Lost in the developing cap-and-trade industrial train wreck (with the Rudd government trying to shame the rest of the country into following America’s foolhardy lead), no one is paying attention to the risk posed to asset values by deleveraging in the commercial real estate sector. Be warned!
Standard & Poor’s is preparing to downgrade some $235.2 billion of commercial mortgage-backed securities (CMBS), according to our friend Dan Ferris. When these downgrades occur, the banks and insurance companies that own this paper are going to have a big problem,” Dan says. “Prices are already down around 25% in the past year.”
Hmm. How do you think Australia’s banks and insurance companies would fare if a larger downturn hurt commercial real estate values? Do you think the bad loan cycle Cameron Clyne referred to yesterday might be even more vicious?
We do. Banks want to survive, of course. And they’ll do so by being more prudent about their lending. We’d also expect them to retain more earnings rather than paying them out as dividends. This means if you’re looking for dividend paying stocks, you may have to look harder.
But it’s all a process of repairing the corporate balance sheet to correct the lending excesses of the bubble. It’s happening at the household level too, with savings rates rising. This, by the way, is an ominous sign for economies that are based on consumption, like Australia, the U.K. and America. De-industrialising political policies seem to exacerbate the weakness of these economies (which are structurally vulnerable to begin with, but no one ever said politicians had the people’s best interests at heart. The political class has become a modern-day oligarchy, concerned only about its re-election and wealth preservation (often at the public expense).
Economist and Nobel laureate Edmund Phelps told Bloomberg this weekend that it may take as long as 15 years for households to rebuild what they lost in the recession. In America, that’s the $14 trillion in wealth (via shares and real estate) that’s been wiped off net worth since the bursting of the credit bubble. “The only way we’re going to get a healthy, full recovery is over a long period of time, involving households rebuilding their balance sheets…There’s no silver bullet that’s going to get us into good shape quickly.”
Check out the chart below, courtesy of our old friend Chris Weber. We are often asked how the Aussie dollar price of gold can go up when the Aussie dollar itself is getting stronger relative to the U.S. dollar. Chris shows that all currencies have been declining against real money since 2000. It’s a case of competitive devaluation.
In the case of the Aussie dollar, what’s good for Aussies touring abroad (a stronger currency) is not as good for manufacturers, who desire a weaker currency. “Since about 2001,” Chris writes, “whenever any currency rises too much, the local manufacturers or farmers – or anyone who lives by exporting – start to scream about it. Their local governments respond by doing all they can to lower the value of that currency, having it fall in value and thus making exports cheaper, all this in the hope that the domestic economy will become better.”
“Pick any period so far this young century and you’ll see how this is true. For instance, right now you see it in those countries whose currencies have soared the most in the last few months….As all the countries with unwanted strong currencies move to cheapen them by printing more money, slashing interest rates, or just ‘talking’ it down, the question remains, just what are those high currencies declining against?”
“If you answer, ‘against the currencies of their main trading partners,’ well, yes, this is true. But it is only temporary. If they are successful in this, then the trading partners don’t want their own currencies to go too high, so at some point they try to cheapen them.
“It has become an endless round-robin game, except to call it a ‘game’ is a little perverse. All holders of currencies suffer in the decline of the purchasing power of their money. You go lower, but then your partners go even lower, and then you have to cheapen your money yet more… It’s an endless cycle that really doesn’t help the world economy in the long run.”
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