came the first course — a fish terrine. Then, the main course, the beef bourguignon. That was followed by the salad course. Then, the cheese course. Followed by the desert — two delicious cakes…one, a cheesecake made by Patrice…and the other, a chocolate cake made by Chantal. Then, at the end, came coffee…and/or an after dinner cognac. Finally, as the cognac was being served, your editor rose and tapped upon his glass. He, as the chatelain (owner of the chateau where the dinner was held), had a role to play too: ‘I just want to spend a second thanking you all…all of those who work in our little village…all who help on the farm or help those who work on the farm… …and I think we should also say a special thanks to Damien and Mickey for hosting this dinner…’ Damien radiated satisfaction. A good dinner…in good company…is a worthy project and a notable, memorable achievement. Then, reaching for another glass of cognac, Damien knocked a cup over. ‘Oaannn! Bordel de pute!’ Regards, Bill Bonner, For The Daily Reckoning Australia All advice is general advice and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment. |
|
Advertisement: Jim Rickards: This year the economy will be slammed into ‘full reverse’ Here’s what you need to know...and how you can prepare...for the biggest geoeconomic shift of our lifetime... Click Here |
|
|