Well, it's not news to my readers....

Distressed Commercial Real Estate has soared so far in 2009 and this has come as a shock to some people.

"Commercial properties in the U.S. valued at more than $108 billion are now in default, foreclosure or bankruptcy, almost double than at the start of the year, Real Capital Analytics Inc. said.

There were 5,315 buildings in financial distress at the end of June, the New York-based real estate research firm said in a report issued today. That’s more than twice the number of troubled properties at the end of 2008.

Hotels and retail properties are among the most “problematic” assets following bankruptcy filings by mall owner General Growth Properties Inc. and Extended Stay America Inc., according to the report. The scarcity of credit is causing property defaults in all regions and among every investor type, Real Capital said."

I'm a little surprised by the rate of deterioration (doubling in the first 6mths of 2009) but there is no doubt the US has a dramatic excess supply of commercial real estate and it's going to take many, many years to work off this excess inventory. As it relates to Upstate NY think about the two most problematic areas mentioned in the article - hotels and retail. Just about every new commercial property in Jefferson County in the past 4 years has been hotel or retail. I don't think I'd want to hold the loans on some of those properties.

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I hate to see the discussion about our nation's financial condition deteriorate into partisan bickering, but that apparently is the nature of the beast. I will note that the GAO report on the stimulus echoed my early concern that the stimulus wasn't really stimulating anything, rather it was being used to maintain the status quo.

"The report released Wednesday by the Government Accountability Office, Congress' investigative arm, found that the $787 billion stimulus package is being used to "cushion" state budgets, prevent teacher layoffs, make more Medicaid payments and head off other fiscal problems."

"For example, the GAO said about half the money set aside for road and bridge repairs is being used to repave highways, rather than build new infrastructure. And state officials aren't steering the money toward counties that need jobs the most, auditors found."

Anyone that has driven along a major interstate right now is aware of the substantial "repaving of America" that is underway. The problem with spending the stimulus money to plug gaps in state budgets is that it assumes state revenues will bounce back soon. However, as we continue to see from California to Massachusetts, tax revenues continue to come in below even the most pessimistic assumptions. This means big cuts in services and state jobs in 2010 or another round of stimulus (however, they'd be smart to call it something other than stimulus - call it what it is - emergency aid to states).

Cheers!

Well at least Washington's hiring....

One of my criticisms of both the Bush administration and the Obama administration has been their reliance on Wall Street insiders to "fix" Wall Street. It's difficult for someone who has worked in the industry for 20 years to suddenly see the light and push for real reform on Wall Street. It's not a new phenomenon for Wall Streeters to take up residence in Washington, but the flow of "talent" from Manhattan to K-Street has been surprising. Via counterpunch.org consider the following hires:



* Robert Hormats, Vice Chairman of Goldman Sachs, is to be installed as Under Secretary of Economics, Business, and Agricultural Affairs.


• Jacob Lew, Chief Financial Officer of Citigroup Alternative Investments Group, as Deputy Secretary of State(Lew’s dept. lost $509 million in the Q1 2008)


• Michael Froman, Citigroup, Deputy National Security Adviser for International Economic Affairs. Froman was formerly Chief of Staff to Robert Rubin at Treasury, before following him to Citi.


• Froman’s deputy, David Lipton, ran Citi’s global country risk management effort.


• Lewis Alexander, Citigroup’s chief economist and now Counselor to Treasury Secretary Timothy Geithner


• Neal Wolin, President and COO, Hartford Insurance Company, Property and Casualty Group now Deputy Treasury Secretary (Hartford received $3.4 billion in TARP funds).


• Gary Gensler, Goldman Sachs partner, now Chairman of the Commodity Futures Trading Commission



• Mark Patterson, Goldman Sach’s lobbyist, now Treasury Chief of Staff


The tinfoil hat crowd will notice a couple of names pop up frequently - Citi and Goldman.


Cheers!

Weekend wrap-up

Well, the sun finally decided to make a cameo appearance in Upstate NY and everyone's feeling better. While, I'm on the subject of weather, I've got a question that I'd love to have someone clarify. When the local weatherperson says today's high will be 68 degrees, well below our average for this date of 81... do they really mean AVERAGE or do they really mean NORMAL? I suspect that it's really a normal temperature for a given date because our departure from AVERAGE every day is so substantial that eventually our average would start showing some real fluctuations.

On to news....

Swedish Banks now want customers to pay for the privilege of holding their money.

Well, about a year ago I joked that it wouldn't surprise me if we continue along our current path that punishes savers and rewards those that are leveraged to their eyeballs, if banks started charging you for the privilege of holding your money.

"Deep economic downturn
Economic activity abroad is very weak and this hits Sweden hard. Exports have fallen substantially and the situation on the labour market is continuing to deteriorate rapidly. The information received in recent months points to the economic downturn in 2009 being somewhat deeper than the Riksbank forecast in April.

Deposit Rate
The decision on the repo rate will apply with effect from Wednesday, 8 July. The deposit rate is at the same time cut to -0.25 per cent and the lending rate to 0.75 per cent."

That's not a misprint. Instead of paying interest on deposits, Swedish depositors will now PAY their banks 0.25% per year. Those banks might deserve to get a Jimmy Stewart style run on their deposits tomorrow.

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Congress is pushing for another short-selling ban.

Short sellers are not bad people. In fact, they are often the best educated investors in the market because they look through all of the happy, sunshine talk and delve into the reality of a business. Most 401k's would look better today if more short-sellers had been on CNBC in 2007 and 2008. A market without short selling is a rigged game designed to have one outcome. At a time when investors around the globe are getting increasingly nervous about their US holdings this sort of move might push global investors to reallocate assets elsewhere.

Also, it should be noted that short-selling puts a floor in stock prices and often stops rapid stock price swings like the ones we saw last October when a short-selling ban was in effect.

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I've also expected that local assessments were going to start getting appealed on a pretty wide basis and this story seems to back up that theory....

"Officials in some states say their property tax revenue is falling for the first time since World War II.

The recession has already taken a significant toll on states’ budgets, as rising joblessness, a weak business climate and a drop in consumer demand have cut sharply into receipts from taxes on sales, personal income and business earnings.

The pain at the state level is trickling down to county and local governments. To compensate, about 10 percent of large counties are raising the tax rates associated with home values to minimize the revenue loss, the county association said.

Even so, most counties simply have to absorb the lost revenue. Municipalities are laying off workers, renegotiating labor contracts, freezing salaries and cutting services.

The revenue losses are coming as homeowners prod towns for new assessments, and as municipalities conduct regular revaluations of their real estate. While declining residential values weigh heaviest on many governments, the value of commercial real estate is also sliding as businesses shut down and move out of storefronts or shopping malls.

But officials across the country say there is no question that the number of appeals has risen from the usual trickle to a flood."

The most likely scenario is that municipalities will lower assessments and raise tax rates to offset the change. It won't be popular, but once one town cracks and raises taxes it will spread through a county faster than the H1N1 virus.

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If you get a chance to catch a repeat of the Pete Peterson interview on Charlie Rose sometime it's valuable use of your time. Mr. Peterson has embarked on a campaign to change our habit of running perpetual consumer and federal deficit. I hope to be able to stay as informed on the global economy as Mr. Peterson when I grow up.

Save the newspapers by killing the web....

A couple of blogs have picked up on a post written by a US Appeals Court judge last week. In essence, the idea is to give news outlets exclusive rights to their stories without allowing linking from other news aggreators (think Drudge or locally our own Newzjunky).

"Expanding copyright law to bar online access to copyrighted materials without the copyright holder's consent, or to bar linking to or paraphrasing copyrighted materials without the copyright holder's consent, might be necessary to keep free riding on content financed by online newspapers from so impairing the incentive to create costly news-gathering operations that news services like Reuters and the Associated Press would become the only professional, nongovernmental sources of news and opinion."

I can't imagine that this would gain traction as the linking horse has left the barn --- what would Twitter, Facebook, etc, be without links? However, some connected media members are also floating the idea of making content "exclusive" for a certain time period (24 hrs for example) before allowing links. This could become a big story if it gets any traction. You can read the entire post here... --- for now, until it becomes illegal to link to other posts :)

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I meant to throw up these photos the other day, but it got lost in a pile of housing and jobs data.

I was in the market for a nice 12 foot aluminum boat or maybe a sailfish sailboat until this concept boat caught my eye.

I love the fact that with a 250 ft yacht in the middle of the greatest body of water on the planet, this boat needs a pool on the main deck.

It's a yacht, it's a small country, it's a floating Nike size 42....:)

Just in case 250 fee doesn't quite meet your needs, this 300 foot prototype should fit the bill.

If anyone sees one of these on the River, let me know :)

Take that college degree and .......

These stories aren't exactly market related but the failure of our higher education system to prepare students to enter a global workforce is a pet peeve of mine. I found it funny that I heard three college related stories in the past 24 hours and I thought it might be worthwhile to share them here.



1) The always unbiased NY Post brings us: Don't get that college degree... This is an overly simplistic look at the finances behind attending college. Their argument is that an 18 yr-old that enters the workforce and diligently saves for the next 15 years while their colleagues are paying off student loans, is going to end up ahead of the person who attends college. This is the sort of thing that only works on paper. Unfortunately, all people under the age of 30 seem to have a distaste for saving - college educated or not. The example also falls for the old "stocks return 8% a year" joke. Those were the days my friends.... Anyway deep down in the article there is an argument for changing our system of higher education because it's broken right now.



"Students want jobs and respect. Degrees bring both. Employers, meanwhile, want smart, capable workers. A degree is a decent enough proxy for intelligence, but we want it to be more than that. We want degrees to mean that students have learned the foundations of human knowledge: literature, chemistry, physics, composition, metaphysics, psychology, economics and so on. If we didn't, we'd replace degrees with inexpensive vocational exams.


In 2005, the Department of Education created a commission to study the college system and recommend reforms. A year later, the Spellings Commission (named for then-Secretary of Education Margaret Spellings) reported a long list of shortcomings, including "a remarkable absence of accountability mechanisms to ensure that colleges succeed in educating students." It found "disturbing signs" that degree earners "have not actually mastered the reading, writing and thinking skills we expect of college graduates." Literacy levels among college graduates, the commission noted, fell sharply over the 12 years ending in 2003.


I hate to be the old guy that remembers the good old days, but when I see 75% of a high school class on the Honor Roll something is wrong. My high school graduating class had 5-10% of the students on the Honor Roll (with a class size of 27 you can guess that usually meant me and one other student). Today, my alma mater has north of 80% of it's students on the honor roll in every grade. This is not limited to my alma mater, just about every high school in the North Country puts about 60-80% of their kids on the honor roll.



2) This WSJ story isn't really about educational matters, but rather the failure of the YALE model of endowment management. This pleases me to no end. A couple of years ago you couldn't find a soul that would question the Yale methodology which allowed


"Yale University to profit from pioneering moves away from U.S stocks into often illiquid alternative investments, such as private equity, commodities and timber."

I always found this to be a strange methodology and I feared that as more endowments followed the same model, the groupthink of endowments across the US might lead to substantial losses. I was interviewing in 2007 for a position with an Ivy league endowment that shall remain nameless (sounds a bit like the maker of Spam :)) and I remember how the interview turned confrontational when I challenged their mindless following of another endowment's model. Needless to say, I didn't take the job.

Separately, how about the fact that Cooper Union doesn't charge tuition? I'm already filling out applications for freshmen class of 2018.

3) Finally, I caught a replay of Andrew Ross Sorkin's interview with Elliot Spitzer - yes, that Elliot Spitzer - and I was struck by the fact that he offered a fresh view on higher education. Mr. Spitzer mentioned a model of higher education that would turn the current model on its head. Tuition, not as a flat payment, but rather as a percentage of future earnings. The University would suddenly have a vested interest not in keeping you on campus for 7 years, but rather getting the student prepared to enter the workforce ASAP. The student could feel free to pursue a real passion as a career instead of chaining themselves to a desk (or spend weekends with a sleazy former Governor --- ooops, that's low) to repay $85k in student loans for their Art history degree from Tuscan University. Make more, pay more in "tuition". I don't know how we'd ever get the universities off the tuition model, but boy that sounds like an innovative approach.

Anyone with deep pockets want to launch this as a start-up? Set up online universities that are tuition free (have you seen how fast online universities like University of Phoenix are growing? Up 24% in this down economy) but require 10% of future earnings for the next 10 years. I see holes in this idea, but it has it's merits.

Cheers!

JP Morgan upping salaries?

"J.P. Morgan Chase is considering raising its investment bankers' salaries to match hikes at rivals like Citigroup and Bank of America and retain talent."

About 5 months ago in the midst of the crisis and when Wall Street bonuses were a hot topic, I predicted this trend. Instead of paying a bankster $500k base salary and $2 million in year-end bonuses, the banks will shift to a model of $2.5 million in base pay to "retain talent". Everyone wins!! The banks and the "talent" get to keep acting as if it's business as usual. The only potential losers might be the taxpayer and consumers, but no real news there.

Cheers!

Chinese Banks Looking Wobbly....

I don't have much to add here, but this is interesting....

"China's banks are veering out of control. The half-reformed economy of the People's Republic cannot absorb the $1,000bn (£600bn) blitz of new lending issued since December.

Money is leaking instead into Shanghai's stock casino, or being used to keep bankrupt builders on life support. It is doing very little to help lift the world economy out of slump.

Fitch Ratings has been warning for some time that China's lenders are wading into dangerous waters, but its latest report is even grimmer than bears had suspected.

"With much of the world immersed in crisis, China appears to be one of the few countries where the financial system continues to function largely without a glitch, but Fitch is growing increasingly wary," it said.

"Future losses on stimulus could turn out to be larger than expected, and it is unclear what share
the central and/or local governments ultimately will be willing or able to bear."

Note the phrase "able to bear". Fitch's "macro-prudential risk" indicator for China threatens to jump from category 1 (safe) to category 3 (Iceland, et al). This is a surprise to me but Michael Pettis from Beijing University says China's public debt may be as high as 50pc-70pc of GDP when "correctly counted".

The regime is so hellbent on meeting its growth target of 8pc that it has given banks an implicit guarantee for what Fitch calls a "massive lending spree".

Unfortunately, 40pc of the "real economy" consists of exports, mostly to the US and Europe, the consequence of a mercantilist export model that has crashed and burned. Chinese exports were down 26pc in May.

World trade may be stabilizing at last after contracting at faster rate than during the early Great Depression. But it will not rebound fast in a world where the US savings rate has risen to a 15-year high of 6.9pc. A trade policy based on the assumption that debtors in the Anglosphere and Europe's Club Med can ruin themselves for ever is absurd.

Andy Xie, a Sino-bear and commentator for Caijing, said Western analysts are in for a rude shock if they think that China's surging demand for raw materials implies genuine recovery.
Commodity speculators have been using cheap credit to play the arbitrage spread between futures and spot on the oil markets. They have even found ways to trade lumber to iron ore by sheer scale of leverage. "They've made everything open to speculation," he said.

Mr Xie thinks the spring recovery is an inventory spike, to be followed a double-dip downturn into next year as stimulus wears off.

Reformers know what must be done to boost consumption. China needs a welfare revolution. But creating a social security net takes time, and right now Beijing is facing a social crisis as 20m jobless workers retreat to the rural hinterland.

So the regime is resorting to hazardous methods to keep excess factories humming: issuing a "Buy China" decree: using a plethora of export subsidies; holding down the price of coke, bauxite, zinc and other resources to lower production costs (prompting a complaint from America and Europe); and suppressing the yuan, again.

Protectionism is a risky game for a country that lives off global trade and runs a surplus near 10pc of GDP. Mr Pettis said he fears China is nearing its "Smoot-Hawley moment", repeating the US tariff blunder of 1930 that brought the world crashing down on Washington's head.

Two facts stand out about China's green shoots. While the Shanghai composite index is up 70pc since November, Chinese imports are down 25pc from a year ago. China is still draining real stimulus from the global economy.

If the world's biggest surplus state ($400bn) is too structurally deformed to help offset the demand shock as Western debtors retrench, we are trapped in a long deflation slump."

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Interesting thoughts from the Federal Reserve Bank of San Francisco -

"Our analysis generally supports projections that labor market weakness will persist, but our findings offer a basis for even greater pessimism about the outlook for the labor market. Specifically, we suggest that the relatively low level of temporary layoffs and high level of involuntary part-time workers make a jobless recovery similar to the one experienced in 1992 a plausible scenario."

The only segments of the economy that I see demonstrating any strength in hiring are tied to the Federal government - census hiring, veteran's affairs, etc, etc. I think the prospects of a jobless recovery is strong, but that implies that we eventually have a recovery ;)

Another example of high quality Chinese manufacturing...

This picture pretty much sums up the disposable nature of everything these days. I love the fact that the building didn't collapse, it just sort of fell over.

In fairness, it was likely due to a flood that eroded dirt around the foundation, but it's more fun to think that they are building disposable condos in China :)

Cheers!

I think it's spelled K-A-R-M-A

You probably recall my disapproval of the breathless media coverage of the dreaded H1N1 virus earlier this year. From all of the reports I read, it was clear that while this was a contagious virus it was not a serious health threat to healthy individuals and the symptoms appear to be mild.

So, when a member of my household tested positive last week it kind of brought the story full circle.

My observations:

1) The flu itself isn't as bad as the seasonal flu. High temp, sluggishness and some coughing. If the seasonal flu is a 6.5 on the 1-10 pain scale, the H1N1 would probably be a 3.

2) This sickness has been all over the North Country for the past 3 weeks and everyone kept sending their kids to school because the recovery is so fast (you feel back to normal in about 48 hours).

3) Roche Pharma made a killing off my family's Tamiflu prescriptions.

4) If we ever get a dangerous pandemic we will have a real problem because I feel like I was the only person that actually followed any of the CDC's recommendations (although I drew the line at wearing surgical masks around the house).

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If you're a casual reader of the blog you might not understand where my natural distrust of all things Goldman Sachs comes from. Rolling Stone - don't laugh, some of the best investigative reporting comes out of Rolling Stone - did a long, detailed report on the home of the original Banksters and their move to create the next great bubble.

I'm not gifted enough in the ways of ipaper to post the article so I'll link to the Big Picture's post here.

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Michigan is experiencing a severe state budget crisis as a result of the reshaping of the auto industry. This description of their State Police pension policy seems shocking. Does anyone know if NY's state police are on a similar model?

"Troopers start getting a portion of their pension while still working and simultaneously collecting their regular salary. The amount of pension they can collect is 30 percent the first year, 50 percent the second, and then increases 10 percent each year until eventually they are getting full pension and full pay before they have retired. The money is not paid out to them immediately but is deposited into an interest-bearing retirement account they get when they really retire."

Sounds like a pretty sweet deal if you could avoid the whole getting shot at thing....