For all of those who feel China is going to take over the free world, just remember that when you blow a bubble (particularly a balance sheet bubble) it is bound to pop. The damage from the pop invariably does more harm than the boost from the bubble. It has always been the case, particularly when leverage is involved - which makes the impact that much more devastating. If anybody can attest to this, it should be us Americans (British, Spanish, Irish, those from Dubai, Japanese...).

Methinks that before China gets a chance to become a preeminent world power, their profusely blown asset bubble (by way of a most accomadating fiscal policy) will blow up in their face and they will go through what the US, Japan and UK just (is still) went through, exacerbated by the fact that they are still a net export reliant economy when the bubble blowing is removed. With the developed world in sluggish mode, they will have very little to fall back on as their asset prices collapse to equilibrium and debt from their steriodal lending system is left under or uncollateralized and unable to be serviced.

Why does everybody confuse bubbles with economic progress?

From Bloomberg:

For all of those who feel China is going to take over the free world, just remember that when you blow a bubble (particularly a balance sheet bubble) it is bound to pop. The damage from the pop invariably does more harm than the boost from the bubble. It has always been the case, particularly when leverage is involved - which makes the impact that much more devastating. If anybody can attest to this, it should be us Americans (British, Spanish, Irish, those from Dubai, Japanese...).

Methinks that before China gets a chance to become a preeminent world power, their profusely blown asset bubble (by way of a most accomadating fiscal policy) will blow up in their face and they will go through what the US, Japan and UK just (is still) went through, exacerbated by the fact that they are still a net export reliant economy when the bubble blowing is removed. With the developed world in sluggish mode, they will have very little to fall back on as their asset prices collapse to equilibrium and debt from their steriodal lending system is left under or uncollateralized and unable to be serviced.

Why does everybody confuse bubbles with economic progress?

From Bloomberg:

First, a quick news scan:

My regular readers should remember my warnings on the currency trade risks (Japan's Hirano can testify), and interest rate derivative concentrations (let's see what happens to the counterparty daisy chain if Dubai defaults): "The Next Step in the Bank Implosion Cycle???". As excerpted:

Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

Click to expand!

bank_ficc_derivative_trading.png

First, a quick news scan:

My regular readers should remember my warnings on the currency trade risks (Japan's Hirano can testify), and interest rate derivative concentrations (let's see what happens to the counterparty daisy chain if Dubai defaults): "The Next Step in the Bank Implosion Cycle???". As excerpted:

Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

Click to expand!

bank_ficc_derivative_trading.png

It's bound to happen if regulators don't stop playing hide the sausage and don't start forcing banks to take their medicine. First, a quick recap of the nonsense currently taking place. This post is designed to convince banks that they are considerably better off taking their medicine now than going on with the government endorsed plan of pretending your not sick and risking major surgery, plus chemo and radiation just a year or two later. My next post will be a selection of REITs that didn't make my shortlist, followed by a new REIT report for subscribers that will explicitly show property values of each and every property in said REITs portfolio (and potentially the lender or CMBS/mortgagee pool collateralized by said properties - that's right, someone may be called out).

After dealing with European banks during my work with GGP, I have come to the conclusion that most regional, community and even global banks have no where near the capacity and/or expertise to properly evaluate and value the projects/assets that they have invested in. Well, if that is the case, this is your chance to rectify that problem - on the cheap, at least on a relative basis. So if you are in an appropriate position in your bank, fund or lender - read this evidence that supports the proactive behavior of snatching the big crumbs off the table before there is a mad dash for the micro-specs of bread that may or may not be left if one were to wait it out while playing "hide the sausage games". I'll give you the tools to make a convincing argument, trust me. Here is the broader macro argument for lenders pulling bad debt from under the REIT and CRE industry, thus supporting a bearish thesis for said players.

First: A picture is worth a thousand words...

fasb_mark_to_market_chart.png

Instance asset gains and market value stemming from just a small tweak of truth. Financial stocks fly, moving farther and farther from their fundamental values.

Second: We have the obvious manipulation that is occurring in the REIT space (see Here's a Big Company Bailout by the Taxpayer That Even the Taxpayer's Missed!). Zerohedge speculates "Is Goldman Preparing To Upgrade The REIT Sector?" 

Third: We have government complicity in the purposeful opacity of the values of the mortgage assets (see the FDIC "Prudent Commercial Real Estate Loan Workouts" guidance issued Oct 30th, as reported by the WSJ: Banks Hasten to Adopt New Loan Rules and the new FDIC guidance that states performing loans "made to creditworthy borrowers" will not require write downs "solely because the value of the underlying collateral declined").

Fouth: We have a false sense of security that nearly everybody believes should make us insecure, yet somehow we have those long in the markets feelng warm and fuzzy. See You've Been Bamboozled, Hoodwinked and Lied To! Here's the Proof. What Are You Going to Do About It?.

Now, for those of you who believe that the government's "pretend and extend" policy has any chance in hell of working, or better yet, that we are not following in the footsteps of Japan, let's take a pictorial trip through recent history. There are nearly no Japanese banks in the top 20 bank category on  global basis by 2003 - NONE (save potentially Nomura, which arguably survived in name, alone). As you can see, they literally dominated 90% of the space in 1990!

Click to enlarge...

top_20_banks.jpg

Source: Cap Gemini Banking M&A

I want the banks that read my upcoming real estate analysis to take heed to history. It truly does tend to repeat itself. If you are an officer in a bank with CRE exposure, reach out to me from your work email and I will supply you with an abbreviated copy of one of the recent reports, gratis. This should  whet your appetite to subscribe for more. 

Well, are we following the Japanese "Lost Path". Notwithstanding the damning evidence of hide the truth and hide amongst lies linked to above, ponder the following rather dated, but still quite poignant data... 

It's bound to happen if regulators don't stop playing hide the sausage and don't start forcing banks to take their medicine. First, a quick recap of the nonsense currently taking place. This post is designed to convince banks that they are considerably better off taking their medicine now than going on with the government endorsed plan of pretending your not sick and risking major surgery, plus chemo and radiation just a year or two later. My next post will be a selection of REITs that didn't make my shortlist, followed by a new REIT report for subscribers that will explicitly show property values of each and every property in said REITs portfolio (and potentially the lender or CMBS/mortgagee pool collateralized by said properties - that's right, someone may be called out).

After dealing with European banks during my work with GGP, I have come to the conclusion that most regional, community and even global banks have no where near the capacity and/or expertise to properly evaluate and value the projects/assets that they have invested in. Well, if that is the case, this is your chance to rectify that problem - on the cheap, at least on a relative basis. So if you are in an appropriate position in your bank, fund or lender - read this evidence that supports the proactive behavior of snatching the big crumbs off the table before there is a mad dash for the micro-specs of bread that may or may not be left if one were to wait it out while playing "hide the sausage games". I'll give you the tools to make a convincing argument, trust me. Here is the broader macro argument for lenders pulling bad debt from under the REIT and CRE industry, thus supporting a bearish thesis for said players.

First: A picture is worth a thousand words...

fasb_mark_to_market_chart.png

Instance asset gains and market value stemming from just a small tweak of truth. Financial stocks fly, moving farther and farther from their fundamental values.

Second: We have the obvious manipulation that is occurring in the REIT space (see Here's a Big Company Bailout by the Taxpayer That Even the Taxpayer's Missed!). Zerohedge speculates "Is Goldman Preparing To Upgrade The REIT Sector?" 

Third: We have government complicity in the purposeful opacity of the values of the mortgage assets (see the FDIC "Prudent Commercial Real Estate Loan Workouts" guidance issued Oct 30th, as reported by the WSJ: Banks Hasten to Adopt New Loan Rules and the new FDIC guidance that states performing loans "made to creditworthy borrowers" will not require write downs "solely because the value of the underlying collateral declined").

Fouth: We have a false sense of security that nearly everybody believes should make us insecure, yet somehow we have those long in the markets feelng warm and fuzzy. See You've Been Bamboozled, Hoodwinked and Lied To! Here's the Proof. What Are You Going to Do About It?.

Now, for those of you who believe that the government's "pretend and extend" policy has any chance in hell of working, or better yet, that we are not following in the footsteps of Japan, let's take a pictorial trip through recent history. There are nearly no Japanese banks in the top 20 bank category on  global basis by 2003 - NONE (save potentially Nomura, which arguably survived in name, alone). As you can see, they literally dominated 90% of the space in 1990!

Click to enlarge...

top_20_banks.jpg

Source: Cap Gemini Banking M&A

I want the banks that read my upcoming real estate analysis to take heed to history. It truly does tend to repeat itself. If you are an officer in a bank with CRE exposure, reach out to me from your work email and I will supply you with an abbreviated copy of one of the recent reports, gratis. This should  whet your appetite to subscribe for more. 

Well, are we following the Japanese "Lost Path". Notwithstanding the damning evidence of hide the truth and hide amongst lies linked to above, ponder the following rather dated, but still quite poignant data... 

Monday, 14 September 2009 20:00

Leading Indicators

 U.S. Credit-Card Defaults Resume Ascent as Unemployment Worsens

JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc., the biggest U.S. credit- card lenders, said defaults climbed in August as the unemployment rate jumped and the impact of tax refunds waned.

American Express Co. was the only one of six card-issuers releasing data today to report an improvement in the rate of both defaults and delinquencies, a signal of future write-offs.

The industry’s data may signal that the second quarter’s improvement will be short-lived as tax refunds and federal efforts to stimulate the economy run out. Defaults tend to track the jobless rate, which dipped in July for the first time since the start of the recession before resuming its climb to 9.7 percent in August.

 The crisis—one year on: McKinsey Global Economic Conditions Survey results, September 2009

A year after the global economic system nearly collapsed, many companies are finally finding ways to increase profits under the new economic conditions. But almost as many expect profits to continue falling, and executives also indicate that their broader economic hopes remain fragile. Many expect more government involvement in economies and industries over the long term.

September 2009MetroMonitor: Tracking Economic Recession and Recovery in America’s 100 Largest Metropolitan Areas

 The American economy continued to weaken during the months of April, May, and June 2009, but it was no longer in free fall. Employment remained on a downward path—the nation lost nearly 1.3 million jobs during those three months alone—and by June, the national unemployment rate had reached its highest rate in more than 15 years, at 9.5 percent. But the pace of economic decline also slowed during the second quarter. Real Gross Domestic Product (GDP) shrank at an annualized rate of 1 percent, far less than the 6.4 percent rate of contraction during the first quarter of the year. And signs began to emerge that the housing market was stabilizing, with sales of both new and existing single-family homes rising throughout the spring.

Notice how employment change seems to track residential real estate pricing weakness throughout the country...

Monday, 14 September 2009 20:00

Leading Indicators

 U.S. Credit-Card Defaults Resume Ascent as Unemployment Worsens

JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc., the biggest U.S. credit- card lenders, said defaults climbed in August as the unemployment rate jumped and the impact of tax refunds waned.

American Express Co. was the only one of six card-issuers releasing data today to report an improvement in the rate of both defaults and delinquencies, a signal of future write-offs.

The industry’s data may signal that the second quarter’s improvement will be short-lived as tax refunds and federal efforts to stimulate the economy run out. Defaults tend to track the jobless rate, which dipped in July for the first time since the start of the recession before resuming its climb to 9.7 percent in August.

 The crisis—one year on: McKinsey Global Economic Conditions Survey results, September 2009

A year after the global economic system nearly collapsed, many companies are finally finding ways to increase profits under the new economic conditions. But almost as many expect profits to continue falling, and executives also indicate that their broader economic hopes remain fragile. Many expect more government involvement in economies and industries over the long term.

September 2009MetroMonitor: Tracking Economic Recession and Recovery in America’s 100 Largest Metropolitan Areas

 The American economy continued to weaken during the months of April, May, and June 2009, but it was no longer in free fall. Employment remained on a downward path—the nation lost nearly 1.3 million jobs during those three months alone—and by June, the national unemployment rate had reached its highest rate in more than 15 years, at 9.5 percent. But the pace of economic decline also slowed during the second quarter. Real Gross Domestic Product (GDP) shrank at an annualized rate of 1 percent, far less than the 6.4 percent rate of contraction during the first quarter of the year. And signs began to emerge that the housing market was stabilizing, with sales of both new and existing single-family homes rising throughout the spring.

Notice how employment change seems to track residential real estate pricing weakness throughout the country...

Tuesday, 11 August 2009 20:00

ACC Quarterly Earnings Review

The most recent quarterly earnigns highlight for ACC is now available to subscribers. ACC 2Q09 results review ACC 2Q09 results review 2009-08-12 01:25:50 110.50 Kb

Highlights from the opinion...

In 2Q09 ACC’s net income available to common shareholders’ declined to $(5.3) mn, or $(0.11) per share, for 2Q09 compared with $0.30 mn, or $0.01 per share, in 1Q09 primarily owing to decline in average occupancy to 90.7% in 2Q09 compared with 92.8% in 1Q09 and higher marketing expenses. Although in 2Q09 ACC’s total debt declined to $1,190 mn as of June 30, 2009 due to equity offering ($199 mn) the company still continues to face significant problems relating to financing of its debt maturities, particularly in light of its meager cash flows. The company’s average debt maturity as of 2Q09 was at 4.2 years while its Debt-FFO as of June 30, 2009 was at 20.5x.

 

Tuesday, 11 August 2009 20:00

ACC Quarterly Earnings Review

The most recent quarterly earnigns highlight for ACC is now available to subscribers. ACC 2Q09 results review ACC 2Q09 results review 2009-08-12 01:25:50 110.50 Kb

Highlights from the opinion...

In 2Q09 ACC’s net income available to common shareholders’ declined to $(5.3) mn, or $(0.11) per share, for 2Q09 compared with $0.30 mn, or $0.01 per share, in 1Q09 primarily owing to decline in average occupancy to 90.7% in 2Q09 compared with 92.8% in 1Q09 and higher marketing expenses. Although in 2Q09 ACC’s total debt declined to $1,190 mn as of June 30, 2009 due to equity offering ($199 mn) the company still continues to face significant problems relating to financing of its debt maturities, particularly in light of its meager cash flows. The company’s average debt maturity as of 2Q09 was at 4.2 years while its Debt-FFO as of June 30, 2009 was at 20.5x.

 

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