Where is the market/economics really going?

One man's view of 2008 to 2010

by John Rubino 2/24/2008 www.dollarcollapse.com
Back in June of 2006 I posted some long excerpts from an internal report produced by Colorado & Santa Fe Real Estate, a Denver firm owned by an entrepreneur named Marcel Arsenault. After riding the long bull market in U.S. real estate to a considerable personal fortune, Marcel was doing something unusual for a real estate guy: He was selling out at what now appears to be the top. But not just selling out. He was so convinced that real estate was headed for a crash that he'd converted his company to a hedge fund that was shorting REITs and industrial commodities. ...

Commercial Real Estate (Retail, Office, Industrial)
The thing that’s keeping commercial real estate afloat is that owners enjoyed a good economy for the last five years. Tenants are still paying rent, and until recently, expanding. But once the economy turns negative—I think we’re probably in the beginning stages of a recession—then that fig leaf of “I’ve got income fundamentals working for me” goes away. By year end, it’s a different world for commercial owners. After six years of writing mortgages at super peak values, in which commercial mortgage debt doubled nationwide, commercial mortgage lenders are suddenly realizing that they’re highly exposed and are starting to tighten up. Once mortgage volumes start falling, lenders will tighten mortgage underwriting, triggering a feedback loop that produces a crescendo of falling values. Our proprietary liquidity index predicts a downtrend that reflects the past few years’ logarithmic upturn, but in reverse...

Most commercial lenders and property owners don’t agree, but commercial real estate is likely headed for a worse downturn than housing. After all, a subprime borrower living a house will typically do whatever she can to keep the house. The scoundrels I know in commercial real estate will send the keys back in a heartbeat....

What other advice?
Avoid the financials, particularly banks. They’re just working through the first of three or four perfect storms that are coming. They’re dealing with their subprime problems but they haven’t set much aside for the coming consumer credit card and auto loan recession; they haven’t set much aside for the coming wave of corporate loan defaults, nor have they prepared for a commercial real estate downturn....

This is a liquidity crisis. In a systemic deleveraging, assets plummet in value as lenders call in their loans and tighten lending standards. They’ll suck up cash like a fire sucks up oxygen. Cash will move from being king to emperor....We’d go in and start accumulating distressed banks. But that can’t be done until the financial deleveraging has worked through the system. That's probably two years away, and you want to be waiting like a vulture.