November 29, 2020

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latest-analysis

latest-analysis (22)

Not only are unemployment insurance claims rising again, but not a single media outlet has chimed in on the fact that after 6 months of so-called "economic recovery" (that doesn't really exist since claims are back on the rise), the claims number remained materially above any level that has every been recorded by the government pre-COVID lockdown - EVER!

Yes! That's how bad it is! The best of the Pandemic is still worse than it's ever been... until the start of the pandemic. And... The claims are rising again! Those of you who follow my YouTube channel shouldn't be surprised.

Stagflation is a combination of numerous economic conditions: slow economic growth, high unemployment, and high levels of inflation, i.e. it describes an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output. Lain Macleod first used the term stagflation in 1965 before that stagflation was long believed to be impossible by the economist.

The term is later used to describe the recessionary period in the 1970s following the oil crisis when the U.S. underwent a recession that saw five quarters of negative GDP growth. The U.S. inflation rate hit double digits in 1974; unemployment hit 9% by May 1975.

Stagflation is often caused by supply-side shocks which cause an unprecedented increase in costs or disruption to production. This results in a higher inflation rate and lower GDP. Stagflation may also occur with a decline in traditional industries leading to rising structural unemployment and lower output. 

The outbreak of COVID-19 led the historically strong job market of the U.S to a record level of unemployment. Imposed restrictions and shutdowns of economic activities resulted in negative GDP during the first and second quarter of 2020. The Federal Reserve made an emergency rate cut in the federal funds rate which paused hiking in inflation.

However, the emergency cut made by the Federal Reserve has also exposed the risks associated with the policies as the economy begins to reopen. Many analysts expected that, backed by low rates, businesses and consumers may spend aggressively after being quarantined for a while - pushing inflation upward. At the same time, unemployment remains high, and likely growth negative, resulting in a material chance of pushing the U.S. economy into stagflation.

Let us look at the key factors which will tell us if the predictions made are correct or not.

Gross Domestic Product (GDP)

According to the "advance" estimate by the Bureau of Economic Analysis, U.S. the real gross domestic product (GDP) in the U.S. contracted 2.91% in the third quarter of 2020 over the same quarter of the previous year as efforts continued to resume activities and reopen businesses that were postponed or restricted due to COVID-19.

Figure1: Official GDP Reporting vs. Alternate ShadowStats Estimates (Y-o-Y Real Growth)

Source: shadowstats.com

The U.S. economy suffered its steepest downturn in the second quarter, 2020, highlighting the effect of the pandemic that disrupted businesses across the country and left millions of Americans unemployed.

Gross domestic product shrank by 9.0% in the second quarter of 2020 over the same quarter of 2019. The main reasons for the shrinking GDP include lockdown measures issued in March and April, and the pandemic assistance program of the government, to assist households and businesses.

This was the biggest ever contraction, pushing the U.S. economy officially into a recession as the coronavirus pandemic forced many businesses including restaurants, cafes, stores and factories to close and people to stay at home, hurting consumer and business spending.

However, the GDP numbers by the BEA, include numerous adjustments allowing room to present a more positive gloomy picture of the economy.

If we are to believe Shadowstats.com, a site that attempts to recalculate GDP as it was historically configured, states that GDP would actually have come down to -12.96% and -6.74%, respectively, in the second and third quarter in 2020 - if calculated by historical methods, resembling a materially worse situation than estimated.

Balance of Payments

According to the latest data published on 4th November by the U.S. Census Bureau and the U.S. Bureau of Economic Analysis, the U.S. goods and services deficit fell to US$63.9 billion in September decreased from US$67.0 billion in August (revised) as exports increased more than imports.

Exports

Exports of goods and services increased US$4.4 billion, or 2.6%, in September to US$176.4 billion. Exports of goods increased by US$3.7 billion, and exports of services increased by US$0.7 billion.

Figure2: Exports (in US$ billion) Seasonally Adjusted (by Commodity/Service)Source: bea.gov

The increase in exports of goods are mainly due to the increases in foods, feeds, and beverages (US$1.6 billion) and in capital goods (US$1.4 billion).

The increase in export of services is a result of an increase in transportation activities (US$0.2 billion), in travel (US$0.1 billion), in financial services (US$0.1 billion), and other business services (US$0.1 billion).

Imports

Imports of goods and services increased by US$1.2 billion, or 0.5%, in September to US$240.2 billion. Imports of goods increased by US$0.6 billion and, imports of services increased by US$0.6 billion.

Figure3: Imports (in US$ billion) Seasonally Adjusted (by Commodity/Service)

Source: bea.gov

The increase in imports of goods is mainly due to the increasing demand in automotive vehicles, parts, and engines (US$3.2 billion) and capital goods (US$0.8 billion).

The increase in imports of services is a reflection of the increase in travel (US$0.3 billion) and transport (US$0.2 billion), which was halted temporarily, due to COVID-19.

However, both export and import are yet to reach the level of the pre-pandemic period, and the current rise in COVID-19 cases can drag trade downward, indicating a lower demand in the economy.

Consumer Price Index (CPI)

Consumer Price Index (CPI) measures the average change over a time in the prices paid by urban consumers for a basket of consumer goods and services.

Figure4: Monthly CPI for All Urban Consumers - Seasonally Adjusted, (% Change)

Source: bls.gov

According to the U.S. Bureau of Labor Statistics, the CPI-U became negative in March and April of 2020 with declined demands due to imposed lockdown to avoid the spike in cases of COVID-19. During May 2020, the government started loosening and lifting the restrictions which positively drove the CPI-U and increased it by 0.6% in June and July 2020. All items index increased by 1.4% over the last 12 months before the seasonal adjustments.

When substituting BLS numbers with that of Shadowstats’, the inflation figures are different and much higher. The ShadowStats provides alternate inflation data that uses the 1980 CPI methodology. This is because of the methodological shifts in government reporting, which have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living and towards a core inflation index stripped of the several volatile, yet necessary cost of living price inputs. Reference Shadowstats No. 515—Public Comment On Inflation Measurement And The Chained-Cpi(C-CPI) for more information.

Figure5: Consumer inflation – BLS Vs. ShadowStats (Not Seasonally Adjusted) (% Change) (Index 1980= 100.0)

 

Source: bls.gov, Shadow Government Statistics

As per the U.S. Bureau of Labor Statistics, the October 2020 Consumer Price Index (CPI-U) gained 0.04%, having gained 0.20% in September, up by 1.18% year-to-year, versus 1.37% in September.

The October 2020 ShadowStats Alternate CPI (1980 Base) rose by 8.9% year-to-year, slowing versus 9.1% in September and 9.0% in August. The ShadowStats Alternate CPI estimate restates current headline inflation to reverse the government's inflation-reducing gimmicks of recent decades, which were claimed to explicitly designed to reduce/understate COLAs (cost of living adjustments), used for products such as social security, annuities, and other products very heavily used by wage earning consumers and savers.

This apparent “theft” from wage earners and savers can be seen to easily be the source of the rise populism in the US, and the concentrated, yet staunch following of political personalities such as Donald Trump. These potential fire starters of populism can be seen in both the adjusted inflation figures, and the figures of the US unemployment rate.

Unemployment Rate

The outbreak of COVID-19 has severely affected the U.S. employment market. In January 2020 the unemployment rate in the U.S. was 3.6%, however, in April 2020; the U.S. recorded an unemployment rate of 14.7%, the highest and the most massive over-the-month surge in the history of the data (available back to January 1948).

The total unemployed persons in the U.S. rose by 15.9 million to 23.1 million in April 2020. However, with the Federal governments' efforts and continued resumption of economic activities, the unemployment rate has started to decline and reached 7.9% in September 2020 with the number of unemployed persons dropping to 12.6 million.

According to the Bureau of Labor Statistics, the non-farm payroll employment has risen by 0.66 million in September 2020. A significant number of job was generated in leisure and hospitality, retail trade, healthcare and social assistance and professional and business services sectors. Employment in the government sector has declined over the month, particularly in state and local government education.

Figure6: Monthly Unemployment Rate, Not Seasonally Adjusted (% Change)

Source: bls.gov

Both the measures of unemployment – the unemployment rate and the number of unemployed persons, have declined for the five consecutive months but are higher than in February, by 4.4% points and 6.8 million, respectively.

According to Shadow Government Statistics, the actual scenario is much different. SGS claims BLS. BLS is understating the unemployment from the last eight months by misclassifying some of the unemployed persons as employed in the household survey. While calculating, an estimate of 562,000 persons were considered employed who more properly should have been counted as unemployed. This has reduced the U3 unemployment rate of October 2020 to 6.88% from September 2020 level of 7.86%. The unemployment rate of the U6 category has declined to 12.19% in October 2020 from 12.84% in September 2020.

Figure7: Unemployment Rate - BLS vs ShadowStats-Alternate (Seasonally Adjusted)

Source: bls.gov, Shadow Government Statistics

The Y6 unemployment category includes short-term discouraged workers and workers employed part-time for economic reasons. The overall unemployment rate, including long-term discouraged/displaced workers as per ShadowStats Alternate measure, was 26.3% for October 2020, down from 26.9% in September 2020.

Figure7: Unemployment Rate U-3 vs ShadowStats-Alternate Unemployment Rate (Seasonally Adjusted) (Jan-oct, 2020) 

 

Source: bls.gov, Shadow Government Statistics

 

Currency De-valuation

The dollar started dramatically weakening at the onset of the spike in the coronavirus cases in March, and its downward slide was reinforced when Fed Chairman Jerome Powell announced a new policy of average interest rate targeting. That policy would allow the Fed to keep interest rates at zero, even if inflation temporarily rises above its 2% target, which means a further weakening of the dollar.

The three most important aspects behind the weakening USD are the ultra-loose monetary policy adopted by the U.S. Fed, the historically unprecedented increase in federal, state, and municipal debt and the weakening U.S. economy. It is further expected that the interest rates will continue to be near zero for the foreseeable future in the U.S. A rise from this point would make US debt service untenable, but despite record debt in both nominal and GDP adjusted terms (near record), debt service is cheaper now than when at lower levels.

Figure8: Federal Reserve Board vs ShadowStats U.S. Dollar Exchange Rate Indices (Not Seasonally Adjusted, Level and 

Y-o-Y % Change)

Source: shadowstats.com

Usually, falling currency rates indicate more inflation, aided with higher unemployment and lower GDP growth thereby, making the economic situation difficult.

What the USD is witnessing today, might just be the beginning of a broader structural downtrend, driven partially by the steady recovery of other countries post Coronavirus relative to the US, particularly Asia and Africa, but Europe as well.

The SGS Financial-Weighted Dollar Index reflects a composite value of the foreign-exchange-weighted U.S. dollar, weighted by the proportionate trading volume of the USD versus the six highest-volume currencies: EUR, JPY, GBP, CHF, AUD, CAD.

On the other hand, the FRB Trade-Weighted Dollar is the Major Currency Index published by the Federal Reserve, with the USD weighted by respective merchandise trade volume against the same currencies.

Over the past seven months, the U.S. dollar has continued to lose value against other currencies and the euro in particular. As can be seen in the chart, the value of the dollar in August has fallen to -4.53% as per ShadowStats and -3.95% as per the Federal Reserve Board, the lowest in all of 2020.

What the weaker dollar does is that it makes the economy slower than it otherwise would, causing an economic recovery more challenging for the U.S. with, the investors tending to invest elsewhere. Of course, it also makes exports cheaper on a relative basis, but with demand muted to the extent that it has been, this benefit can be easily overstated.

The continued growth of Coronavirus cases in the U.S. is slowing the speed of the economic recovery while apparently, Eurozone and Asia are doing relatively better – save certain European hot spots.

Money Supply

Increase in money supply lowers the interest rates in the economy, reducing the price for borrowing money with increased consumption and lending. Usually, in the short-run, higher rates of consumption, lending and borrowing increase the total output of an economy with a rise in inflation.

As can be seen from Figure 9, the excessive printing of money (from M1 to the full monetary base) bears a tight correlation with the skyrocketing stock market - as liquidity drives nominal prices ever higher. This is only interrupted by the sharp contraction in Q1 when the reality of the bursting "everything bubbles" through COVID eventually hit.

Figure 9: Money Supply Vs. Stock Market (indexed at Jan 2016 = 100)

Source: fred.stlouisfed.org

Conclusion

The COVID-19 pandemic has replaced a historically strong U.S. job market with record levels of unemployment. The unemployment rate in April rose to 14.7%, four times the rate in January 2020. At the same time, second-quarter GDP numbers plummeted to an all-time low of 31.7% on an annualized basis.

If we are to believe the data provided by the government of the U.S., so far, there is no sign of inflation. If anything, prices have fallen during the pandemic. Both exports and imports remained low during the pandemic, reflecting the impact of COVID-19, as many businesses continued to cease operations entirely or operate at limited capacity, and the movement of travellers across borders remained restricted. Adding to the worries is the depreciation in the value of the USD.

However, the reopening of economic activities witnessed a positive uptick. The significant rebound in GDP in the third quarter seemed promising, yet the spread of the novel coronavirus in the country over the summer has put growth at significant risk. Many pundits view the surge in stock prices as a powerful sign that many in the market expect a healthy recovery. We see it as the inevitable results of ZIRP (zero interest rate policy), QE (quantitative easing) and the largest fiscal and monetary stimulus packages in the history of the union. Keep in mind that these share prices have been spiking as earnings stagnate and a record number of companies mire in mediocre operating results, slowing businesses and insolvency.  Unemployment has soared since the pandemic hit the U.S. economy but is slowly coming down with 7.9% in September, the lowest post-pandemic number, as inflation also remains low at 0.2%.

In addition, the U.S. Federal government acted with unprecedented scale, speed, and coordination, surpassing past efforts to mitigate the crisis caused by the pandemic and to bring back the economy on track. By mid-August, the federal government had spent more than US$3 trillion, to keep hundreds of thousands of businesses and over 150 million Americans from the brink of economic failure, preventing the recession from turning into a depression. Also, the Fed spent US$ 2 trillion on securities between March – June and June to preserve the economy.

But, the current set of data provided by Shadowstats, shows high retail inflation, high rate of unemployment, falling currency rates, along with a contraction in GDP. This is analogous to the phenomenon of stagflation. The current situation has emerged mainly due to the impact of the pandemic and is more cyclical in nature. There is one major exception to this cyclicality, though. It is now not only mandated, but from efficacy perspective, highly desirable to have employees work from home when possible. This effectively gutted the large urban commercial centres in the country’s metropolitan clusters – leaving vast swaths of office centres with 65% to 90% vacancy rates, which daisy chain into the surrounding ecosystems that rely on the commercial real estate activity, i.e., restaurants, retail stores, office support infrastructure, public transportation, and the cities’ commercial tax base. This is essentially a structural and permanent (or at best, semi-permanent) change in the demographic make-up in major cities. The CMBS underpinning these office parks are cracking now as we pen this. Reference With Every Hedge Fund and Their Mother Crowding Into the Big Short 3.0, Remember Who Warned You 1st, in 2007 and 2020.

The main factors leading to supply-side disruptions are local lockdowns, particularly for perishable agricultural products, which have contributed extensively to the rise in inflation of certain food items.

At present, supply disruptions caused by localized lockdowns and changes necessitated by social distancing, are overshadowing faltering demand, which is raising the likelihood of a stagflation-like scenario. "Nevertheless, if the situation presented by these data trends continue in the medium term, the economy is at risk of entering into stagflation."

The idea that the U.S. economy has fallen into the trap of Stagnation is still a minority view and at this point fears about the inflation side of it seem to be subsiding. However, the stagnation half of it seems a real danger only if a vaccine is delayed or the damage from the coronavirus pandemic extends for longer than is anticipated.

It is our opinion that this second branch of thought is overly optimistic, for a vaccine, even if produced timely, must be distributed at an unprecedented rate and volume and at an unprecedented cost (nigh zero). In addition, real-world safety and efficacy issues loom, which may also mire the speed with which the vaccine can be used, borne from the speed at which it was developed and tested.

Add to all of this, the rapid rise of the infection rate across the western world and the unprecedented re-closing of many economies in Europe and the states foreshadows a much more stagnant GDP growth forecast than pundits are espousing.

Currently, the infection rates in many U.S. states and several major EU countries and the U.K. and India are at the highest they've ever been, eclipsing the rates that have caused the original shutdowns that drove GDP negative in the first place.

Although the mortality rate has materially lessened, the increase in overall infections has increased the net deaths relative to the pre-lockdown peaks, threatening once again to overload healthcare systems across much of the western hemisphere, posing a threat of another economic downfall.

Bloomberg reports America’s $20 Trillion Debt Pile Is Getting Cheaper as It Grows

The U.S. government is paying less as it borrows more, one reason investors appear more comfortable than

Congress about funding another leg of stimulus. Interest payments in the federal budget declined about 10% in the first 11 months of this fiscal year, when America was running up its biggest deficit since World War II. Over the next few years, servicing the national debt will be cheaper than any time in the past half-century when measured against the size of the economy, according to the Congressional Budget Office.

 The concerns that pundits have regarding the US record debt stockpile is unfounded - at least for now and the near future. Take note that although nearly every government expense category has spiked from last year, one of the biggest actually shrank - net interest expense. 

lewaegq 3b63d

The CBO forecasts this cost savings to be extrapolated into the future as well. Of course, in today's highly politicized environment, I think it is wise to take many potentially conflicted data sources with a  healthy dose of skepticism. Alas, the logic behind their forecasts holds up (chart sourced from Bloomberg LP)....

safdsf 2219d

What Bloomberg, nor any other media outlet fails to inform us of is that the US is economically defaulting on its debt at the same time that it is paying a lower interest rate. That's right, what the US is doing is actually an economic default on it obligations to is investors. It is not a technical, legal or accounting default since the US is paying its debt service on time. What it is NOT doing is paying back the economic value of what it has borrowed, plus interest. Although this scenario is not laid bare in the charts above, it is plain as pie in the chart below. 

uyguyg 18410

What does all of this mean? Well, in a nutshell, it means that rates will not be going up anytime soon. If rates do go up, then debt service risks becoming untenable. 

It also means that one should expect the US to continue printing money at this ungodly clip until true, "organic" economic activity actually recovers at a reasonable pace. That will not happen this year, and is likely not to happen in full next year either. There's a risk that the year after that or more may be moot as well.

With the USD, being devalued, and interest rates dropping closer to zero as the Federal budget looms larger among historically unprecedented unemployment and corporate earnings that are dropping (even with the accounting "massaging" that's taking place - see Forensic Review of Bank of America's 2Q2020 Earnings - It's Ugly! and Analysis of JP Morgan's Terrible, Horrible, No Good 2nd Quarter of 2020 - Why Am I the Only One?) guess where the equity markets will go relative to gold? See "Panic-Driven Monetary Inflation and It's Effect on Tokenized Gold"

This chart is the base of the entire argument of holding gold as an currency reserve. First, look at the trend of each component/line.

    • The economic world has been upended during the popping of the 2007 bubble.
    • In 2009, the Fed has doubled in balance sheet through quantitative easing, thereafter increasing it by ~700% more through today. It has added more than 30% to its balance sheet in just the last two months.
    • The broad money supply has jumped 49% in the last 6 months.Monetary inflation is at its highest level, ever, and half of the annualized inflation rate of Zimbabwe.
    • US borrowing has increased by 300% over the largest period of borrowing in the modern history of this country. There has never been a period where the US has borrowed more, or borrowed as fast.
    • Gold has tracked this monetary debasement (inflation) closely, now near an all-time high

In closing, remember there's a strong chance that Stagflation is Here Right Now! As Is A Depression. Buy your VeGold digital, fully redeemable gold here

 U.S. Budget Gap Tripled to Record $3.1 Trillion for 2020. Shortfall relative to economy largest since World War II. Total outlays soar 47.3% Hear those machines go Brrrrr? If not, reference Panic-Driven Monetary Inflation and It's Effect on Tokenized Gold 

This chart below tells a harrowing story!

  • Federal debt as a percent of GDP is the highest it has been since WWII, without the ability to gun the manufacturing machine to create bullets and arms to sell to warring factions to boost the economy. 
  • M3 has skyrocketed, at the same time GDP has tanked - both setting all-time records,simultaneously
  • Gold has seen its sharpest spike that I know of. Gold has a 84% negative correlation to real interest rates. Guess who has negative real rates? Time's up! The country whose currency gold is priced in...
  • Oh yeah! Real rates are negative in a time of collapse GDP and record unemployment. Stagflation, y'all!

Intiially, I thought goldbugs would (and probably should) rejoice. Then I thought about the comparison the economic turmoil that led up to WWII in the US, and I thought, "Uh! Oh!". The US confiscated private gold and made its ownership illegal, in an attempt to effectuate an early form of QE and dollar debasement, You. see, you can't print dollars if you have to spend gold to do it, and the USD was on the gold standard. So, take all of the gold, then reprice what you have taken by government mandate (vs market forces), and voila! You've found instant money before the age of the digital printing press. The war started for the US 6 years later.

Things are al little different in this day and age, with tokenization, the blockchain and the Internet, but the government still wields nigh ultimate power.

For those that think this was a one time occurrence....

  • United States' Gold Confiscation of 1933 as discussed above, by presidential Executive order. This was primarily to effect QE, $20 per ounce was paid. Look at how good a deal that was over time.
  • Germany Seized Czech Gold through the Bank of England
  • German Nazis' Seizure of Jewish Gold (raubgold, or stolen gold) in World War II, making it illegal for any Jews fleeing Nazis German territory to take any valuable of theirs with them.
  • Australia Confiscated Private in 1959, but at least they paid for it in paper fiat, worth so much less now.
  • British Gold Ban of 1960's.., The UK literally prosecuted what they called "speculators" who held more than 4 gold coins as the pound collapsed against gold.
  • A Modern Day Case Study – Venezuela: Britain withheld Venezuela's gold requested to help deal with the COVID-19 pandemic. This was THIS year!

Buy your fully redeemable digital gold at VeAssets, and read the relevant research in the research section here.

 

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This is the first in a series of articles designed to showcase the historical predictive success of BoomBustBlog and the research team behind it. We will detail several research topics from devastating bank failures to cataclysmic macro events, to unseen monopolies in the making - all to illustrate the value of BoomBustBlog relative to the mainstream media, specialized financial and business media, sell side Wall Street analysts and even think tank and regulatory bodies.

We will kick off this series with our research on what was the 2nd largest commercial REIT in the United States...

GGP abd1c

BoomBustBlog Coverage on General Growth Properties Inc.

Realizing the impending crisis in commercial real estate and the deteriorating economic fundamentals in the US, BoomBustBlog, written by Reggie Middleton, pointed out the trouble General Growth Properties Inc. had and its impact on its stock price in an article (BoomBustBlog.com's answer to GGP's latest press release), early in 2008. According to the article, the possibility of GGP filing bankruptcy was rising with debts payment falling due. The article was published in January 2008, 15 months before GGP filed for Bankruptcy.

Comparison Matrix

Media Houses

First article published on

No. of Articles published

The time lag from BoomBustBlog

The time difference from GGP filing for Bankruptcy

Comments

BoomBustBlog

January 2008

7+ 

  1. Will the commercial real estate market fall? Of course it will.
  2. The Commercial Real Estate Crash Cometh, and I know who is leading the way!
  3. BoomBustBlog.com’s answer to GGP’s latest press release 
  4. Another GGP update coming…

-

Predicted 15 months before GGP's filing for Bankruptcy

Predicted well before filing for Bankruptcy

Bloomberg

-

-

-

-

-

The Wall Street Journal

October 2008

January 2009

2

9 Months

Four months  before (1st article)

Two months before filing for Bankruptcy (2nd article)

Predicted crisis in the commercial property along with GGP

Financial Times

-

-

-

-

-

Forbes

-

-

-

-

-

Reuters

April, 2009

1

15 Months

Zero, as it published on the same day when GGP filed for Bankruptcy

Reacted only after filing for Bankruptcy

The New York Times

April 2009

1

15 Months

Zero, as it published on the same day when GGP filed for Bankruptcy

Reacted only after filing for Bankruptcy

Fortune

-

-

-

-

-

Business Insider

December 2009

1

23 Months

8 months after GGP filed for Bankruptcy

Comparative analysis of fall of GGP

 

Key Highlights:

BoomBustBlog

Reggie Middleton, through his articles, provided comprehensive and some of the earliest warnings about a challenging operating environment for GGP in the wake of deteriorating macroeconomic environment in the US and the Company's substantial financial debt liability. Based on his analysis GGP, a highly leveraged firm was heading into a refinancing-induced liquidity crunch and might have to file for Bankruptcy. Some of the critical points, as highlighted by Reggie, which eventually led to GGP filing for Bankruptcy, includes:

  • Declining rentals of commercial real estate pushed by a slowdown in US consumer spending and a rising unemployment rate
  • Tightening credit market resulting in refinancing challenges for the huge debt liability for GGP
  • The increasing interest burden on the huge debt obligation and inability to outperform in a tight operating environment
  • Low capitalization rates for the properties acquired in 2006-2007 (they simply overpaid by buying at the top of a bubble)
  • Falling Stock prices owing to a slowdown in the commercial real estate sector
  • The distress caused by loose a lending market and sub-prime mortgage crisis
  • Insiders trading activities

The Wall Street Journal

In its first article published in October 2008, WSJ hinted of probable distress in GGP as GGP replaced its chief executive officer and president in a bid to keep its debt load from dragging the Company into Bankruptcy.

In the second article published in January 2009, WSJ pointed the likelihood of a bankruptcy filing for mall giant General Growth Properties Inc., threatening to overlay one of the biggest real-estate bankruptcies ever as GGP was struggling to pay US$2.6 billion credit which was about to mature.

Notably, Reggie had pointed out these facts many months before the article released by WSJ, with his first articles released in the beginning of 2008. At the end of Q4 2007, GGP had US$2.6 billion of debt maturing in 2008. At the end of Q1 2008, GGP had USD2.8 billion due.

Reuters

In its article published in April 2009, right after GGP filing for Bankruptcy, Reuters discussed the reasons leading to Bankruptcy.

Reuters pointed out the failure of GGP to restructure its debt of USD27.29 billion due to the ongoing global financial crisis.

Reuters also pointed out the Bankruptcy of GGP could signal further troubles for other financial institutions who are General Growth creditors.

Notably, Reggie Middleton, in his article in BoomBustBlog, had already pointed this out over a year earlier - that GGP was finding challenges in refinancing its debt obligations due to tightening credit market.

The New York Times

In its article published in April 2009, right after GGP filing for Bankruptcy, The New York Times pointed out the reasons that let GGP file for Bankruptcy.

NYT pointed out that General Growth's Bankruptcy was widely expected as the commercial real estate market was weakening, and GGP was unusually dependent on mortgage financing, as its debts totaled US$27 billion.

NYT also pointed out that GGP could not persuade investors who own more than US$2.25 billion of its bonds to waive payments due in 2009 as debt maturities mounted.

According to NYT, the fall of GGP was seen as a looming crisis in commercial real estate.

Business Insider

In its articles published in December 2009, after 8 months of GGP filing for Bankruptcy, Business Insider pointed out the comparison between the two case studies published by Bill Ackman and Hovde Capital and also stating their facts, that led GGP file for bankruptcy.

Bill Ackman presented the report with its bullish views on the malls and retailers which according to the Hovde Capital are wrong and proved to be wrong. But according to Whitney Tilson’s rebuttal article, the Hovde’s bearish case paints an inaccurate picture of rapidly declining financial performance, then misstates NOI, and then applies an inappropriate capitalization rate a rare trifecta of poor analysis. Also what Whitney Tilson’s said in its article is that, GGP based on their belief that the Company is very likely in the near future to either exit bankruptcy or be acquired.

This is the first in a series of articles designed to showcase the historical predictive success of BoomBustBlog and the research team behind it. We will detail several research topics from devastating bank failures to cataclysmic macro events, to unseen monopolies in the making - all to illustrate the value of BoomBustBlog relative to the mainstream media, specialized financial and business media, sell side Wall Street analysts and even think tank and regulatory bodies.

We will kick off this series with our research on what was the 2nd largest commercial REIT in the United States...

Untitled 79b2f

BoomBustBlog Coverage on General Growth Properties Inc.

Realizing the impending crisis in commercial real estate and the deteriorating economic fundamentals in the US, BoomBustBlog, written by Reggie Middleton, pointed out the trouble General Growth Properties Inc. had and its impact on its stock price in an article (BoomBustBlog.com's answer to GGP's latest press release), early in 2008. According to the article, the possibility of GGP filing bankruptcy was rising with debts payment falling due. The article was published in January 2008, 15 months before GGP filed for Bankruptcy.

Comparison Matrix

Media Houses

First article published on

No. of Articles published

The time lag from BoomBustBlog

The time difference from GGP filing for Bankruptcy

Comments

BoomBustBlog

January 2008

7+ 

  1. Will the commercial real estate market fall? Of course it will.
  2. The Commercial Real Estate Crash Cometh, and I know who is leading the way!
  3. BoomBustBlog.com’s answer to GGP’s latest press release 
  4. Another GGP update coming…

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Predicted 15 months before GGP's filing for Bankruptcy

Predicted well before filing for Bankruptcy

Bloomberg

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The Wall Street Journal

October 2008

January 2009

2

9 Months

Four months  before (1st article)

Two months before filing for Bankruptcy (2nd article)

Predicted crisis in the commercial property along with GGP

Financial Times

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Forbes

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Reuters

April, 2009

1

15 Months

Zero, as it published on the same day when GGP filed for Bankruptcy

Reacted only after filing for Bankruptcy

The New York Times

April 2009

1

15 Months

Zero, as it published on the same day when GGP filed for Bankruptcy

Reacted only after filing for Bankruptcy

Fortune

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Business Insider

December 2009

1

23 Months

8 months after GGP filed for Bankruptcy

Comparative analysis of fall of GGP

 

Key Highlights:

BoomBustBlog

Reggie Middleton, through his articles, provided comprehensive and some of the earliest warnings about a challenging operating environment for GGP in the wake of deteriorating economic fundamentals in the US and the Company's substantial financial debt liability. Based on his analysis GGP, a highly leveraged firm was heading into a refinancing-induced liquidity crunch and might have to file for Bankruptcy. Some of the critical points, as highlighted by Reggie, which eventually led to GGP filing for Bankruptcy, includes:

  • Declining rentals of commercial real estate pushed by a slowdown in US consumer spending and a rising unemployment rate
  • Tightening credit market resulting in refinancing challenges for the huge debt liability for GGP
  • The increasing interest burden on the huge debt obligation and inability to outperform in a tight operating environment
  • Low capitalization rates for the properties acquired in 2006-2007
  • Falling Stock prices owing to a slowdown in the commercial real estate sector
  • The distress caused by loose lending market and sub-prime mortgage crisis
  • Insiders trading activities

The Wall Street Journal

In its first article published in October 2008, WSJ hinted of probable distress in GGP as GGP replaced its chief executive officer and president in a bid to keep its debt load from dragging the Company into Bankruptcy.

In the second article published in January 2009, WSJ pointed the likelihood of a bankruptcy filing for mall giant General Growth Properties Inc., threatening to overlay one of the biggest real-estate bankruptcies ever as GGP was struggling to pay US$2.6 billion credit which was about to mature.

Notably, Reggie had pointed out these facts much before the article released by WSJ. At the end of Q4 2007, GGP had US$2.6 billion of debt maturing in 2008. At the end of Q1 2008, GGP had USD2.8 billion due.

Reuters

In its article published in April 2009, right after GGP filing for Bankruptcy, Reuters discussed the reasons leading to Bankruptcy.

Reuters pointed out the failure of GGP to restructure its debt of USD27.29 billion due to the ongoing global financial crisis.

Reuters also pointed out the Bankruptcy of GGP could signal further troubles for other financial institutions who are General Growth creditors.

Notably, Reggie Middleton, in his article in BoomBustBlog, had already pointed out that, GGP was finding challenges in refinancing its debt obligations due to tightening credit market.

The New York Times

In its article published in April 2009, right after GGP filing for Bankruptcy, The New York Times pointed out the reasons that let GGP file for Bankruptcy.

NYT pointed out that General Growth's Bankruptcy was widely expected as the commercial real estate market was weakening, and GGP was unusually dependent on mortgage financing, as its debts totalled US$27 billion.

NYT also pointed out that GGP could not persuade investors who own more than US$2.25 billion of its bonds to waive payments due in 2009 as debt maturities mounted.

According to NYT, the fall of GGP was seen as a looming crisis in commercial real estate.

Business Insider

In its articles published in December 2009, after 8 months of GGP filing for Bankruptcy, Business Insider pointed out the comparison between the two case studies published by Bill Ackman and Hovde Capital and also stating their facts, that led GGP file for bankruptcy.

Bill Ackman presented the report with its bullish views on the malls and retailers which according to the Hovde Capital are wrong and proved to be wrong. But according to Whitney Tilson’s rebuttal article, the Hovde’s bearish case paints an inaccurate picture of rapidly declining financial performance, then misstates NOI, and then applies an inappropriate capitalization rate a rare trifecta of poor analysis. Also what Whitney Tilson’s said in its article is that, GGP based on their belief that the Company is very likely in the near future to either exit bankruptcy or be acquired.

 FT.com reports: Central banks flip to gold sales after record rally

Henry Sanderson in London AN HOUR AGO 2 Print this page Central banks became net sellers of gold in August for the first time in a year and a half, in the latest indication that demand for the metal is slowing following a record-setting rally.  Global central banks sold a net 12.3 tonnes of gold over the month, according to estimates published on Wednesday by the World Gold Council, an industry-backed body. The shift came just as the precious metal reached a record high above $2,070 a troy ounce in early August. It has since fallen more than 8 per cent to $1,890 per ounce. The latest data reflect the pullback of some major buyers as countries free up resources to deal with the coronavirus crisis. “All central banks around the world are facing a lot of pressure for liquidity,” said Bernard Dahdah, an analyst at Natixis in Paris. “Now is not the time to hoard gold, the hospitals need the money,” he said. Uzbekistan led the sales, exporting $5.8bn worth of gold in the first eight months of the year, according to government statistics. Central bank purchases have been a lesser factor in this year’s surge in gold, which has been dominated by record demand for gold-backed exchange traded funds. Global investors have poured more than $60bn into such ETFs so far in 2020. But central banks have still bought between 200 and 300 tonnes, according to the WGC’s estimates — worth about $13bn at the lower end, on current prices.

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Eurasianet reports: Uzbekistan pins economic fightback on gold sales

The State Statistics Committee revealed on September 21 that the country had exported $5.8 billion of gold in the first eight months of this year. That accounted for half of exports-based revenue.

Just to put that in context, Uzbekistan exported $4.9 billion worth of gold over the whole of 2019 – an amount that then accounted for 27.5 percent of trade turnover.

Uzbekistan became the world’s leading exporter of gold in July, easily outstripping Mongolia’s 6.1 tons with its 11.6 tons of sales. In August alone, it sold $2.5 billion worth of gold. Over the entire duration of 2015, it sold $1.9 billion worth of the metal.

... “The price of gold is at its peak, and economic activity has sunk to its nadir, so I think right now it is necessary to sell gold and foreign exchange reserves, and to use these funds to urgently save the economy from a further decline and to avoid more unemployment,” Nazirov (director of the Capital Markets Development Agency) said.

... Uzbekistan’s external debt burden has surged too. As of July 1, it stood at $17.3 billion, still only equivalent to what is generally deemed a highly manageable 30.3 percent of gross domestic product. It rose by $1.6 billion since the start of the year.

Uzbek economic expert Navruz Melibayev told Eurasianet that while gold is a lifesaver for Uzbekistan in how it generates revenue and helps bridge the trade deficit, reliance on it can only be a time-limited fix.

“We still need to develop industry and other spheres of the economy. Betting on the sale of gold is a temporary measure necessitated by the pandemic and rising prices for this metal,” he said.

The net sale of gold by central banks likely contributed greatly to, if not caused, the 8% drop in the price of gold - which has still risen 30$+ year over year. Of interest will be what happens next. Once the revenues from the gold sales have been used, there is no other ready source of liquid capital for many of the smaller and weaker nations, despite the fact that much of the world is going into a second phase of the COVID disease and related economic contractions. 
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With the gold reserves gone, what will the countries do to finance their COVID battle efforts? Well, this is what the world's leading economy has done since the pandemic started...

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They drove interest rates through the floor while spiking the money supply, which drove up the price of gold.  If we were to expand the time series a little, you will see just how egregious this monetary inflation has become....
 fredgraph 10 5153c

 

If I were a gambling man, I would wager the purchase of the gold form these central banks in need may be a worthwhile endeavor...

See what we have recommended central banks in highly inflationary countries do with their gold and our distributed tokenized gold system. It's almost as if we were able to predict this would happen (click a graphic to download and view).

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NY Mag reports: Citigroup received the most federal funding during the financial crisis for a total of $476.2 billion in cash and guarantees. Next in line for a bailout was Bank of America with $336.1 billion. But between the billions in convenient funding and millions in settlements for failing to disclose risks and losses, the banks have definitely learned their lesson, right? Not according to the panel:

“Very large financial institutions may now rationally decide to take inflated risks because they expect that, if their gamble fails, taxpayers will bear the loss,” the report concluded. “Ironically, these inflated risks may create even greater systemic risk and increase the likelihood of future crises and bailouts. 

 The bank was bailed out in 2008. The article above was published in 2011.It is now 2020. Did Citibank (or for that matter Bank of America, or for that matter any other "Too big to fail" bank) learn their lesson? The answers are "Hell no!" for Citibank (see below), "Absolutely not!" for Bank of America and "Nah!" for JP Morgan and everyone.

Here's a quick four minutes that will walk you through whats going on in 2020. 

Methodology for scrubbing the misleading reporting of Citibank:

  • Step 1: Calculated the average Provision for credit losses quarterly during 2007-2009.
  • Step 2: Calculated the average of Total delinquency quarterly during 2007-2009.
  • Step 3: Calculated the average delinquency as a percentage of Provision for credit losses.
  • Step 4: Calculated the average Provision for credit losses in Q2 2020, using adjusted delinquency in Q2 2020, divided by the average delinquency as a percentage of Provision for credit losses during 2007-2009. 

 

  2007-2009 Q2 2020 - Reported Q2 2020 - Adjusted
Total Delinquency          23,115               2,761           22,853
Provision             7,470               3,885              7,301
Delinquencies as a percent of provisions 309% 71% 313%

 

 The results? Uh Oh! We've seen this movie before, haven't we? Just send this information viral, and remember where you heard it first. We want the credit!

There's a lot more to see in the upcoming weeks. Stay tuned!! See also: Analysis of JP Morgan's Horrible, Terrible, No Good 2nd Quarter and 

 

A list of Reggie Middleton calls from the past....

 Is this the Breaking of the Bear?Joe Lewis on the Bear Stearns buyoutBSC calls are almost free and the JP Morgan Deal is not signed in stoneThis is going to be an exciting, and scary morningAs I anticipated, Bear Stearns is not a done deal

  1. Correction, and further thoughts on the topic and How Far Will US Home Prices Drop?
  2. (not a single sell side analyst that we know of made mention of this very material point in the industry):Lennar, Voodoo Accounting & Other Things of Mystery and Myth!
  3. (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear?|Joe Lewis on the Bear Stearns buyout Monday, March 17th, 2008:BSC calls are almost free and the JP Morgan Deal is not signed in stone Monday, March 17th, 2008 |This is going to be an exciting, and scary morning Monday, March 17th, 2008 | As I anticipated, Bear Stearns is not a done dealTuesday, March 18th, 2008 []

  4. :Is Lehman really a lemming in disguise?Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC. The question is, “”. I’m curious to see how the options on Lehman will be priced tomorrow. I really don’t have enough. Goes to show you how stingy I am.) |I just got this email on Lehman from my clearing desk Monday, March 17th, 2008| Lehman stock, rumors and anti-rumors that support the rumors  Friday, March 28th, 2008 | It appears that I should have dug deeper into Lehman! May 2008
    1. Will the commercial real estate market fall? Of course it will.
    2. Do you remember when I said Commercial Real Estate was sure to fall?
    3. The Commercial Real Estate Crash Cometh, and I know who is leading the way!
    4. Generally Negative Growth in General Growth Properties - GGP Part II
    5. General Growth Properties & the Commercial Real Estate Crash, pt III - The Story Gets Worse
    6. BoomBustBlog.com’s answer to GGP’s latest press releaseandAnother GGP update coming…(among over 700 pages of analysis, review the January 2008 archives or search for “GGP” for more research).
  5. Municipal bond market and the securitization crisis – part 2
  6. The collapse of the regional banks (32 of them, actually) in May 2008:As I see it, these 32 banks and thrifts are in deep doo-doo! as well as
  7. : “Can You Believe There Are Still Analysts Arguing How Undervalued Goldman Sachs Is? Those July 150 Puts Say Otherwise, Let’s Take a Look”,“When the Patina Fades… The Rise and Fall of Goldman Sachs???“andReggie Middleton vs Goldman Sachs, Round 2)
  8. (potentially soon to be the Global Sovereign Debt Crisis) starting in January of 2009 and explicit detail as of January 2010:The Pan-European Sovereign Debt Crisis
  9. I Suggest Those That Dislike Hearing “I Told You So” Divest from Western and Southern European Debt, It’ll Get Worse Before It Get’s Better!
  10. , May 2010: More on the Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing Wars»

Business Insider reports: How 2020 broke the housing market: So many homes are selling that we could run out of new houses in months. Of course, many are likely asking, "But I thought you called this 'The Great Global Real Estate Crash of the 2020s'?".

Well, the Business Insider article depicts a structural shit in real estate preferences - a move form urban apartments to larger urban houses and suburban ans smaller town single family housing. This demand is hitting limited supply, as homebuilders are wary of overbuilding during a market bubble top - as they have learned their lessons from 2008. Add increased demand to limited supply, and record low mortgage rates (which increase demand through greater affordability) and you get higher prices. These higher prices are rising so sharply, that they more than negate the affordability increase gained from lower mortgage rates. I quote the article above:

"as of the end of July, lower mortgage rates had given buyers an extra 6.9% in purchasing power, but house prices were up 8.2% year-over-year at that point — and they've kept going up since.

In fact, the 2% appreciation in national home prices between May and July was the biggest two-month jump since at least 1991, which was when the Federal Housing Finance Authority started tracking those changes in an index."

Regardless, the crash still cometh. Why? Because:

  1. banks are tightening credit standards to brace for pandemic and popping bubble losses See .
  2. Those jobless claims are STILL (yes, even after 25 weeks) the nastiest they've been since records were kept...
  3. As a matter of fact, if we throw in the most recent numbers, and compare everything to the pre-COVID all-time high record in unemployment claims, the point is undeniable. Where will the money come from to pay for all of those new mortgages, nationwide?
  4. fredgraph 7 fecb2
  5. Take note that there has never been a time since the beginning of record keeping that initial unemployment insurance claims, continuous unemployment insurance claims, and the unemployment rate have been this high and/or have spiked nearly as hard. At the same time, there has never been so drastic a drop in GDP, either. Basically, you are quite possible biting off of big chunk of hard times going into debt now for a residential residence, particularly as prices are spiking. This is not just my opinion, as you can see from below...
  6. 55% of Homeowners Regret Taking Out a Mortgage During the Pandemic

Lett's jump straight into this, shall we? This is the state of the US, as of right now versus the comparable period last year...

A quick description of what we see...

  • Unemployment rate very recently peaked at an all-time high, then eventually fell to a level that matched the highest unemployment on record after 21 weeks of damage.
  • Federal debt is at an all-time high, both in nominal terms and real terms, and still climbing at a breakneck, record pace
  • GDP has fallen more, and faster than any time on record, and is still plunging. Real gross domestic product (GDP) decreased at an annual rate of 32.9 percent in the second quarter of 2020, according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 5.0 percent.
  • Meanwhile, the US monetary base has spiked both more sharply and farther than at any other time on record. That's right, sharp monetary inflation at the same time that we are having a sharp drop in GDP and productive output - at the same time that we are seeing record government debt, at the same time we are seeing record unemployment.

The stock market should be in the shitter right now, but....

The broad market averages fell, then spiked high, sort of like the unemployment numbers. So, practically every number is bad, GDP, employment, federal debt, monetary  inflation... The only way the stock market could spike in such a situation is through dramatically stronger earnings, right?Well, let's take a look.

In the energy sector, we have Chevron. This is its earnings history leading into the worst depression this country has ever seen....

Yet look at its P/E graphed along time.... What?!?!!?!?

Yeah, I know!

How about Apple, who sells some of the most expensive computer and cell phone equipment available going into a depression....

How about Nvidia, who sells chips into those most expensive cell phones and computing things available going into a depression?

This entire 16 page deck, as well as a host of other insightful analysis and commentary is available to BoomBustBlog subscribers here.

 

 

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