Jared Bernstein was VP Joe Biden’s former Chief Economist and is now chair of the United States Council of Economic Advisers. Pretty impressive! Except that Bernstein is not really an economist. He has a PhD in social welfare from Columbia University. In other words, Bernstein is a Progressive Marxist cheerleader, not a real economist. Perfect for The Biden Adminstration where they installed a small town Mayor with no experience (Buttigieg) as Transportation Secretary.
BERNSTEIN: “Yes, it depends on what your benchmark is.”
Bernstein’s answer reminds me of the infamous reply of President Clinton about having sex in the Oval Office with Monica Lewinsky: “It depends on what the definition of sex is.”
Well, Jared, here is the data.
Since January 2021, regular gasoline prices are up 57% under Biden’s and Bernstein’s Reigns of Error. CRB Foodstuffs are up 55% under Clueless Joe and Diesel prices 50% under Bully Biden. Meanwhile, the Strategic Petroleum Reserves is DOWN -46% under Hidin’ Biden.
Meanwhile, the US Treasury 10Y-2Y yield curve has inverted to -102.45 as it does prior to a recession. I would love to hear “economist” Jared Bernstein explain that!
The Chicago Fed’s National Activity index fell to -0.32 in June. That is negative readings for 6 of the last 8 months.
The Fed still hasn’t removed its monetary stimulypto from the market.
No, this isn’t a John Kerry/Greta Thunberg hysterical warning about climate change. But a storm created by 1) Biden/Congress spending splurge and 2) excessive monetary stimulypto by The Federal (Feral) Reserve. Now that The Fed is withdrawing the excess stimulus, we are seeing a world of pain for commercial real estate. A financial climate change!
“We’re in a Category 5 hurricane,” Sternlicht said in an interview on June 28 taped for a July 25 release in an upcoming episode of Bloomberg Wealth with David Rubenstein.
Sternlicht warned, “It’s sort of a blackout hovering over the entire industry until we get some relief or some understanding of what the Fed’s going to do over the longer term.”
He explained the CRE downturn was sparked by the Federal Reserve’s sixteen months of aggressive interest rate hikes to tame inflation — and unlike past downturns — not due to reckless speculation.
Tighter credit conditions following the regional bank crisis in March have made refinancing existing buildings exceptionally hard for landlords and come as vacancies rise.
Sternlicht recalled that his firm tried to obtain a bank loan for a small property not too long ago. He said his staff reached out to 33 banks, and only two came back with offers.
According to Morgan Stanley, the elephant in the room is a massive debt maturity wall of CRE loans that totals $500 billion in 2024 and $2.5 trillion over the next five years.
As we’ve seen in San Francisco, the inability to refinance as some properties sustain rising vacancies will pressure landlords to sell properties or walk away from them.
Sternlicht said there’s a very real possibility of a “second RTC” event playing out, referring to Resolution Trust Corp., the government entity that led the effort to liquidate assets of the savings and loan associations that failed three decades ago.
“You could see 400 or 500 banks that could fail,” he said. “And they will have to sell. It also will be a great opportunity.”
Sternlicht launched his real estate firm during the era of RTC, purchasing multi-family units and flipping them to billionaire Sam Zell 18 months later for triple the price.
Sternlicht said the Federal Deposit Insurance Corp would likely begin offloading CRE loans on Signature Bank’s books, which failed in March. He said, “The government’s going to prop up the value of that portfolio by providing very cheap financing to it.”
* * *
Transcript of the interview:
David Rubenstein:
Sometimes people are saying that the best investment opportunity now is distressed real estate debt — that you can buy the debt from banks at a discount. But do you think it’s too early for that?
Barry Sternlicht:
You know, we were gonna give back an office building. And they said, “Well, not so fast. If you want to, we’ll restructure the loan. And we’ll cut the loan in half. And you put the money in here. And we’ll take this as a junior note.” Because the banks don’t want the assets back. They’re not set up to carry these assets. It’s not their business.
So you’re beginning to see stuff. We’re going to see this big trade of the [Signature] Bank portfolio. That’s going to be a benchmark for market.
David Rubenstein:
A lot of fortunes were made in the real estate world in’ 07-’08 when people bought distressed real estate. The late ’80s too, when the RTC was here. Do you see funds being formed to buy these assets? But you think they won’t be available for a year or two?
Barry Sternlicht:
Right now you have an unusual situation in the real estate markets because everyone’s sort of looking at the yield curve. And it says rates will be lower later. Everyone says, “You know, survive till ’25. Hold onto your assets.” So transaction volumes have plummeted.
Unless you have to sell something today, nobody wants to sell anything today. They think tomorrow will be rosier. So for the most part, everybody’s pushing any sales back. But what you’re seeing is when a loan is maturing and a borrower can’t cover the current debt service. Something’s gotta give. Unfortunately, we’re also a lender.
David Rubenstein:
Are we going to change the way office buildings are really valued in the future because tenants aren’t going to need as much space? Or do you think eventually the tenants will come back and the employees will come back?
Barry Sternlicht:
The work-from-home phenomenon is a US phenomenon. If you go to England or Germany, rents are up, and vacancy rates in the top German property markets — Berlin, Frankfort, Munich, Hamburg — are less than 5%. People are back in the office. You and I go to the Middle East, they’re full. We have offices in Asia, they’re full. So this is a US situation.
In the US you have two markets. The nice buildings will stay rented and my guess is at pretty good rates. And the B and C stuff is going to be — maybe fields of grain or something. It’ll be very pretty. We’ll have all these little mid-block parks in New York City because there won’t be anything else to do with those buildings.
The other thing about office is AI. AI is going to hit a couple of these industries that have been big users of office space. So that’s sort of a big question mark in the investment equation.
David Rubenstein:
Let’s suppose I’m an average person. Where should I put my money as an investor in real estate?
Barry Sternlicht:
High interest rates are depressing the number of single-family home units that have been built so now you’re having an ever-increasing scarcity of residential. Given the cost of construction, the whole residential complex — including single-families for rent, multi-family, the housing market, even residential land — I think they make interesting investment opportunities today.
David Rubenstein:
Is it a good thing for people to now invest in a real REIT?
Barry Sternlicht:
I think real estate has a nice place in the balance sheet of any individual. In the pandemic, we raised a special-situations fund and bought 15 names in the REIT business, and we were up, like 70% at one point. We’re going to do that again. And if you take a long-term view, some of these are good companies with the wrong interest-rate environment. I wouldn’t even say they have the wrong balance sheet, but they are so out of favor. There are some really good buys out there. So if you’re clever, you could buy some public REITs.
David Rubenstein:
What kind of return should an average REIT investor expect?
Barry Sternlicht:
In the mortgage REIT, Starwood Property Trust, we’re paying a 10% dividend. So you get that and any appreciation in the stock, and the stock’s currently trading below book value. It usually trades above book value. It used to trade at 1.23 times and now it’s trading at .9. So if it reverts, you’ll get a 15% return. We’ve averaged 11.3% over 10 years.
David Rubenstein:
Why should somebody want a career in real estate? Why is that a good business to be in?
Barry Sternlicht:
You’ve got to find niches, and there are a lot of niches in real estate. And it’s very micro, block by block. If I didn’t have my firm today, could I buy — even in a city like New York — and redo apartments and housing. I could make money doing that. I have a friend of a friend who’s bought 300 homes. He turned living rooms into bedrooms, put them all on Airbnb. He’s earning a fortune and using Airbnb as his distribution set. It’s a giant industry. There’s always something to do.
David Rubenstein:
You were based in the northeast part of the US for much of your career. You grew up in Connecticut, you were born in Long Island. But you picked up and moved to Miami. Why did you do that a few years ago? And any regrets about moving to Miami?
Barry Sternlicht:
Well, my mom’s down there. And I got divorced. That was one reason. Change your life, start over. There was obviously a tax benefit to doing so. And I had sold an interest in my firm at the time. I was based in Connecticut. I was based in Greenwich, our headquarters was there. I looked at my travel calendar in a normal year and I was only home for about a third of it. So I didn’t think it’d be that hard to move and make that my base of operations. It turned I caught the wave perfectly.
I was an early settler into Miami. And, you know, the home prices probably tripled there. I should have bought everything with my house. I would have had the best-performing real estate fund in the world.
David Rubenstein:
If your mother came to you and said, “I have $100,000. I need to invest it somewhere. Where should I invest it?” You would say where, real estate?
Barry Sternlicht:
Today if you look at my portfolio, I have a significant amount of cash that I never had before because I’m getting 5% for the cash. Pretty soon I’m going to just start deploying that capital when I can see the sun coming through the clouds of the Fed’s movement. When the Fed basically tells you they’re done, I think real estate will catch a very firm bid.
Greta Kerry? John Thunberg?? They are the same repeater, and non thinker.
Here the real (financial) climate terrorists!! Yellen and Powell.
I have never seen anything like this. The US Treasury 10Y-2Y yield curve is deep in inversion and has had a negative slope for 265 straight days. Bidenomics is born under a bad sign!
On the commodities front, heating oil is up almost 2% this morning and nickel (an important element in Biden’s green energy mandates) is up 1.78%.
On the crypto front, Bitcoin is up 0.47% and Dogecoin is up 5.58%.
You can always buy Kamala’s Own Word Salad Dressing!
When I see the faces of Alan Greenspan, Ben Bernanke, Janet Yellen and Jerome Powell, all I think of is …. the Minsky Moment brigade!
From Zero debt in 1776 to $21 trillion in 1997 and just in the last 4 years, debt has gone up by that same $21 trillion. This graph shows the debt explosion, a 63x increase.
And then we have Congress promising >$192 trillion in entitlements (wealth transfers) that will likley be added to the already >$32 trillion in Federal debt.
As The Federal Reserve is poised to continue it inflation-fighting crusade, the US economy is rapdily approaching DEFLATION. US Producer Price Index FINAL DEMAND fell to 0.1% YoY in June.
Bidenomics, the combination of insane monetary stimulus and insane directed Federal spending towards going green at all costs, is running out of steam. M2 Money growth was last measured to be -4% YoY and the US Dollar is down -8.2% since September 2022.
As Bidenomics (why Biden would brag about massive inflation in energy, food and shelter is beyond me), lurches forward, we have another shred of lousy economic news: US mortgage purchase demand fell -19% from the previous week and is how down -53% under Bidenomics).
Mortgage applications increased 0.9 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 7, 2023. This week’s results include an adjustment for the observance of Independence Day.
The Market Composite Index, a measure of mortgage loan application volume, increased 0.9 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 19 percent compared with the previous week. The Refinance Index decreased 21 percent from the previous week and was 39 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 2 percent from one week earlier. The unadjusted Purchase Index decreased 19 percent compared with the previous week and was 26 percent lower than the same week one year ago.
Yes, mortgag purchase demand is down a staggering -53% under Bidenomics (another word for the next best thing to Socialism which is Federal control of where the trillions are spent). Economic traffic led by The Keystone Kops.
Here is the rest of the data. Mark Zandi will look at the seasonally adjusted data, I look at the raw or non-seasonally adjusted data.
On a different note, I watch “Sound of Freedom” last night. A tremendous film highlighting the problem of pedophelia and child sex slavery in the US and Latin America. Very, very moving. Biden should be ashamed for cancelling Trump’s anti trafficking program.
I am anxiously waiting for the US inflation report tomorrow, so I am just looking at the US Treasury yield curve, mortgage rates and cryptos today.
The US Treasury 10Y-2Y yield curve stumbled (just like Biden and Bidenomics) to -91.166 basis points as the turnaround in M2 Money growth has stalled. Bankrate’s 30Y mortgage rate is up to 7.37%, that is UP 156% under Bidenomics.
Bitcoin is down today. At least Solana is up.
Since November 3, 2022, the US Dollar Index is DOWN -9.68%, Gold is UP 18.55% and Bitcoin (Elizabeth Warren’s latest obsession) is UP 51.11%.
The US has passed the 32 trillion mark in national debt, and is going much, much higher. More like 32 tons on the back of taxpayers. When we add unfunded liabilities like Social Security, Medicare and Medicaid, the tab soars to $224.5 TRILLION.
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.
There were 54 recorded corporate bankruptcy filings in June, unchanged from the 54 bankruptcies in May. Last month, some of the most notable companies to submit filings were Lordstown Motors, Rockport Co., Instant Brands Acquisition Holdings, and iMedia Brands.
“Lordstown Motors Corp. filed for bankruptcy June 27, with plans to restructure its business and seek a buyer, according to a company release. The electric vehicle manufacturer’s assets include its Endurance pickup truck and related resources,” S&P noted in the July 6 report.
“Instant Brands Acquisition Holdings Inc. also sought bankruptcy protection June 12. The tightening of credit terms and higher interest rates had impacted the company’s liquidity levels, according to an official release. The company has also already secured $132.5 million from existing lenders and plans to continue discussions with its financial stakeholders.”
Year-to-date through June, 15 companies with more than $1 billion in liabilities filed for bankruptcy, such as Cyxtera Technologies, Diebold Holding, Bed Bath & Beyond, Diamond Sports Group., and Party City.
Epiq Bankruptcy, a U.S. bankruptcy filing data provider, confirmed that 2,973 total commercial Chapter 11 bankruptcies were filed in the first half of 2023, up 68 percent from the same period in 2022.
Higher Interest Rates Impacting Businesses
Banking experts purport that higher interest rates are the leading cause of the increase in corporate bankruptcies. Many businesses either maintain vast debt loans that will require refinancing or need more liquidity to stay afloat.
“The increase in commercial and individual bankruptcy filings during the first half of 2023 underscores the economic challenges faced by businesses and individuals,” said Mr. Gregg Morin, Vice President of Business Development and Revenue at Epiq Bankruptcy, in the report. “Our objective is to provide bankruptcy professionals with timely and accurate data necessary for analyzing stakeholder volumes and trends for making informed business decisions.”
The situation could be exacerbated should the Federal Reserve pull the trigger on two more rate hikes this year. The futures market is penciling in a quarter-point boost to the benchmark fed funds rate at this month’s Federal Open Market Committee (FOMC) policy meeting.
Meanwhile, according to a recent Fitch Ratings report, the corporate default rate is projected to climb to as high as 4.5 percent in 2023, up from the previous forecast low of 2.5 percent. The updated projections reflected “the tighter lending conditions and capital access resulting from stress in the banking sector and inflation uncertainty.”
However, some argue that corporate bond market indicators are “less ominous.”
“The interest rate differentials, or spreads, between the 10-year U.S. Treasury note and investment grade (IG) and high yield (HY) corporate bonds continue to hover within their average width over the past 25 years, a bond market signal indicating the likelihood of a less severe recession, with traders pricing in fewer corporate defaults,” wrote John Lynch, the CIO at Comerica Wealth Management, in a research note.
Economists contend that the worst corporate bankruptcies typically occur one or two years into a recession. Today, they are happening before the official start of an economic downturn as the U.S. economy is still expanding.
What’s happening?
“Simple,” says Mr. Pete St. Onge, a Heritage Foundation economist, “banks aren’t lending.”
“Banks are battening down the hatches, hogging their bailout money instead of lending it out,” he said in a recent podcast. “That credit crunch means not only do we get bankruptcies like in any recession, on top of that, we get a lending wall that cuts off even the healthy businesses. Of course, their jobs go down with them.”
Since the Federal Reserve launched the Bank Term Funding Program (BTFP) following the Silicon Valley Bank collapse in March, financial institutions have kept tapping into these emergency lending facilities. After hitting a record high at above $103 billion at the end of June, it remains elevated at $102 billion.
32.5 trillion in debt and $192 trillion in unfunded liabilities which means a total of $224.5 total debt + liabilities.
This is Bidenomics. Spend trillions, borrow trillions, promise entitlements. Rinse, repeat.
Confounded Interest - Anthony B. Sanders 
You must be logged in to post a comment.