Check out the latest from my friend Brandon Saylor ………

Lessons Learned From Iceland

Officially, the Great Recession started in December 2007. There is a lot of blame to go around for the causes that precipitated the Greatest Recession. Some of the responsibility goes to the politicians. Politicians and the banks sought deregulation of the banking and investment banking industries. In 1999, the Glass-Steagall Act was repealed with bankers and politicians believing that they were too smart to outwit another depression. They got their wish after deregulation and absolutely neglected the lessons from the Great Depression.

Maybe it was the toxic paradigm that home prices would never go down and persist upward eternally. Easy credit caused increased speculation and people began buying several houses or houses they could not afford. Mortgage companies had relaxed lending standards and were therefore unconcerned with the credit worthiness of the buyers because most sold their mortgages in the secondary market.

Maybe it was the rating companies Moody’s, Standard and Poor’s and Fitch. Their job was to properly rate securities relative to risk. They stamped the highest and most secure AAA rating on toxic mortgage backed securities assets on which mortgage insurance had been purchased from AAA rated Insurance Companies.

It is clear multiple culprits were responsible. By the fall of 2008 it became evident there were formidable troubles as housing prices continued to fall and more and more people who now owed more against their homes than those homes were worth.  Defaults and foreclosures were rising well beyond what the models had predicted, and it was way beyond the worst case scenario. This economic freefall sent shockwaves across the globe. No country was immune to the destruction.  Banks started to have severe capital and liquidity problems as home prices fell and their mortgage backed securities dramatically sank in value. The banks were in jeopardy of running out of money.

Countries across the globe took different measures to address the credit crunch. Most resorted to bail outs and to this day many countries are still dealing with the repercussions. Between TARP (Troubled Asset Relief Program), bank bailouts, auto bailouts and 3 stimulus packages the total price tag for the United States reached $1.4 trillion (that we know about). Much of this money will never be recouped. Not to mention the $1.4 trillion investment yielded an agonizingly sluggish recovery with unemployment still years later of 14.9% (U6), trillions of dollars in debt, a credit rating downgrade of US Treasury Debt (first time in history) and a projected GDP for 2012 of an anemic 2%.

What should the United States government have done differently? We were told the bailouts were the only option to prevent a worldwide 1929 style depression. Iceland took a different approach. Just like the United States in the early to mid 2000s, Iceland benefited from nearly a decade of robust economic growth. The country’s three largest banks Glitnir, Kaupthing and Landsbanki went broke within weeks of each other after the collapse of Lehman Brothers and Bear Stearns.

What set the Icelandic government apart from most governments in the world is they declared that the government would only rescue domestic bank account holders. They were not going to save the banks or any other industry. The free market would correct itself. And, instead of attempting to prop up its currency, Iceland let the value of the Krona devalue. It also enforced capital controls to thwart money from leaving the country.

Make no mistake this was an audacious effort for the Icelandic government. Iceland still took a beating. From the peak in the third quarter of 2007 to the low in the second quarter of 2010, the economy contracted by 14.3%. The decrease in the value of the Krona slingshoted inflation up to 19%. Slicing real wages through inflation meant that unemployment rate climaxed at 7.6% in 2010 lower than any of the peripheral European countries, and even the United States. The collapse of the banks demolished domestic stock markets. On August 17 2007 the stock market peaked at 8,238. By March 13 2009 just over 18 months later it grasped a low of 379.93 a plunge of more than 95%. Prime Minister Geir Haarde asked for God’s support. Protesters packed the streets in retribution for not bailing out the banks. Years later Geir Haarde is currently facing charges and may possibly be jailed if found guilty of “gross negligence in failing to prepare for the impending disaster.” He is rejecting the allegations. His fate will be determined later this year.

This economic freefall sounds excruciating and I am sure if you ask any local residents they would agree. But once Iceland hit bottom the markets began to change and rather quickly. GDP expand on average rate of 6.9% since the second quarter of 2010. Three years later, the unemployment rate has fallen considerably. Tourism has improved by leaps and bounds. The government lucratively raised money from investors in the summer of 2011 for the first time since the disaster.

Arguably just as important, the result of not bailing out the banks has destined the debt to GDP levels peaked at a high but acceptable level of 100% of GDP, and are projected to recede. By contrast, the United States and many other European counties are facing higher than 100% GDP ratios because of the colossal money spent on bailouts.  The Greek bailout deal is hoping to achieve a debt to GDP ratio of 120% by 2020 and that’s the best case scenario. Right now the debt/GDP ratio of Greece is 166%.

The lessons learned from Iceland are incredibly powerful and simple. In the heat of the moment I believe decision makers want to believe that fiscal measures will cure the problem because there is nothing else they can do. The consequences of such actions are evident. Bailouts do not work. They only prolong the original problems and never solve the core issue. Iceland’s economic course was risky, yet I am sure in hindsight they were glad to let the banks fail. In future economic downturns governments should focus on saving depositors only not other bank creditors, insurance companies and whole industries. Iceland’s experience suggests that devaluation and capital controls may be the least painful solution to an economic contraction. Compare Iceland’s troubles to what happened to other countries and you will realize that things could have been much worse for Iceland particularly given the absolute scale of its banking bubble. Iceland represents a tiny fraction of the size and impact of the American Economy and the US Dollar in the world’s reserve currency. But there are some parallels that are worth noting when the intellectual arguments of bail outs and the moral hazard associated with government sponsored bailouts are considered.

Have a great weekend!

Brandon Saylor
-Associate

Check out Robert Bach’s latest post on city rankings.  Where does your city rank….chances are…you can find it here…..cheers….rob

http://myemail.constantcontact.com/Ranking-Cities.html?soid=1102184413218&aid=h4SPz0bJUfE.

Below is a post from Bob Bach……I hope you enjoy…..rob

Manufacturers Rally

Analysts shuddered two months ago when the monthly Business Outlook Survey from the Philadelphia Federal Reserve plummeted unexpectedly, signaling a worrisome slowdown for manufacturers in the region. Although it covers only a corner of the U.S. – eastern Pennsylvania, southern New Jersey and Delaware – the survey provides an early clue to the more widely followed manufacturing index from the Institute for Supply Management. The dismal August reading from the Philly Fed raised fears that the economy was sliding into recession.

But the manufacturing sector is expanding again according to the October survey, released yesterday. The survey asks manufacturers a list of questions with three possible answers – increase, decrease and no change – and calculates a diffusion index for each question, which is the difference between the percentage of respondents citing an increase and those citing a decrease. The index rose from minus 17.5 in September to 8.7 in October, the largest one-month gain since the early 1980s. The index measuring activity levels expected in six months increased to its highest reading since April before the economy began to slow. The survey doesn’t point to robust growth ahead, but it is consistent with Grubb & Ellis research showing sustained demand for industrial space over the past two quarters and this quarter as well. Together with other recent indicators such as retail sales and weekly jobless claims, the Philly Fed survey suggests that the economy is fighting off a near-term recession.

Have a great weekend.

Best regards,
Bob

Robert Bach
SVP, Chief Economist
Grubb & Ellis
312.698.6754

Outrunning a Recession

A near-term recession is possible, but recent economic data suggest the economy is staying ahead of it. The latest is the September retail sales report released this morning by the Census Bureau, revealing a seasonally adjusted 1.1 percent increase in total sales during the month and a 0.5 percent gain in core sales, which excludes autos and gas. Motor vehicles led with a gain of 3.6 percent. Other strong performers included clothing & accessories (+1.3 percent), food services & drinking establishments (+1.2 percent) and furniture & home furnishings (+1.1 percent).

There are casualties in the retail space, too. Tim Van Noord, our intrepid research manager in Grubb & Ellis’ Boston office, confirmed that the Good Newstand (sic) is no longer in business. On his way back to the office, Tim said he passed shuttered Borders and Barnes & Noble stores as well. But in search of good news, Tim ventured to nearby Cambridge, where Google just expanded by 60,000 square feet and Microsoft has announced an expansion. Tim says people are “opting out of print media and using smart phones, iPads and other devices to get their news in digital form.”

Gap Inc.’s announcement that it will shutter a fifth of its namesake stores stands in contrast to the jump in clothing sales last month. Retail has long been one of the most competitive property sectors, and Gap’s problems are due mainly to overexpansion, merchandising missteps and aggressive competition.

Consumer spending, while not strong, has been enough to keep the economy afloat, which is important because it accounts for 70 percent of total GDP. The economy has been a factor in recent closings such as Borders and downsizings such as Gap, but the bigger factor has been aggressive competition from other retailers in the case of Gap and new technologies in the case of Borders.

Have a great weekend.

Best regards,
Bob

Robert Bach
SVP, Chief Economist
Grubb & Ellis
312.698.6754

I know it has been a while but I truly want to get back into the swing of things and keep this blog going.  Once recognized as one of the top ten commercial real estate investing blogs in the country….now….just another blog…maybe worse.  I hope to fix that in the next coming months.  So….I would like to kick things off …..again….

I would like to introduce you to my buddy and colleague, Brandon Saylor….he’s a writer and a good one at that…..check out his latest below.  Brandon is sometimes controversial but….I agree with most of what he says…if not all.  With Brandon’s permission….I will be posting Brandon’s writings on this blog.

Brandon Saylor

Anatomy of an Economic Bubble

This recession has taught me a lifetime worth of knowledge. Observing the catastrophic meltdown that occurred in 2008 seared lessons within me. One of these fundamental lessons is the understanding of economic cycles and the red flags of danger. In short, the economic meltdown of 2008 began with the bubble bursting of credit markets affecting everything from real estate to the stock market. It is paramount to understand the anatomy of a bubble and the natural economic cycles that ebb and flow through time. Below are the main stages of a bubble.

There are no time limits between each stage. The “stealth phase” is the 1st phase in which the asset is adhering to its core fundamentals. Subsequently, the “awareness phase” is when the value of the asset begins to rise above its fundamental value. In the third phase, the asset value explodes as the media begins to remark about its escalating value. A swelling number of investors eulogize the merits of the asset as they merge with the cause.

In the final phase, the value of the asset begins to dissipate. Many naive investors still believe it will continue to increase in value. The daunting reality sets in that the asset is overpriced and everyone tries to get out. Unfortunately, many are left behind as the value of the asset plummets to its long term fundamental value.

Conceivably, the most legendary and oldest, well-documented instance of a speculative bubble is the “tulipmania” that hit 17th century Holland like a bomb. The tulip became an instant hit upon its introduction to Western Europe in the mid 16th century. Dutch collectors developed a hierarchy of tulip varieties based upon their species and coloring. Because it was impossible to determine which variation would bloom from a particular bulb, the tulip grew into an asset of speculation. Before the 1630s, the bulbs were popular among the extreme wealthy and were flaunted to exhibit class. By the mid 1630s, the obsession caught on with the middle class and lower socioeconomic classes. The increased demand caused the price of the bulbs toescalate dramatically.

The market reached its pinnacle in late 1636 and early 1637, after the bulbs had been seeded to blossom the following spring. People mortgaged their homes and traded in their savings in order to buy rare and exotic bulbs to resale at higher prices.

In February 1637, as winter turned to spring the bulbs were close to flowering, consumer confidence evaporated and the market suddenly crashed. As the price collapsed, nobody would buy the bulbs, even though they offered them at one quarter of the sums they had paid for them. The tulip bubble burst is alluded to in the recent sequel of Wall Street 2.

Economic bubbles are a reality of any capitalistic monetary system. The point of this email is to recognize the red flags before it is too late. The first red flag is to recognize the larger macroeconomic forces that dictate the market. It is now understood the catalyst for any bubble begins with easy money. The Austrian School of Economics believes “asset bubbles occur when there is an extended period of low interest rates coupled with an expansion of credit. The availability of cheap money encourages speculation in one or more asset classes causing the price to escalate rapidly exceeding their underlying fundamental value.” The availability of cheap money promotes an over abundance of growth. Consequently, a bubble ensues. Bubbles can be an excellent way to make money if you get in at some stage in the “awareness phase” and get out before you reach the inevitable landslide. The key to success is to not be trapped when the eruption begins.

What is the next bubble? In the past decade, we have had the escalation and crash of the dotcoms, the oil bubble and the monstrous credit bubble following the oil crash. Is the stock market the next big bubble? The Dow Jones industrial average is now trading at 86% of its all time high of 14,164.53. Is it gold? Gold is constantly breaking record prices for the value of a troy ounce of gold. Could it be the bond market? Another energy bubble? At this point, it is hard to determine which market/asset is going to be the next bubble. However, armed with the knowledge of warning signs it will be easier to decipher the craze when an asset is going gangbusters.

Ultimately, there are two things about economic bubbles I want to leave with you today. Greed intensifies the problem and it is the definitive drive to astronomical prices. As they say, “Avarice has ruined more souls than extravagance.” And ask yourself does this type of speculative behavior make sense?  Does gold trading at $1,455/oz make sense? Is the stock market value reflective of the health of the economy? Does $107/ barrel of oil make sense? If common sense does not fit the reality of the time then maybe it is a good time to get out before it is too late.

Have a great weekend my friends!

-Brandon Saylor

Good stuff huh?

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Until next time….rob