Weekly Market Update by Retirement Lifestyle Advocates
In my books, “Economic Consequences” (2011), “New Retirement Rules” (2014, first edition), and “Revenue Sourcing” (2020), I reiterated the forecast of founding father, Thomas Jefferson, who suggested that if the American people ever allowed private banks to control the issue of the currency, the country would experience inflation, followed by deflation.
Ever since 1913, when the Federal Reserve (a group of private bankers) was founded, there has been a pattern of booms and busts. Booms and busts eventually lead to resets. The last major reset was in the 1930’s and arrived in the form of The Great Depression.
After the Federal Reserve was founded in 1913, it took the private bankers just one year to begin to issue Federal Reserve notes. These notes were redeemable for gold.
However, the issuance of these notes also allowed for the massive and rapid expansion of the money supply as the backing of the dollar by gold was reduced from the US Dollar being backed 100% by gold to a backing of just 40%.
The result of this money supply expansion was the Roaring 20’s, a period of a debt-fueled prosperity illusion ending with a real estate price crash and a stock market crash; the Great Depression arrived with a vengeance.
After World War II, the Bretton Woods Agreement returned the US to a quasi-gold standard with foreign entities holding US Dollars having the ability to redeem those dollars directly for gold at a rate of $35 per ounce.
However, in 1971, this gold exchange privilege was revoked by President Richard Nixon, making the US Dollar a fiat currency and allowing for unlimited amounts of currency creation.
Shortly after the US Dollar became a fiat currency, the United States executed an agreement with Saudi Arabia which had the Saudi’s agreeing to sell their oil only in US Dollars in exchange for military protection and favors.
Since 1971, predictably, there has been a series of boom-and-bust cycles. After each bust, more currency creation is required to reflate the bubble. This currency creation simply adds to total debt levels which makes the next bust more painful and makes it increasingly improbable that it will be possible to reflate the bubble.
Which brings me to where we now find ourselves.
Worldwide, debt is now in excess of $300 trillion. That’s triple the total worldwide debt of 2008 at the time of the financial crisis.
There are signs that the bubble is in the relatively early stages of unwinding.
Stocks, which at this point have retraced about 72% from their decline that began in December of 2021, remain in a technical downtrend despite the increased optimism from stock market participants.
Real estate inventories are increasing. The median home sales price is declining. Commercial real estate is suffering, with very high levels of commercial loans up for refinance in the next 18 to 24 months.
There are signs that we are now seeing the beginning of the deflationary cycle, catalyzed by the Federal Reserve’s rate hikes, ostensibly to get inflation under control.
“The Epoch Times” (Source: https://www.theepochtimes.com/corporate-bankruptcies-reach-highest-level-since-2010-post_5381228.html) reports that corporate bankruptcies have now reached their highest level since 2010:
New data show that a growing number of U.S. firms are collapsing under the weight of higher interest rates as corporate bankruptcies reached their highest first-half levels since 2010.
In the first six months of 2023, there were 340 corporate bankruptcies, topping every other comparable span in 13 years, according to S&P Global Market Intelligence. This is up 93 percent from the same time a year ago and higher than in 2020, when there was a spike during the early days of the coronavirus pandemic.
Office space vacancies are at record levels. Dorothy Neufeld, of “Visual Capitalist” (Source: https://www.visualcapitalist.com/visualizing-1-billion-square-feet-of-empty-office-space/) reports that there is now more than one billion square feet of office space available in the United States.
In April, one of America’s largest office owners, Brookfield, defaulted on a loan.
The loan, covering 12 office buildings, was mainly concentrated in the Washington, D.C. market. Faced with low occupancy rates, it joined other office giants Blackstone and WeWork defaulting on office debt this year.
At the end of the first quarter of 2023, a record square feet of office space was unoccupied in America. An estimated are at risk of defaulting each month according to Manus Clancy, senior managing director at Trepp.
The graphic referenced in the article excerpt illustrates more than 48,000 vacant floors of office space. If each floor is 20,000 square feet with 11-foot ceilings, the number of vacant floors would reach into the thermosphere where the international space station orbits the earth!
Growing commercial mortgage default rates reflect this trend. This from “Wolf Street” (Source: https://wolfstreet.com/2023/07/05/cre-nightmare-for-cmbs-holders-office-mortgage-delinquency-rate-has-biggest-six-month-spike-ever-and-its-just-the-beginning/):
After blowing through the pandemic with no more than a squiggle, the delinquency rate of Commercial Mortgage-Backed Securities (CMBS) backed by office properties jumped to 4.5% by loan balance in June, up from 1.6% just six months ago in December 2022, according to Trepp, which tracks and analyses CMBS.
Office mortgages that had been packaged into CMBS went through a horrendous default cycle following the Financial Crisis, with the delinquency rate topping out at over 10% in 2012/2013.
But this current six-month 2.9-percentage-point spike from 1.6% to 4.5% is the fastest six-month spike in Trepp’s data going back to 2000.
The mortgages – as we have seen in the current wave of defaults, including those where the landlord has just walked away from the property – are often variable-rate. Landlords liked variable-rate mortgages because they offer a lower interest rate, compared to fixed rate mortgages. And investors liked them because when rates go up, investors get a higher return, and the market value of the mortgage is largely protected.
But when rates go up a lot, as they have done since March 2022, the interest payments go up a lot, and by late last year, these interest payments began to double, and suddenly the building doesn’t pencil out anymore because rents, especially at office towers that are partially vacant, won’t cover the interest payments.
And then landlords might walk away and lose the equity. And CMBS holders end up with a defaulted mortgage and an office tower whose price at a sale will be far below the loan value. We have discussed the revenge of variable-rate office mortgages here.
And so even landlords – giant landlords such as private equity firm Blackstone and private equity firm Brookfield – have defaulted on the mortgages and then walked away from the property. They lose the equity in the property, and the lenders then have to sell the office tower for whatever they can get.
Meanwhile, there is growing evidence that consumers in the United States are feeling increasingly stressed by inflation and a weakening economy.
“Zero Hedge” (Source: https://zerohedge.com/markets/something-just-snapped-consumers-panic-search-pawn-shop-near-me) noted that online searches for “Pawn shops near me” have reached record highs:
Cash-strapped Americans are panic-searching "pawn shop near me." The search trend spiked to a record high at the start of July and is an ominous sign the consumer might be pawning items or selling things that were possibly bought during the Covid boom to raise quick money amid the worst inflation storm in a generation.
Let's begin by analyzing Google search data for "pawn shop near me." The search trend started surging in January and exploded higher in the last few months to record highs just days ago.
In past issues of “Portfolio Watch”, I’ve discussed that credit card debt is at an all-time high. This continues to be the case. This from “Business Insider” (Source: https://www.businessinsider.com/personal-finance/questions-should-you-get-credit-card-2023-6):
According to the Federal Reserve Bank of New York, credit card debt is at an all-time high. With inflation sticking around, credit cards are being used to bridge the gap consumers are feeling at the grocery store and the gas pump.
In response to this increased usage, credit card issuers are stepping up their offerings in anticipation of increased originations. TransUnion expects 14 million more credit cards to be issued in 2023 than 2019.
Could it be that there are now Americans who have maxed out their credit cards who are now financially desperate enough to be pawning personal property in order to make ends meet?
The data certainly seems to suggest that is the case.
Interestingly, despite record high levels of debt, banks are continuing to issue more credit cards. Why would banks issue 14 million more credit cards today than 4 years ago even though it’s obvious that consumers are in a weaker payback position?
Think it might have something to do with the taxpayer backstop that banks now enjoy?
The radio program this week features an interview with Mr. Jeffrey Tucker.
I interviewed Mr. Tucker about his recent article “Twenty Grim Realities Unearthed by Lockdowns” and got his take on what's happened to liberty and freedom in the US.
You can listen to the show in its entirety by clicking on the "Podcast" tab at the top of this page.
“Creditors have better memories than debtors.”