A weekend topic starting with Global Finance. “Avaya Holdings Corp, Tuesday Morning, Sorrento Therapeutics—what’s the common thread between these very different companies? Within a few days, the three of them went bankrupt. ‘We have had almost unlimited credit for 10 years,’ reinforces Jim Baer, president of CMBG Advisors in Los Angeles. ‘Quantitative easing has flooded the economy with low interest rates. In 1998, we had cumulative deficits of $6 trillion, in 20 years we have added $25 trillion. That’s not sustainable, the party is over.’”
“Ronald Winters and Clare Moylan, principals at Gibbins Advisors, noticed filings of large healthcare corporations in the fourth quarter of 2022 that were three times higher than during the first quarter year-to-date. Hospitals and nursing homes suffer from higher labor costs and ‘they used the cash that the government sent during the pandemic.’ Biotech companies are also at risk, but for a different reason. ‘They used to raise large amounts of capital because market conditions were so good,’ says Moylan. ‘Pharmaceutical companies could basically burn all that money until the commercialization of their product.’ Not anymore—’the balloon burst.’ Chapter 11 seems to be back on the horizon.”
The Washington Examiner. “A coming crunch in the commercial real estate market could spell trouble for banks that sunk lots of money into commercial real estate loans over the past several years. ‘Joel Griffith, senior fellow for economic policy studies at the Heritage Foundation, blamed ‘cheap money and excessive money printing’ for the burst of commercial real estate investment. ‘Why were commercial real estate values increasing at a time when we had vacancy rates increasing?’ Griffith told the Washington Examiner. ‘That’s because of the Fed.’”
From Bisnow London. “A harsh spotlight has been turned on the commercial real estate loan books of U.S. regional banks in the past fortnight. The question now for UK real estate is, will the same problems be repeated here, or manage to cross the Atlantic? First, landlords should expect some pain and equity should expect to take losses. For some of those whose loans were based on aggressive pre-2022 valuations, it could be curtains. Academics at business school Bayes looked at European bank lending and concluded that German lenders might be a potential source of stress in the UK and European lending market.”
“‘German bank lenders still offer some of the highest LTV for investment assets (between 75% and 80%) and loan-to-cost for development lending (between 77% and 82%),’ Bayes said. ‘Other European bank lenders have been more conservative (between 55% and 60% LTV and 60% and 75% LTC).’ The implication is some of these loans are likely to be underwater if valuations are under pressure. Alongside German banks, another area to watch is debt funds and nonbank lenders.”
The Epoch Times. “During a Feb. 28 speech by FDIC Chairman Martin Gruenberg, he casually admitted that ‘Unrealized losses on ‘available for sale’ and ‘held to maturity’ securities totaled $620 billion in the fourth quarter.’ At the time we thought Gruenberg’s estimate of unrealized losses for the banking system was remarkably small. Unfortunately, we may have been right. A study released on March 13th took a deeper look at the unrealized losses banks were likely holding. The study found that actual losses to banks’ security holdings were $780 billion, versus the $620 billion estimated by the FDIC.”
“But the authors went deeper, rightly noting, ‘Loans, like securities, also lose value when interest rates go up.’ They found that total unrealized losses as of December 2022 were $1.7 trillion. In a chilling warning, the authors noted that ‘the losses from the interest rate increase are comparable to the total equity in the entire banking system.’ We’re not out of this banking crisis. In fact, it may be just the beginning.”
Mansion Global on California. “A new Los Angeles mansion tax, to be enacted April 1, will require sellers to pay 4% on sales of homes priced between $5 million and $10 million, and 5.5% on sales of properties at $10 million or above. The looming tax has helped some sellers get on the same page as buyers about pricing, after months of failing to meet in the middle, said The Agency co-founder Billy Rose. That is especially true of developers, many of whom planned their projects under a wholly different calculus, when the market was hot, he said. ‘A lot of these houses were conceived when the market was kind of go-go and escalating,’ Mr. Rose said. ‘Now, [developers are] hemorrhaging money and getting cold feet about holding on to these properties.’”
The Copenhagen Post. “Ah well, they were good times while they lasted. Following a decade of furious development, the housing market now finds itself in a downward spiral. According to figures from Danmarks Statistik, not only have prices plummeted for houses and apartments across the country, but the sale of housing has also faded significantly.”
“‘All of the country’s regions saw a decline in housing prices from the fourth quarter of 2021 to the fourth quarter of 2022,’ wrote Danmarks Statistik. ‘The biggest price decline for single family houses was in Bornholm at about 15 percent, followed by Copenhagen (8.7 percent) and north Zealand (7.6 percent). The lowest fall was registered in north Jutland at 2.4 percent. On average, the decline in house prices nationally was 6.2 percent.’”
“Apartment prices also dipped nationally by 5.3 percent last year – Funen was hit particularly hard with a downturn of 11.2 percent, while Copenhagen sustained less ‘damage’ at about 4 percent. Housing sales overall have also been impacted by rising inflation and interest rates. As a result, demand has plummeted. Nationally, the number of house sales dropped by 30 percent – a figure that was even more pronounced in the capital at about 40 percent. A similar trend was seen with apartments. The number sold nationally fell by 35 percent last year.”
The Sydney Morning Herald in Australia. “After the shock collapse of the country’s 12th-largest home builder on Friday, Porter Davis clients are scrambling for legal advice and answers, while some claim their unfinished homes have been damaged and looted overnight. Suzi Ralph, who has been living in a rental with her husband and two children while their home was being built in Warranwood, said her family had spent $900,000 on their Porter Davis build before the company folded. Ralph’s is one of about 1700 properties that were started by the Melbourne-based builder but are now left unfinished. Contracts had been signed for another 800 future homes but work had not started.”
“Ralph, 42, who is currently travelling in Japan, said her neighbour sent photos on Saturday showing someone taking supplies from her property. ‘I have no idea what I can do, if it legally is ours or [if it is] the contractor who hasn’t been paid,’ she said. ‘We thought our money would be safe. I’m paying $7000 a month in rent and mortgage repayments and funding the build at the same time. I’m bleeding money.’ They have paid the lock-up invoice, but cladding isn’t finished, the front isn’t rendered, there’s no roof on the garage, no appliances, toilets or cabinetry and plaster work is damaged from a leaking roof.”
“In Struthtulloh, in Melbourne’s outer-west, Kim Misic has hired a security fog machine and changed the locks on their Porter Davis property, concerned it could be broken into and damaged. She is worried about how they are going to finish the house, if they lose their money. ‘We are pretty much paying a full mortgage on it. I’m currently on maternity leave, we are living on one wage with two young kids. It’s all just very scary. It’s very hard for us to think about what the future is going to look like,’ she said. ‘If someone was to break into that property, we’d have to pay for that and that’s money we don’t have to spare.’”
“For Lina, who spent inheritance money from her mother on her Truganina property, the collapse of the builder is emotional. On Saturday, she said her son saw a disgruntled tradie throwing bricks through other half-finished Porter Davis builds. ‘Everyone is angry, it’s not just the homeowners. No one wants to go to work for nothing. My son stopped him and had a chat and said, ‘this was not going to help anyone,’ she said.”
“Mother-of-two Nadya Krienke-Becker said they were building their ‘dream home’ in Bayside. Their slab had been laid, and they were told the frame would go up after Easter. ‘The whole thing is a debacle. None of us know what’s next. Then the staff, suppliers, tradies. The impact on the economy. People think it’s 1700 families, but it’s not. It’s a far bigger ripple effect. There are a lot of people who woke up today and do not know how they are going to feed their families. That’s horrendous.’”
From Mises.org. “In the midst of the panic, Credit Suisse’s CEO, Ulrich Koerner, offered an insightful public statement: ‘Our capital, our liquidity basis is very very strong,’ Koerner said. ‘We fulfill and overshoot basically all regulatory requirements.’ This was perhaps one of the only factual statements uttered across global financial media during the chaos, amid a flurry of mainstream analysts begging for Credit Suisse’s rescue while conversely claiming that this rescue posed no threat to the global financial system.”
“Despite its reputation as a tax haven, the Swiss banking industry is one of the most regulated financial sectors on Earth, with countless stringent requirements established in the name of protecting the solvency of the financial system, all of which Credit Suisse dutifully adhered to. Yet the bank completely imploded, proving that these regulations were at best, useless, and at worst, directly responsible for its woes.”
“As with every financial crisis, the central bank sets the stage for a collapse by creating untenable economic conditions in the form of an artificial boom fueled by a drastic increase in the money supply. The SNB’s near-fifteen-year suppression of interest rates directly lowered the returns on fixed-income assets, which form the bulk of every bank’s portfolio, dramatically diminishing profitability in the Swiss banking sector.”
“More importantly, the SNB’s distortion of markets resulted in all kinds of financial absurdities, such as negative-yielding 50-year government bonds, 0 percent unsecured corporate bonds, and near–0 percent mortgages. These malinvestments never would have come to life without the SNB’s intervention, but year after year of low interest rate, zero interest rate, and negative interest rate policies have resulted in Swiss markets pricing themselves upon the lowest rates seen in five thousand years, a recipe for disaster.”
“While the yields on Credit Suisse’s assets continually fell as the suppressed-rate environment dragged on, the vulnerability of its portfolio to a rise in interest rates increased. Anyone with a shred of common sense questioned the sustainability of keeping rates so low for so long, but as always, state officials justified their delusion through convoluted academic dogma.”
“To any proponent of the Austrian school of economics, this is yet another example that can be added to the list of countless business cycles that have proven the validity of Austrian business cycle theory: The Swiss government and the SNB intervened in the economy in the name of fostering prosperity. Their intervention fueled a bubble of malinvestment in low-yielding assets. Their attempts to slow the resulting uncomfortable rise in prices without causing a recession were futile as the bubble popped, and the illusionary house of cards they had erected collapsed before their eyes.”
“The dissolution of Credit Suisse is far from the end of this business cycle’s financial crisis, as negative interest rate policies were not unique to Switzerland, having been implemented across Europe and in Japan.”