The Ugly Truth

The punch bowl is gone, the music is off and the lights are on - the party is over! Be it through massive inflation or crushing, systemic deflation - the result is the same: devaluation of the dollar.

Run On The US Dollar ... Soon

It's one of those numbers that's so unbelievable you have to actually think about it for a while...

Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion.

Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?

How did we end up with so much short-term debt? Like most entities that have far too much debt – whether subprime borrowers, GM, Fannie, or GE – the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then "rolling over" the loans when they come due. As they say on Wall Street, "a rolling debt collects no moss."

What they mean is, as long as you can extend the debt, you have no problem. Unfortunately, that leads folks to take on ever greater amounts of debt... at ever shorter durations... at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that's when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.

When governments go bankrupt, it's called a "default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists – Alan Greenspan and Pablo Guidotti – published the secret formula in a 1999 academic paper. The formula is called the Greenspan-Guidotti rule.

The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world's largest money-management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."

The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default.

The U.S. holds gold, oil, and foreign currency in reserve. It has 8,133.5 metric tonnes of gold (it is the world's largest holder). At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger.

According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we've been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months – an amount far larger than our reserves.

Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.

So... where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP.

Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or Russian central banks, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.

So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

One thing they're not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None owns even 1% of its total reserves in gold.

All of this is going to lead to a severe devaluation of the U.S. dollar... Which I expect to happen within 18 months. I examined these issues in much greater detail in the most recent issue of my newsletter, Porter Stansberry's Investment Advisory, which was published last week. Coincidentally, America's paper of record – the New York Times – repeated our warnings (nearly word for word) last weekend. Word is getting out.

If you haven't taken steps to protect yourself from the coming devaluation – like owning gold and silver bullion, foreign real estate, and farmland – make sure you do it soon. The dollar rout is coming.

Good investing,

Porter Stansberry

Living in Wonderland

Mike Shedlock picks apart Bernankes most recent op-ed at globaleconomicanalysis.blogspot.com and the full article can be read here.

Mike also provides this nifty chart that stood out to me for its simplicity, obviously made in excel in probably less than 10 seconds, to show how Ben Bernanke is living in Wonderland and asks the question of why are we still listening to this guy?

Ben apparently hasn't thought about what it means to target 2% inflation a year- the function is a parabola- Duh! (1+x)^t where x is the interest rate and t is time in years.

Gold For Bread

Weekend at Bernie's For the Dollar?

For those that missed the cult classic Weekend at Bernie's, it's a story of two hapless insurance executives that are forced to convince the world their boss, Bernie Lomax is still alive by carting around his corpse in order to escape from a web of fraud and danger.

Like Bernie, the dollar can only be propped up so long...

The Day the Dollar Died
by John Galt

November 18, 2009

The following story in italics is a potential fictional time line for the day the dollar died. I hope not to instill fear or loathing but to give everyone some perspective on a POSSIBLE outcome which does not really take much of a reach to come to any conclusion. Despite popular belief and promises from those who wish to rob you of your savings and investments, the collapse of the dollar might just be an event measured in hours, not days as their control is not what it seems…..

Mike was less than an hour from home in Minnesota after dropping his load off in Fargo but knew he needed to top his tank off this Sunday evening to insure his rig would make it home. He pulled into the Petro Truck Stop just outside of Fargo and hopped out of the cab into the bitter twenty below temperatures which he could not believe had already hit at ten o’clock at night. He slid his fuel card into the pump waiting for the next prompt when the “SEE ATTENDANT” message flashed in the screen. He blustered, figured it was another card problem and whipped out his Master Card and slid it in after the pump reset and again the “SEE ATTENDANT” message flashed up. “What the hell is going on?” he thought to himself as he wandered into the long line of drivers boisterously yelling at managers and clerks alike.

Tom finished up his shift on the docks at the Nestle warehouse in Hampton, Georgia at exactly 11 o’clock at night and decided that because of the scuttlebutt he had been reading on the message boards, it may not be a bad idea to pick up a few cans of food and some toilet paper at the local WalMart Super center. Even though it was a Sunday night, they were always stocked and it was just five minutes out of the way to his home. As he walked inside the store, his mouth dropped. It looked like the day after Thanksgiving sale with every register open and ten plus people deep at 11:30 p.m. “Oh my God!” he gasped as he walked in grabbing the last shopping cart with the wheel that was half locked up. As he walked as fast as he could to the aisle with the paper goods, he looked at all the shelves then noticed the clerk who looked stunned himself. “How in the SAM HELL does WalMart sell out of Toilet Paper son?” he screamed at the eighteen year old kid. “Sir, I don’t know what is going on. Is the world ending? I’m a little freaked out!” the clerk stammered. Tom realized that he was not to blame and as he calmed down said to the kid “Son, I don’t know what is going on either. It must be an ice storm on the way. Are you folks getting another truck soon?” The clerk said in a very low voice “Sir, I think there are two coming at 2 a.m. I would wait here if I were you.” With that information Tom slinked outside to his car and called his wife at home just before midnight to tell her he would be staying to wait on the WalMart trucks.

1730 ET…February 21, 2010

It was a typical Sunday night in my household, a tremendous dinner, nice weather in Florida and of course a chance to chat with my friends online about the events of the world. The big news was that on Friday, February 19, 2010 the US Dollar Index closed at 69.07 far below any level in history and of course shattering all known technical support. As I grabbed a glass of Port and settled in front of my computer at 5 p.m. Eastern to watch the Asian fireworks and watch Bloomberg and CNBC-Asia on my computer, I noticed the Middle Eastern markets closed in horrid shape. The Israeli market closed three hours after the open and down 22% for the session. The Saudi markets closed after one hour and down 41%. Other regional markets did not open or were shut down due to national emergency declarations. As I tuned in expecting the usual repeat on Bloomberg, it was live with a somewhat excited news babe reading information from a blog reporting “rumors” that the CEO’s of Citigroup and Bank of America were in meetings since 11 a.m. with the New York Fed. At that point, it was time to put the port up and break out the hard stuff.

Gold had closed at a record high again, up some $37 to finish Friday’s session up at $1289 and change so I figured it would be jumping again with all of this worldly instability on display. I searched the boards and feeds like mad, looking for anything on an Iranian attack or outbreak of war elsewhere in the world but nothing was found at all. As 6 p.m. Eastern flipped up on my watch, CNBC interrupted their programming with a live update from New York instead of Australia or Tokyo about the meeting at the NY Fed. Bloomberg also broke from their Asian coverage with a brief story but no details as to why there was a meeting today or who else was there. As the New Zealand markets opened, the prices went nuts but shockingly to the upside. Their markets shot up 11% on the open to break over the 3900 price level but that was not the story. As the futures opened in Chicago for the evening session, no matter where you were in the world that day or night, you printed that screen at 6:04 p.m. Eastern time as the prints were staggering:

Gold UP $212.15 to $1501.15

Silver UP $39.13 to $81.06

US DOLLAR INDEX DOWN 9.5869 or just over 14% to 59.4830

US S&P FUTURES DOWN 49.13

US DOW FUTURES DOWN 472

NASDAQ FUTURES DOWN 135

Holy Smokes! This was an absurd way to start the night and my phone started ringing along with text messages and emails out my wazoo. The sense of panic was evident on Bernie Lo’s face as he came on to the air discussing what was happening in the futures market and fortunately he announced that Jim Rogers would be joining him after the next break. As the commercial started at 6:09 p.m. Eastern the scroll at the bottom of the screen was bright red with the headline:

ALL U.S. EQUITY FUTURES ARE LOCK LIMIT DOWN…..TRADING SUSPENDED UNTIL 0900 ET MONDAY FEB 22….US DOLLAR BEING SOLD ACROSS THE BOARD

READ ENTIRE ARTICLE HERE

The Height of Excess & Waste

Dubai's imminent default isn't much of a shocker as The best-selling items were suitcases. At the rate of 5,000 a day, workers are heading home. Once, the world came to Dubai. Now all that's left of the World in Dubai is hundreds of empty islands.

A Five-Star Ghost Town at the End of 'The World'

I want to see the world," I told a boatman in Dubai Creek, and pulled out my map. He waved me on board his little wooden boat with no hesitation. I could have told him I wanted to sail up the river Styx, and he would have agreed. Times are tough in the Persian Gulf emirate, and my Bangladeshi boatman had spent hours chugging up and down the creek looking for a fare. It was his bad luck that his passenger appeared to be crazy.

"The World," I repeated. Again he nodded, this time rolling his eyes slightly. He tried distracting me, asking me if I wanted to visit the Ali bin Abi Taleb mosque or ogle the colossal white yachts lining the waterfront like beached Moby Dicks. I pointed out our route — down the creek to the harbor and into the Arabian Sea. There, three miles offshore, was a cluster of 300 man-made islands shaped like a map of the globe. Each was named after a country or a city. The massive archipelago stretched across six miles and supposedly had been constructed with more than 5,000 tons of coral, making it the largest artificial reef on the planet. "See?" I said. "This is the World."

The boatman shook his head madly. "Not possible," he muttered. With sign language — the universal drawing of the finger across the throat — he made it clear that no matter how much money I was offering (and frankly, it wasn't much), he wouldn't sail into the maze of islands. The World was a pet project of Dubai's ruler, Sheik Mohammed bin Rashid al-Maktoum, and it was patrolled by security guards in fast boats. Illegal Bangladeshi immigrants and nosy foreign reporters entered at their peril.

Depending on your point of view, the World is either the apex of mankind's ingenuity or a cautionary tale about the feverish excesses of Dubai's 21st century boom. Each island was selling for $15 million to $50 million, by invitation only: its developers were pitching the spits of land to tycoons, sportsmen and celebrities. But when Dubai's property market imploded last year, dropping more than 50%, cheeky headlines in the international press suggested that "the end of the World" had arrived. One dealer was quoted as saying that the multibillion-dollar project had been postponed "indefinitely."

In promotional materials, the World looks impressive: a scattering of computer-generated islands lush with palm trees and peppered with lavish hotels and villas. Brad Pitt and Angelina Jolie were supposedly interested in buying Ethiopia, although a representative for the couple later denied the deal. An Irish investor (who committed suicide in February, after his company went broke) planned to build a theme resort on Ireland; never mind that the gulf's extreme heat would turn a pint of Guinness into a bubbling black stew. Only one island, reportedly belonging to Sheik Mohammed, ended up occupied, its palms shading a large mansion. The 299 others are barren smears of sand. From his lonely vantage point in the eye of the World, the sheik, a horse-racing enthusiast and multibillionaire, recently waved aside Dubai's financial crisis — economists say the emirate is $80 billion in the hole — as a "passing cloud."

The World is one of many architectural fantasies in Dubai that now appear to be shimmering mirages. The emirate boasts the 2,684-ft. Burj Dubai, the world's tallest skyscraper; a man-made island shaped like a giant palm; a ski slope in a shopping mall; and an 18-hole golf course (unfinished) in the middle of the desert that will slurp down a million gallons of water a day. But the dozens of giant cranes that once littered the skyline have migrated elsewhere. Dubai today has the feel of a futuristic, five-star ghost town blasted by sandstorms.

With a relieved wave, the boatman let me off at a souk filled with Indians, Pakistanis, Filipinos and Yemenis — the immigrants who built Dubai and keep it ticking. But even there the mood was grim. The best-selling items were suitcases. At the rate of 5,000 a day, workers are heading home. Once, the world came to Dubai. Now all that's left of the World in Dubai is hundreds of empty islands.

Yuan devaluation in the cards

Albert Edwards believes a depreciating yuan is a black swan event, I disagree and believe that actually it is a high probability event coming as soon as the current cyclical inventory led GDP growth ends and contraction begins anew.

Civil unrest and fears of revolution are very palpable in an undemocratic China and the government there will do whatever is necessary to stay in power. This means keeping people employed and the Ponzi economy going.

This will be a very important part of what I believe is the coming final wave of deflation. Chinese companies will sell at losses to gain market share and keep factories running- think lower prices at your local Chinese store -Wal Mart.

Expect Yuan Devaluation Following Deep 2010 Downturn

"With everyone and their grandmother screeching that it is about time for China to inflate the renminbi, despite that such an action would be economic and social suicide for the world's most populous country, SocGen's Albert Edwards once again stalks out the Black Swan in left field and posits the contrarian view de jour: China will aggressively devalue the yuan following a deep 2010 downturn coupled with escalating trade wars. As Edwards says: "I think the next 18 months will see major ructions in the financial markets. The consequences of a double-dip back into recession next year require some lateral thinking. If the carry trade unwind results in a turbo-charged dollar, any collapse in the China economic bubble will be doubly destructive to commodity prices. A surging dollar, coupled with China moving into sustained trade deficit through 2010, could prompt the Chinese authorities to acquiesce to US pressure for a more flexible exchange rate. But why does no-one expect a yuan devaluation?"

Read full article here.

Parabolic Debt Will Have Parabolic Consequences

par⋅a⋅bol⋅ic
1  /ˌpærəˈbɒlɪk/ Show Spelled Pronunciation [par-uh-bol-ik] Show IPA

–adjective
1. having the form or outline of a parabola.
2. having a longitudinal section in the form of a paraboloid or parabola: a parabolic reflector.
3. of, pertaining to, or resembling a parabola.

$4.8 trillion - Interest on U.S. debt
Unless lawmakers make big changes, the interest Americans will have to pay to keep the country running over the next decade will reach unheard of levels.

NEW YORK (CNNMoney.com) -- Here's a new way to think about the U.S. government's epic borrowing: More than half of the $9 trillion in debt that Uncle Sam is expected to build up over the next decade will be interest.

More than half. In fact, $4.8 trillion.

If that's hard to grasp, here's another way to look at why that's a problem.

In 2015 alone, the estimated interest due - $533 billion - is equal to a third of the federal income taxes expected to be paid that year, said Charles Konigsberg, chief budget counsel of the Concord Coalition, a deficit watchdog group.

On the bright side - such as it is - the record levels of debt issued lately have paid for stimulus and other rescue programs that prevented the economy from falling off a cliff. And the money was borrowed at very low rates.

But accumulating any more interest on what the United States owes at this point is like extreme sport: dangerous.

All the more so because interest rates will rise when private sector borrowers return to the debt market and compete with the government for capital. At that point, the country's interest payments could jack up very fast.

"When interest rates rise even a small amount, the interest payments go up a lot because of the size of the debt," Konigsberg said.

The Congressional Budget Office, which made the $4.8 trillion forecast, already baked some increase in rates into the cake. But there is always a chance those estimates may prove too conservative.

And then it's Vicious Circle 101 - well known to anyone who has gotten too into hock with Visa and MasterCard.

The country depends heavily on borrowing to fund what it wants to do. But the more debt it racks up, the more likely it becomes that creditors could demand a higher interest rate for making new loans to the government.

Higher rates in turn make it harder to pay off the underlying debt because more and more money is going to pay off interest - money, by the way, which is also borrowed.

And as more money goes to interest, creditors may become concerned that the country can't pay down its principal and lawmakers will have less to fund all the things government is supposed to do.

"[P]olicymakers would be less able to pay for other national spending priorities and would have less flexibility to deal with unexpected developments (such as a war or recession). Moreover, rising interest costs would make the economy more vulnerable to a meltdown in financial markets," the CBO wrote in its most recent long-term budget outlook.

So far, that crisis of confidence hasn't happened. And no one can predict with any certainty whether or when it could occur.

But should it occur, the change could be abrupt.

That's because the government frequently rolls over - or refinances - the debt it has issued as it comes due.

In other words, when a Treasury bond or note matures, the government must pay the investor the face value on that debt. In order to do that, the Treasury borrows money to pay back the investor, which means the debt would be refinanced at whatever the going interest rates are at the time.

Just how much churn is there? Of late, a fair bit it seems. A Treasury borrowing advisory committee reported in early November that "approximately 40 percent of the debt will need to be refinanced in less than one year."

Since rates may well stay low over the next year, it's possible that debt could be refinanced at the same or even lower rates. But that situation won't last forever.
So what will Washington do?

To help mitigate the potential risk of rising rates, the Treasury has said it would start increasing the average maturity of the new debt it issues. That way the debt it refinances in the next couple of years will be locked in at lower rates for longer periods of time.

And the Obama administration has promised to produce a deficit-reduction plan that would aim to bring down annual deficits to roughly 3% of GDP over the next several years, below the 4% to 5% currently projected.

Silverdome Sells for Less Than House

The real story here is that foreign money is reinvesting in Detroit. This is a trend which will be going supernova on a national scale in the near future. Unlike 2004-2007 this will not be a bubble but a skimming off the top of assets for pennies (fraction of pennies) on the dollar. In the 1980s there was concern over the Japanese buying iconic buildings like the Rockefeller Center in New York - today, Americans are too broke to care and too clueless to understand what this means...that capital has and will continue to flee this country and will not return until the standard of living is SIGNIFICANTLY lowered. When the capital does return, Americans will be working in factories owned by offshore corporations.

Silverdome Sells For ... Less Than a House

Unidentified Toronto-based real estate company buys Pontiac stadium for $583,000 - a fraction of the $55.7 million it cost to build.

NEW YORK (CNNMoney.com) -- An unidentified Canadian real estate company was the winning bidder for the Silverdome, snatching it up for a mere fraction of its original value.

A Toronto-based family-owned company bid $583,000 for the under-used stadium on Monday, which is currently owned by the City of Pontiac, Mich., according to auctioneer Williams & Williams.

The company plans to refurbish the Silverdome into a stadium for men's Major League Soccer and women's professional soccer teams, said the auctioneer. While the stadium was the former home of the National Foodball League's Detroit Lions, it also played host to the World Cup in 1994, when Brazil beat Italy in a knuckle-biter that ended in a penalty shootout.

The auctioneer Williams & Williams, based in Tulsa, Okla., said it will not identify the buyer "until the final details are worked out and the sale closes."

"The Silverdome will now be in the hands of professionals who can devote their time to transform this high-profile property into a vital asset instead of enabling it to continue to languish as an empty facility," said Fred Leeb, the emergency financial planner for Pontiac, in a press release.

READ ENTIRE STORY HERE

Mauritius Picks Up Gold

$1,000 seems so long ago - is paper deteriorating THAT quickly?

Mauritius Buys IMF Gold, Follows India as Metal Soars to Record

By Sandrine Rastello and Kim Kyoungwha

Nov. 17 (Bloomberg) -- Mauritius followed India buying gold from the International Monetary Fund, prompting renewed speculation that other central banks will bolster their holdings as the precious metal trades near a record and the dollar slumps.

The Bank of Mauritius bought 2 metric tons for about $71.7 million, said the Washington-based agency, which plans to sell a total of 403.3 tons to shore up its finances. The Reserve Bank of India paid $6.7 billion for 200 tons earlier this month.

Gold has surged 29 percent this year as the dollar declines and investors seek to protect their wealth. Evy Hambro, who helps to manage BlackRock Investment Management Ltd.’s $11.6 billion World Mining Fund, said yesterday there will be renewed interest in gold from holders of reserves.

The purchase is “another signal that emerging-market central banks are looking to increase their foreign-exchange allocation in gold,” said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. Calls by Bloomberg News to Mauritius’s central bank went unanswered this morning.

Gold for immediate delivery, headed for a ninth annual gain, touched an all-time high of $1,143.60 an ounce yesterday. The metal, which traded at $1,137.54 at 10:48 a.m. in Singapore, had become the “ultimate currency,” Gijsbert Groenewegen, a partner at Gold Arrow Capital Management in New York, said yesterday.

The sale to Mauritius was based on market prices on Nov. 11, the IMF said in an e-mailed statement yesterday. Spot gold traded between $1,105.66 and $1,118.88 an ounce that day, according to Bloomberg data. The IMF has said it is ready to sell directly to central banks and later make transactions on the open market if necessary.

‘Viable Option’

“There are a lot of uncertainties in the U.S. dollar and not much confidence in other currencies either,” AMP Capital Investors’s Oliver said from Sydney. “Gold is a viable option.” The Dollar Index, a six-currency gauge of the dollar’s value, was little changed today near a 15-month low.

Asian nations, which have amassed stockpiles of foreign currency reserves since the 1998 financial crisis, have shown increased interest in diversifying out of U.S. assets.

The Federal Reserve has cut borrowing costs to an all-time low while the U.S. government boosted spending to a record to combat recession in the world’s biggest economy, fueling speculation that the currency will be debased.

China, the biggest gold producer, has increased gold reserves 76 percent to 1,054 tons since 2003 and has the fifth- biggest holdings by country, Hu Xiaolian, head of the State Administration of Foreign Exchange, said in April.

The world’s most populous nation may buy some of the 403.3 tons being offered by the IMF, Market News International said in September, citing two unidentified government officials.

Commercial Real Estate Implosion

Extend and pretend...a rolling stone gathers no moss and a rolling loan gathers no loss. The banks, the reits, the sovereign wealth funds, the insurance companies and everyone else living by these ideas and involved in the commercial real estate industry are living in denial. Owners that are 50% underwater still refuse to sell in hopes of a change of fortune in the near future because the banks are simply not writing down the losses.

There is a way out of this - if prices continue to rise then the losses can be avoided. The problem is you rob a whole lot of Peters to pay just a few Pauls.

If You Thought The Housing Meltdown Was Bad...

By Doug Hornig, Senior Editor, Casey Research

…wait until you see what’s in the cards for commercial real estate.

That’s right, the next train wreck will be in commercial real estate. Couldn’t be worse than last year’s residential market crash? That remains to be seen. But it’s coming soon, probably as early as the second quarter of next year, and there’s nothing that can prevent it. The government will intervene, trying desperately to delay the day of reckoning, and may even succeed. For a while. But make no mistake about it, that train is going off the tracks no matter what.

Every part of the sector – from multifamily apartment buildings to retail shopping centers, suburban office buildings, industrial facilities, and hotels – has accumulated a huge amount of defaulted or nonperforming paper. It’s an impossible, swaying structure that cannot long stand.

Just ask Andy Miller.

Andy is one of the most knowledgeable people around when it comes to commercial real estate. Co-founder of the Miller Fishman Group of Denver, he has spent twenty years buying and developing apartment communities, shopping centers, office buildings, and warehouses throughout the country. He’s also worked extensively – especially lately – with asset managers and special servicers (those who handle commercial mortgage-backed securities, or CMBS) from insurance companies, conduits, and the biggest banks in the U.S., advising them on default scenarios, helping them develop realistic pricing structures, and making hold or sell recommendations.

It isn’t easy. Commercial real estate sales are off a staggering 82% in 2009, compared with 2008, and last year was worse than ’07. No one is selling at depressed prices, but it hardly matters as there are no buyers, either because they’re afraid of the market or can’t meet more stringent loan requirements. Two years ago, the value of all commercial real estate in the U.S. was about $6.5 trillion. Against that was laid $3-3.5 trillion in loans. The latter figure hasn’t changed much. But the former has sunk like a bar of lead in the lake, so that now between half and two-thirds of those loans will have to be written down, Andy estimates.

“If the banks had to take that hit all at once, there wouldn’t be any banks,” he says.

READ ENTIRE ARTICLE HERE

China's Empty City

"Nobody's ever really lost money, in real estate, in China."

Sounds familiar doesn't it?

I thought it was impossible to spot asset bubbles in the forming...

On Macy's

GREAT NEWS! Macy's only lost $35 million last quarter instead of $44 million previously. All sarcasm aside, the entire organization is a disaster from it's CEO down to the sales people at every store. The products are tired, the atmosphere is depressing and the shopping experience is discombobulated as there is no flow between sub-departments in department stores for the modern consumer. The idea of tailoring each store to it's surrounding area is a pure pipe dream. These people can't hit the middle of a bell curve if their life depended on it in regards to consumer satisfaction and they are going to make hundreds of different shopping experiences across the country?

The problem with the retail industry and commercial real estate as a whole, is that it is lead by business school droids that base their decisions on motivational books and what Jack Welch wrote about in the 1990s. If you talk with one of their executives, they will pop out a pyramid competency chart (with them on top, go figure!) and talk about the "secrets of success." There is zero creativity and a feeling of entitlement that would make the English royalty proud.

Macy's Loss Narrows; Fourth-Quarter Outlook Falls Short

By Andria Cheng, MarketWatch

NEW YORK (MarketWatch) -- Macy's Inc. reported Wednesday a third-quarter loss that narrowed more than expected, helped by its "My Macy's" initiatives to tailor merchandise to local demand and by improved results for its upscale Bloomingdale's chain.

The company /quotes/comstock/13*!m/quotes/nls/m (M 18.28, -1.15, -5.92%) said the results gave it confidence about prospects for the holiday selling season. Still, while management raised full-year sales and profit outlook, its fourth-quarter targets came up short of Wall Street expectations.

Macy's shares dropped 4.3% in pre-market trading.

The loss of $35 million, or 8 cents a share, for the three months ended Oct. 31 compared with a loss of $44 million, or 10 cents a share, in the year-earlier third quarter.

Quarterly sales fell 3.9% to $5.28 billion, with same-store sales decreasing 3.6%. Online sales shot up 21%.

Excluding division-consolidating and other restructuring costs, the company said it would have lost 3 cents a share. Analysts, on average, had estimated Macy's would lose 7 cents a share on sales of $5.28 billion, according to the consensus of estimates compiled by FactSet Research.

Macy's sees fourth-quarter same-store sales to be down 1% to 2% and pegged per-share profit excluding items in a range $1 to $1.05 a share. Analysts' consensus stands at $1.13 a share, according to FactSet.

Layoffs Continue to Roll In

No jobs...no consumer...no recovery.

Electronic Arts to Cut 1,500 Jobs After Latest Loss

By Adam Satariano

Nov. 9 (Bloomberg) -- Electronic Arts Inc., the second- largest video-game publisher, plans to cut 1,500 jobs as Chief Executive Officer John Riccitiello battles shrinking industry sales that have contributed to 11 straight quarterly losses.

The maker of “Madden NFL” reported its second-quarter loss widened to $391 million, or $1.21 a share, from a loss of $310 million, or 97 cents, a year earlier, according to a statement today. Excluding some items, Redwood City, California- based Electronic Arts posted profit of 6 cents, missing the 10- cent average estimate of 18 analysts surveyed by Bloomberg.

Sprint to Lay Off Over 2,000 Before The Year Is Up

By Matthew DeCarlo, TechSpot.com
Published: November 10, 2009, 9:30 AM EST

After reporting a third-quarter loss of $478 million and 545,000 customers, Sprint plans to let go between 2,000 and 2,500 people -- about 6% of its 42,000-strong workforce -- by the end of this year. The company expects the job cuts to reduce annual expenses by $350 million, and it will dole out $60 million to $80 million in severance payments during the fourth quarter.

The layoffs will affect positions across the entire company, including its wholesale unit and even contractors. The carrier said it would be careful to ensure that the restructuring doesn't impact its recently improved customer service record.

When Sprint's current CEO Dan Hesse took over in late 2007, poor service was a common complaint among customers. Support has improved so drastically in the last two years, however, that the company has discontinued using 27 call centers.

RealNetworks to Lay Off 4 Percent

The Seattle area is going to get another jobless jolt Thursday, with RealNetworks planning to lay off 4 percent of its workforce, sources said.

That's a small number--just about 70 people out of its 1,700-person staff--but the move comes on the heels of layoffs of another 800 employees at nearby Microsoft on Wednesday. The software giant has cut thousands of jobs over the last year, part of a move to eliminate 5,000 positions by mid-2010.

While the dismissals--which are likely to be announced to affected RealNetworks employees sometime Thursday morning by managers--will be global, both RealNetworks and Microsoft are tech leaders with headquarters in the Pacific Northwest.

The Golden Dragon

Survival of the fittest - learn, adjust and evolve.

How and Why China Will Flood the Gold Market

Jeff Clark of Casey Research writes: As you read this, the Chinese government is doing an extraordinary thing... something nearly unheard of in the modern world.

It is encouraging citizens to put at least 5% of their savings into precious metals.

The Chinese government is telling people gold and silver are good investments that will safeguard their wealth. After last year's meltdown in the stock market, people believe it. After all, Chinese citizens don't receive government retirement money... and they don't have company pension plans like people in many other countries do.

This is why folks in China are lining up outside of banks, post offices, and the new official mint stores to buy gold and silver (they especially like silver because it's cheaper per ounce).

The Chinese attitude toward gold and silver is a striking contrast to the American attitude right now. I don't recall a TV or radio ad from my congressman or President Obama encouraging me to buy gold or silver. Does your bank sell silver bars? Are gold mints popping up in your neighborhood? Are any of your friends, family, or coworkers scrambling to buy precious metals?

In spite of a few ads on television and satellite radio, buying gold and silver in the U.S. is still largely seen as a fringe-group activity. That's not the case in China. And in the big picture, there are three distinct trends occurring in China today that many in the Occidental world are not paying attention to.

First, look where China stands as a gold-producing nation.

In 2008, China produced 9,070,000 ounces of gold, exceeding all other countries. Further, its production continues to rise, while many of the top-producing countries are in decline.

Second, China had the lowest per-capita gold consumption of any country over the past half-century. This year, it is widely expected that Chinese demand for gold will surpass that of India. In other words, they'll also become the world's No. 1 retail buyer.

Third, the Chinese government has been using its foreign exchange reserves to buy gold – a lot of it – and doing so on the sly. This past April, Chinese officials made a surprise announcement that they had been secretly buying gold since 2003, increasing their gold reserves by 76% to 33,886,000 ounces. The Chinese government now owns 30 times the gold it held in 1990. And China is believed to be a leading candidate to buy some or all of the 12.9 million ounces the International Monetary Fund says it will sell.

But all this production and all this buying isn't enough...

Even though China is the world's seventh-largest holder of gold, gold comprises but a tiny fraction of its reserves, as shown in the table below.

What would happen to the gold price if China increased its gold reserves to just 5%? What about 10%? To overtake the U.S. as king of the gold hill, it would have to buy all the gold held by the governments of France, Italy, and Germany combined. Can China really do any of that?

At $1,000 gold, to push China's gold holdings to 5% of reserves would take $55.3 billion; to 10% would cost $144.4 billion; to be the world's top gold dog would run $227.6 billion.

Chinese reserves are approaching $2.3 trillion, of which almost 70%, or $1.6 trillion, are denominated in U.S. dollars. The cost to become the world's biggest holder of gold would be a pittance compared to the amount of money China has available. In other words, money is not a problem.

Combining the country's massive holdings of dollars and the very real likelihood those dollars are going to lose much of their value, the motivation to buy tangible assets is urgent.

Further, keep this in mind: China's reserves continue to grow. Therefore, the country must continue buying gold (or consuming its own production) just to maintain the small gold-to-reserves ratio it has, let alone increase it.

In addition to the government buying precious metals, Chinese citizens will continue gobbling them up, too. Demographics alone tell us why.

Government statistics show the average urban household in China has about US$1,300 in disposable income. Multiply that by the number of urban households in China and you come up with roughly $36 billion in available capital.

According to precious metals consultancy CPM Group, about 9.5 million ounces of gold will be turned into coins this year (including "rounds" and medallions). At $1,000 gold, that's $9.5 billion, or only about one-third of the capital available in China.

The number is more striking for silver: Total coin production this year is expected to hit 35 million ounces, equaling $615 million or just 1.7% of the available capital in China. Of course, a lot of Chinese people want cars and refrigerators, etc., but it won't take much of a shift of this capital into gold and silver to have a major impact on the global retail precious metals market. It may already be under way.
And long-term projections show the demographic trend won't slow down: The middle class in China is expected to increase by 70% by 2020. So over these next 10 years, more Chinese and more money will be coming into the precious-metals markets, all at a time when inflation is almost certain to be high, adding to gold and silver's appeal. Couple this with China's long-standing cultural affinity for gold and you have the makings for a potentially life-changing gold rush.

If I were a crime detective, I'd say China has the motive, means, and opportunity to push gold and gold stocks much higher.

READ ENTIRE ARTICLE WITH GRAPHS HERE

The Dawn of the Dead Malls

George A. Romero, best known for his groundbreaking "Night of the Living Dead", released a little known sequel in 1978 titled "Dawn of the Dead" (remade in 2004). Lost to many in this cult classic is the scathing social commentary in the film on then contemporary America's addiction to consumer goods and it's unwillingness to face danger head on by remaining in a catatonic state of denial.

In the film, the loan survivors' flight away from the growing zombie presence lands them in a super regional shopping center, chocked full of all the material goods they could have ever wanted. Unfortunately, innate in the zombies is this same desire. When asked by a compatriot why thousands of zombies are lining up outside the mall doors and fighting for a more favorable position of entry, the hero answers "Some kind of instinct. Memory, of what they used to do. This was an important place in their lives. They're after the place. They don't know why, they just remember. Remember that they want to be in here". Unfortunately for the survivors, they become lulled into complacency by their surroundings setting in stone their fate and became zombies in their own right.

Dawn of the Dead is as relevant today as it was in the 1970s, however, more and more malls are being over run by zombie retailers and mass vacancies as consumer spending has gone beyond zombie and right into the grave. The fall of the mall has become a bit of a cult/pop culture phenomenon and is tracked on websites like Dead Malls.COM


So why do these malls fail, why do they sit vacant?

A BRIEF HISTORY

After the second world war, urban sprawl took hold of America as automobiles became obtainable for the average family and gas remained cheap. With this, there was a dire need for consumer goods in the new communities and equally as desperate a need for sales by the major department stores as their target demographics moved out of the big cities.

Building on this trend, the first regional shopping centers were erected in suburbs which had access to multiple jurisdictions that were home to "target demographics" - middle class families with disposable income. These locations were painstakingly chosen and designed so as to be centrally located to the maximum number of consumers within a 25 mile radius (later regional gave way to super regional centers with a 50 + mile draw).

These regional and super regional centers flourished throughout the 60s, 70s and 80s and were cash cows for anchors which would co tenant these developments. Sears, JC Penney, Marshall Field's and Macy's peacefully co existed in each project, typically drawing in different types of consumers. These mega stores brought in millions of visitors per year and drove high foot traffic numbers for specialty retailers inside the mall which would augment and complement the selection of goods offered by the anchors.

In the background, the consumer had begun to feel the squeeze in the late 1970s and early 1980s with decreased purchasing power of their dollars, high inflation and a severe recession. This caused a paradigm shift in the culture and a gradual move towards value...which would have come much sooner should the access to credit not have been made so easy.

Wal-Mart and like discounters began to emerge in the mid 1980s in blue collar, rural towns having a dramatic impact on the super regional centers and their sales. Complementing the drive to value, consumers now had the option of driving fewer miles and hitting a "one stop shop" to take care of all of their shopping needs.

The impact of this became dramatic when traditional mall main stays like Montgomery Ward and Service Merchandise went bankrupt in the early 1990s and others followed into the new millennium.

After the tech crash of 2001, the US economy was flooded with cheap credit and skyrocketing real estate/asset prices...the struggling retail sector boomed one last time and the retail footprint per person in the United States expanded to 20...almost 700% more square feet per person than Europe's highest retail square feet per capita of 3 in Sweden.

TODAY

In 2009 the largest department stores in the United States are Macy's, Sears and JC Penney - the last survivors with the specialty retailers that typically accompany them in regional malls barely hanging on as well (when was the last time you bought a $25 dvd/cd at FYI?).

The same problems of the late 1970s and 1980s bog down the consumer's ability to buy and the department stores find themselves losing more and more customers to off mall concepts such as Wal-Mart, Target and Costco with better prices and accessible locations.

The retail industry's problems have spread like a pandemic and now impact strip and power centers across the country.

WHY RETAIL VACANCY CAUSES A CHAIN REACTION

Co tenancy clauses came into vogue in the 2000s when the credit of tenants became more and more important for property owners. Unlike in years past, large, leveraged buyouts of private real estate companies created mega REITs which focused on national, "credit" tenants to improve the appearance of stability in their rent rolls. This helped them obtain favorable financing and the ability to create class A retail assets which could be packaged and sold to every type of investment company imaginable - even funds like TIAA-CREF that placed retirees' money into what was supposed to be rock solid, low risk investments.

The competition for the best tenants in competing malls and retail projects heated up and some tenants were able to grab the upper hand on landlords through favorable lease terms including "co-tenancy" clauses that spelled out rent reductions as drastic as 50-75% or even the ability to terminate the lease all together should other tenants leave the project/go out of business. At the time, these were easy promises to make as the boom seemed like it would never end.

The first wave of bankruptcies in 2008 took out major retailers like Circuit City, Linen's & Things and Steve & Barry's creating opportunities for others to opt out of their commitments should they choose to - dependent upon each lease. Many of the closures that result from co tenancy clauses are public - but the reasoning is not. Limited Brands, Chico's and GAP are all brands that typically built these clauses into their leases and recently exercised them and will continue to do so without the public knowing why.

For more on this concept, please read Co-tenancy Clauses Push Shopping Center Owners Toward Bankruptcy

ZOMBIES AT THE GATES

The REITs and landlords are 1-2 major bankruptcies from losing substantial numbers of their tenants without penalty and a total collapse of the industry. This cannot be understated - if a chain like Macy's were to go bankrupt and close even 25% of their stores they will unleash a chain reaction of co tenancy outs and outright closures of other stores that lose the foot traffic of anchors. The malls will be worth less than ZERO because they will carry high debt payments, millions in litigation against tenants and hefty common area maintenance/insurance and tax bills.

Like the zombies in Dawn of the Dead, the malls, REITs and retailers may be operating on instinct now but are already dead. The lesson we can all take here is to be proactive instead of reactive - anticipate the problem ahead and brace for another major shock from real estate to come.

US Commerce Secretary: Stimulus 2.0 Under Consideration

Which is more naive? To believe that the economy is recovering or that another stimulus may actually work? I guess that's why they call it survival of the fittest - those who cannot evolve and learn from mistakes will be eliminated by nature (the market).

The myth that intervention and quantitative easing positively impact a macro economy (not micro - individuals/corporations may do well) is dead. So too will the currency be if there is another stimulus package - although it may be irreversibly damaged already. Skip to the last 50 seconds for his details on the administration's consideration of a second stimulus. Bloomberg followed this report up with a "correction" from Locke's staff that he misspoke...riigggghhhhhhttttt. Sounds pretty clear to me but you listen for yourself.

Gold Up, Long Way to go

Gold, up today to an all time nominal high of $1,081 + (and rising) is still less than half of it's inflation adjusted high from 1980 of $2,000 +.

Because of the confidence in the dollar as the world reserve currency, it's role in pricing oil contracts and general acceptance everywhere like it was Visa ("everywhere you want to be")- currency integrity was taken for granted.

As that confidence continues to erode in harmony with the greenback's parabolic increase in supply, the price can no longer be effectively manipulated for more than short periods of time by paper exchanges which create derivative contracts on fractional reserves of physical, hard assets.

Gold can come down in a nominal value, but expect it's purchasing power to increase (takes fewer ounces of gold to purchase the DJIA).

India purchasing 200 tons from the IMF is a screaming siren alerting the world that the trend of purchasing metals is here to stay.

Those who do not acquire physical gold and silver and hold it in the palm of their hand in the very near future may lose both the opportunity to do so and a substantial portion of their wealth on a time line of now to two years.

“Gold is the ultimate currency. In fact, only gold came to our rescue during (the) 1991 crisis, so it makes sense that RBI should try to increase its gold holdings.”

RBI To Buy 200 Tonnes of IMF Gold

Mumbai: The Reserve Bank of India, or RBI, is buying 200 tonnes of gold from the International Monetary Fund (IMF), nearly half of what the fund plans to sell.

In 1991, when India faced its worst ever balance of payment crisis, the country had to pledge 67 tonnes of gold to Union Bank of Switzerland and Bank of England to raise $605 million (Rs2,843.5 crore today) to shore up its dwindling foreign exchange reserves, which were then barely enough to buy two weeks of imports. India’s foreign exchange reserves were at $1.2 billion in January 1991 and by June, they were depleted by half. Currently, the Indian central bank’s foreign exchange reserves stand at $285.5 billion.

RBI’s decision to shore up its gold reserves needs to be seen in the context of other central banks across the globe increasing their gold reserves. Among them are the central banks of China, Russia and a few countries in the European Union.

In the last one year, China has increased its gold holdings, by weight, by 75.69%, Russia by 18.78%, the Philippines by 18.50% and Mexico by 108.91%.

Compared with this, India’s central bank did not add anything to its gold reserves in the last one year, according to Bloomberg data.

In fact, the share of gold in India’s total reserves has dwindled over the decade.

In March 1994, the share of gold in the total reserves of the country was 20.86%; by the end of June 2009, gold constituted only 3.7% of the total reserves.

An IMF spokesperson in India declined to comment on this development.

RBI’s foreign currency assets consist mainly of sovereign bonds, mainly US treasurys. So, buying more gold will help the Indian central bank diversify its assets.

“Gold as a proportion of our reserves is relatively small,” said R.H. Patil, chairman of National Securities Depository Ltd and Clearing Corp. of India Ltd.

“Gold is the ultimate currency. In fact, only gold came to our rescue during (the) 1991 crisis, so it makes sense that RBI should try to increase its gold holdings,” Patil said.

RBI’s foreign exchange reserves consist of foreign currency assets, gold, special drawing rights (SDR)—an international reserve currency floated by IMF—and RBI funds kept with IMF.

Out of RBI’s $285.5 billion foreign exchange reserves, foreign currency assets account for the most—$268.3 billion—followed by gold ($10.3 billion), SDR ($5,267 million) and reserve position in the IMF ($1,589 million).

According to RBI’s latest annual report, the foreign currency assets consisting of foreign securities declined by Rs81,010.25 crore from Rs12.98 trillion on 30 June 2008 to Rs12.17 trillion on 30 June 2009 mainly due to net sales of dollars in the domestic foreign exchange market.

At the current market value of $1,054 an ounce, or per 28.5g, RBI would need to spend about $7.4 billion to buy 200 tonnes of gold. With this, its gold reserve will rise to $17.716 billion, or roughly 6.20% of the total reserves.

IMF in September had announced that it wanted to sell 403 tonnes of its gold reserves, or one-eighth of its total holdings, to boost its finances on a long-term basis and to generate money to raise lending to needy nations. Under the concessional lending facility, IMF will lend at zero interest through end-2011 for all low-income members to help them tackle the impact of the financial crisis that rocked the world in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc.

A committee set up by a group of central banks overseeing the gold sales by the IMF has allowed the fund to sell 400 tonnes of its gold annually and 2,000 tonnes in total during the five years starting 27 September.

According to a report by the Associated Press dated 20 September, India, along with China and Russia, had evinced interest in buying IMF-held gold.

At a total holding of 103.4 million ounces, or 3,217 tonnes, IMF is the third largest official holder of gold after the US and Germany.

IMF’s total holding at historical price is valued at about $9.2 billion on its balance sheet. At market prices, as of 28 August, the fund’s gold holdings were worth $98.8 billion.

Traditionally, India has been the largest importer of gold, with imports ranging between 400 and 800 tonnes a year between 2000 and 2008. In the first half of 2009, gold imports have fallen drastically to 51 tonnes, according to the country’s apex bullion body the Bombay Bullion Association.

According to a fact sheet on gold on the IMF website, the yellow metal played a central role in the international monetary system until the collapse of the Bretton Woods system of fixed exchange rates in 1973. Since then, the role of gold has been gradually reduced. However, it is still an important asset in the reserve holdings of a number of countries, and IMF remains one of the largest official holders of gold in the world.

Commercial Real Estate Dominos Falling

Large commercial real estate groups have been embattled since August 2007 and in survival mode for the past 12 months. The underwater loans have been rolled forward over and over again with the hope of asset price increases across the board. This simply will not happen fast enough and will begin taking down companies and causing massive deflation in the industry. Risky developments, such as the the largest apartment complex in Manhattan, will have to be bled out of the system. The numbers being played with dwarf those of the housing market.

In addition to the $3 billion senior loan, there is $1.4 billion of mezzanine debt secured by the borrower's equity interest. Wachovia reported a debt service coverage (DSC) of 0.71x and occupancy of 96% for the three-month period ended March 31, 2009.

Bad News Indeed for Tishman, BlackRock and other NYC Apartment Landlords

By Mark Heschmeyer

October 28, 2009

The grand experiment of converting New York City's rent-controlled apartment units to luxury market rentals has apparently come to a grand costly end. Last week, the New York Court of Appeals essentially ruled that Tishman Speyer Properties, LP and BlackRock Realty, the owners of Stuyvesant Town and Peter Cooper Village have wrongly been inflating rents at the 11,227-unit apartment complex totaling 10.2 million square feet on the east side of Manhattan.

The New York Court of Appeals affirmed an order of the New York Appellate Division and concluded that the current and former owners of the property were not entitled to take advantage of the luxury decontrol provisions of the New York Rent Stabilization Law while simultaneously receiving tax incentive benefits from the city.

Standard & Poor's Ratings Services said its believe the ruling has the potential to cause significant cash flow reductions at the property, resulting in an increased risk of default on $3 billion in loans held by the owners and eventual transfer of the loan special servicing.

The Stuyvesant Town and Peter Cooper Village loan is the largest exposure in the three commercial mortgage-backed securities: Wachovia Bank Commercial Mortgage Trust series 2007-C30 (WBCMT 2007-C30; $1.5 billion, 19%) and ML-CFC Commercial Mortgage Trust 2007-5 (ML-CFC 2007-5; $800.0 million, 18%) transactions. It is also the fifth-largest exposure in the Wachovia Bank Commercial Mortgage Trust Series 2007-C31 (WBCMT 2007-C31; $247.7 million, 4%) transaction. In addition to the $3 billion senior loan, there is $1.4 billion of mezzanine debt secured by the borrower's equity interest. Wachovia reported a debt service coverage (DSC) of 0.71x and occupancy of 96% for the three-month period ended March 31, 2009. The loan was current in payments as of the October 2009 remittance report. The current balance of the debt service reserve was $24.4 million as of the October 2009 remittance report, and S&P said it believed it is likely to be depleted by the end of the year.

Looking beyond Stuyvesant Town and Peter Cooper Village, there are other loans that might also be affected by the ruling because they followed very similar conversion plans: The others are: The Belnord, a luxury apartment building on the Upper West Side, securing a $375 million loan included in JP Morgan 2007-LDP9; and The Parkoff Eastside Portfolio, a $170 million loan in Morgan Stanley 2007-HQ12, securing six Upper East Side apartment buildings.