The commercial real estate market pig is making its excruciating way through the credit market python...
Banks like Synovus and KeyCorp have been restructuring some commercial real estate loans. Keefe, Bruyette & Woods – an investment bank that specializes in the financial sector – said the average ratio of nonperforming commercial real estate loans to total loans at regional banks it covers nearly doubled in the first quarter, from 1.43% to 2.54%.
Morningstar analyst Maclovio Pina says restructuring commercial real estate loans doesn't change much, because 30% of restructured loans default. It's just like bankruptcy. Folks who've declared bankruptcy in the past are much more likely to do so again.
Banks like KeyCorp, Huntington Bancshares, Zions, and Synovus all have huge amounts of commercial real estate loans. One of these banks is certain to fail over the next year or so.
The commercial real estate debacle will drag on for years... According to today's American Banker, more than $200 billion of commercial real estate loans will mature from 2009 through 2013, with more than $300 billion maturing in 2012 and 2013. More than $50 billion of commercial mortgage-backed securities mature every year from 2014 through 2017.
Given that we're in the midst of the worst financial crisis since the Great Depression, it's a good bet [the retail shopper] spends a lot less at Saks and Macy's over the next year or two and at least as much – if not more – at [TJX Companies stores]. – Extreme Value, December 2008
TJX Companies' same-store sales increased 5% in May. Saks' same-store sales plummeted 26.6% and same-store sales at Macy's fell 9.1%. Nordstrom was down 13.1% and Dillard's was down 12%. The Financial Times said it was a "positive surprise" that same-store sales at Kohl's were down only 0.4%, when they were expected to fall 3.8%. You know optimism has taken hold when bad news is reported as good news.
Extreme Value readers who bought TJX companies are up about 44% since December, compared with the S&P 500, which is up just 8%.
Another discount giant, Extreme Value pick Wal-Mart (WMT), expects to add 22,000 jobs this year as it opens or expands about 150 stores. The new jobs include lots of cashiers and stock clerks, but Wal-Mart will also hire more senior positions, like store managers and pharmacists.
Just to repeat, the U.S. lost 532,000 jobs last month, and Wal-Mart is planning to hire 22,000.
Retail shoppers aren't the only ones looking for bargains in the recession. United Airlines is trying to save money on new planes. The airline told Boeing and Airbus it wants competing bids for as many as 150 new airplanes. The purchase could be worth $10 billion to the aircraft makers, who've seen other contracts deferred or canceled. The average age of a United Boeing 757 is 17 years. Its 747s average 13 years old.
Alice Schroeder, author of the Warren Buffett biography, The Snowball, wrote a Bloomberg article explaining Buffett's seemingly wrong call to "Buy American" last October in the New York Times. She argues he wasn't just talking his book – his reputation means far too much to him – and he actually is bullish... He's just not as bullish as it may seem, and he's bullish over a long-time horizon.
And he's got an incredibly powerful economic headwind to prove him right... inflation. Buffett's advice for protecting against inflation is first to increase your earning power – which is easier said than done in today's economy. Second, invest in businesses or stocks, as they will provide some real return over time despite inflation hurting margins. And lastly, according to Schroeder, is to trade more actively. She claims Buffett trades his personal account more actively than the Berkshire portfolio, which allows him to take advantage of market swings – for example, last year, he began moving out of bonds into U.S. stocks.
Yesterday, we asked for notes about anything other than gold and inflation... Today, we got... more inflation e-mails. I bet a good George Soros bullet would change the subject... Don't make me do it... feedback@stansberryresearch.com.
"You have an interesting debate going as to whether we are experiencing inflation or deflation. Yes, some things, like tv sets, cars, and real estate, have been going down. Other things, like gold, copper, and groceries, are going up. By your definition of inflation – an increase in the money supply – we should be in inflation now. But isn't the velocity of money in circulation the real determining factor as to how much we actually experience inflation? Let's say I'm an unproductive losing business like the ones Obama and his cronies like to encourage by giving me more money to lose. Printing money and giving money to me barely compensates for the huge deflation in investments in equities, real estate, and car companies. It's when the banks start multiplying those printed dollars by loaning out ten dollars for every one that they're given – don't you think that's when the velocity of money in circulation will really take off, and maybe even 'run away'? But so far, the banks aren't loaning it out much." – Paid-up subscriber Al Christie
Ferris comment: There's no debate. I'm not concerned with whether we're experiencing higher retail prices across the board right now. That's the effect of inflation. It's not inflation.
I don't worry about the velocity of money. It's like worrying about how hard your plane will hit the ground now that the wings have fallen off. You're going down. The dollar's wings have fallen off, and it's going down, even if we do see a near-term correction here and there along the way.
I know full well there's a $50 trillion hole to fill. When your capacity to print is virtually infinite, you can fill any hole to overflowing.
Virtually all of the stimulus money has been aimed squarely at the banking system. Very little has been sent elsewhere. The government will keep doing this until things seem like they're getting better. By then, it'll be too late.
"Congratulations Mr. Ferris. Glad to see that you can do better than your usual fundamentalist views on inflation and gold as an inflation edge. Now you explain the difference between base money from the Fed and total money supply. You talk about money demand instead of total supply of goods, de-leveraging and the impact on the money multiplier. And we will start reading you again." – Pa
id-up subscriber Alain Soulard
Ferris comment: Not sure what you're talking about. I've written nothing new about this subject in a long time. I've been saying for months our money is mostly created by being multiplied through the banking system. In fact, I started saying it on December 1, in Hong Kong, at the annual Stansberry Alliance meeting. I've also been saying for months that the reason we're not seeing the effects of a massive expansion in Fed credit is that bank capital is still being destroyed, making it hard to get the multiplier effect of bank lending and depositing.
"You are, of course, right about the definition of inflation and about its long term affects. Inflation is, as according to Austrian economics, 'an increase in the money supply not backed by savings.' But the thing you seem unable or unwilling to see is that the highly leveraged derivative bets that have accumulated over the past 15 to 20 years (orders of magnitude more than global GDP from what I read) created an enormous increase in the money supply not backed by savings. That has been inflationary. At the beginning of the current ongoing credit crisis those highly leveraged derivative bets began unwinding. That is deflationary, despite the trillions of dollars they are looting from everyone holding dollars by diluting their value, because it isn't increasing the money supply. It is instead a blatant transfer of wealth to those who feel they deserve it (to cover their foolish losses) more than everyone else from whom they are taking it.
"It isn't going back into the economy because they know (or at least fear) that their derivative bets are nowhere near done unwinding. That is deflationary. The dollars everyone else holds, which have now been enormously diluted in value (even though most don't understand why), don't buy as much as they used to. So people holding dollars are being more frugal, not spending money they don't have to and (gasp!) even trying to pay down their personal debt and save more money than they had been. That also is deflationary and it is what the Fed's velocity of money chart is reflecting. Between the unwinding of the unimaginable leveraging of derivative bets and effects of the looting of the value owned by all dollar holders, we are currently seeing a decrease, not an increase, in 'the money supply not backed by savings.' These trends are only just beginning, which is why I don't expect to see any significant inflation for the next several years." – Paid-up subscriber Leland Hosford
Ferris comment: You've explained well enough the nature of the deflationary event we're still experiencing. But that doesn't change the fact that our system is an inflation machine, not a deflation machine. In a way, I wish you were right. Were banks allowed to fail and wealth allowed to be destroyed, we'd have slightly better than a snowball's chance in hell.
Regards,
Dan Ferris
Medford, Oregon
June 4, 2009