Blog Archives

Could Pricey Urban Meccas become Crime-Ridden Ghost Towns?

If there is any trend that’s viewed as permanent, it’s the enduring attraction of coastal urban meccas: despite the insane rents and housing costs, that’s where the jobs, the opportunities and the desirable urban culture are.

Nice, but like many other things the status quo considers permanent, this could reverse very quickly, and all those pricey urban meccas could become crime-ridden ghost towns. How could such a reversal occur?

1. Those in the top 10% who can leave reach an inflection point and decide to leave. The top 1% who live in enclaves filled with politicians, celebrities and the uber-wealthy see no reason to leave, as the police make sure no human feces land on their doorstep.

It’s everyone who lives outside these protected enclaves, in neighborhoods exposed to exasperating (and increasingly dangerous) decay who will reach a point where the “urban lifestyle” is no longer worth the sacrifices and costs.

It might be needles and human feces on the sidewalk, it might be petty crime such as your mail being stolen for the umpteenth time, it might be soul-crushing commutes that finally do crush your soul, or in Berkeley, California, it might be getting a $300 ticket for not bringing your bicycle to a complete stop at every empty intersection on a city bikeway. (I’ve personally witnessed motorcycle officers nailing dozens of bicyclists with these $300 tickets.)

It might be something that shreds the flimsy facade of safety and security complacent urban dwellers have taken for granted, something that acts as the last grain of sand on the growing pile of reasons to get the heck out that triggers the decision.

Not everyone can move, but many in the top tier can, and will. Living in a decaying situation is not a necessity for these lucky few, it’s an option.

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Dear Trump Advisors: Prop the Market Up Now and Lose in 2020, or Let the Market Crash and Win in 2020

One of the more reliable truisms is that Americans vote their pocketbook: if their wallets are being thinned (by recession, stock market declines, high inflation/stagnant wages, etc.), they throw the incumbent out, even if they loved him the previous year when their wallets were getting fatter. (Think Bush I, who maintained high approval ratings but ended up losing the 1992 election due to a dismal economic mood.)

As a result, politicians try to time the economy to align with elections. Get any economic pain over with early in the election cycle, then prime the fiscal pump in Year 3 to boost the economy in Year 4 (election year).

The global economy and the credit cycle aren’t always so pliable or predictable. Oil can soar due to geopolitical tensions, or a speculative financial bubble can burst (subprime mortgages in 2008, dot-coms in 2000), torpedoing the economy.

The intuitive strategy is to prop up the economy and stock market by any means available heading into the election cycle: if we can just keep this over-valued pig of a market aloft until November of next year, so the thinking goes, we’ll likely win the election (or at least we won’t lose because stocks and the economy tanked).

But this strategy is a loser when the credit cycle has run past its expiration date: most credit-based expansions last at most seven years, and here we are in Year Ten. Credit exhaustion is setting in, speculative bets are maxed out and the global economy is rolling over.

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Push Them Hard Enough and the Productive Class Will Opt Out of Servitude

One of the most astonishing manifestations of disconnected-from-reality hubris is public authorities’ sublime confidence that employers and entrepreneurs will continue starting and operating enterprises no matter how difficult and costly it becomes to keep the doors open, much less net a profit.

The average employee / state dependent reckons that the small business owner / entrepreneur is killing it financially, banking a small fortune in pure profit every month, and that they’re doing what they love so they’ll continue doing it no matter what. In other words, they’re all wealthy Tax Donkeys who can easily afford higher taxes and fees and will tolerate paying more to keep doing what they love.

Wrong on both counts–dead wrong. A far more typical response is the one a house painter emailed me last year: every day, he reported, he wanted to dump his spray rig and power washer in a dumpster and leave the U.S.

The number of small businesses and entrepreneurs hanging on by a thread financially and emotionally is legion. Rather than killing it, they’re getting killed by rising rents, wages, labor overhead, taxes, fees, licensing, inspection fees, insurance and so on.

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No Fix for Recession: Without a Financial Crisis, There’s No Central Bank Policy Fix

The saying “never let a crisis go to waste” embodies several truths worth pondering as the stock market nears new highs. One truth is that extreme policies that would raise objections in typical times can be swept into law in the “we have to do something” panic of a crisis.

Thus wily insiders await (or trigger) a crisis which creates an opportunity for them to rush their self-serving “fix” into law before anyone grasps the long-term consequences.

A second truth is that crises and solutions are generally symmetric: a moderate era enables moderate solutions, crisis eras demand extreme solutions. Nobody calls for interest rates to fall to zero in eras of moderate economic growth, for example; such extreme policies may well derail the moderate growth by incentivizing risk-taking and excessive leverage.

Speculative credit bubbles inevitably deflate, and this is universally viewed as a crisis, even though the bubble was inflated by easy money, fraud, embezzlement and socializing risk and thus was entirely predictable.

The Federal Reserve and other central banks are ready for bubble-related financial crises: they have the extreme tools of zero-interest rate policy (ZIRP), negative-interest rate policy (NIRP), unlimited credit lines, unlimited liquidity, the purchase of trillions of dollars of assets, etc.

But what if the current speculative credit bubbles in junk bonds, stocks and other assets don’t crash into crisis? What if they deflate slowly, losing value steadily but with the occasional blip up to signal “the Fed has our back” and all is well?

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Credit Exhaustion Is Global

The signs are everywhere: credit exhaustion is global, and that means the global growth story is over: revenues and profits are all sliding as lending dries up and defaults pile up.

What is credit exhaustion? Qualified buyers don’t want to borrow more, leaving only the unqualified or speculators seeking to save a marginal bet gone bad with one more loan (which will soon be in default).

Lenders are faced with a lose-lose choice: either stop lending to unqualified borrowers and speculators, and lose the loan-origination fees, or issue the loans and take the immense losses when the punters and gamblers default.

Europe is awash in credit exhaustion, and so is China. China’s situation is unique, as credit expansion has been propping up the entire economy, from household wealth to corporate speculation to the export sector.

As this article explains, The China Story That Is Far Bigger Than Apple, China’s trade balance–trade surpluses for decades–is close to slipping into trade deficits.

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What Happens When More QE Fails to Reverse the Recession?

The Federal Reserve’s sudden return to “accommodative” dovishness in response to the stock market’s swoon telegraphs its intent to fire up QE once the recession kicks into gear. QE (quantitative easing) are monetary policies designed to ease borrowing and the issuance of credit, and to prop up assets such as stocks and real estate.

The basic idea is that the Fed creates currency out of thin air and uses the new money to buy Treasury bonds and other assets. This injects fresh money into the financial system and lowers the yield on Treasury bonds, as the Fed will buy bonds at near-zero yield or even less than zero in pursuit of its policy goals of goosing assets higher and increasing borrowing/spending.

This is pretty much the Fed’s only lever, and it pulls this lever at any sign of weakness in stocks or the economy. That sets up an obvious question that few seem to ask: what happens when QE fails? What happens when the Fed launches QE and stocks fall as punters realize the rally is over? What happens when lowering interest rates doesn’t spark more borrowing?

What happens is the smart money sells everything that isn’t nailed down, a process that is arguably already well underway.

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What Caused the Recession of 2019-2021?

As I discussed in We’re Overdue for a Sell-Everything/No-Fed-Rescue Recession, recessions have a proximate cause and a structural cause. The proximate cause is often a spike in energy costs (1973, 1990) or a financial crisis triggered by excesses of speculation and debt (2000 and 2008) or inflation (1980).

Structural causes are imbalances that build up over time: imbalances in trade or currency flows, capital investment, debt, speculation, labor compensation, wealth-income inequality, energy supply and consumption, etc. These structural distortions and imbalances tend to interact in self-reinforcing dynamics that overlap with normal business / credit cycles.

The current recession has not yet been acknowledged, but this is standard operating procedure: recessions are only declared long after they actually start due to statistical reporting lags. Maybe the recession of 2019-21 will be declared at some point in the future to have begun in Q2 or Q3, but the actual date is not that meaningful; what matters is what caused the recession and how the structural imbalances are resolved.

So what caused the recession of 2019-21? Apparently nothing: oil costs are relatively low, U.S. banks are relatively well-capitalized, geopolitical issues are on the backburner and stocks, bonds and real estate are all well-bid (i.e. there is no liquidity crisis).

This lack of apparent trigger will mystify conventional economists who generally avoid the enormous structural imbalances in our economy because those imbalances are the only possible output of our Neofeudal Power Structure in which a New Nobility/Oligarchy dominates financial and political power and skims the vast majority of gains the economy generates.

The cause of the recession of 2019-21 is exhaustion: 

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Telltale Signs of Recession

Though every recession is unique, all recessions manifest in similar ways in the real economy. By real economy, I mean the on-the-ground economy we observe with our own eyes, as opposed to the abstract statistical model reflected in official declarations of when recessions begin and end.

One characteristic that never makes it into the abstract statistical representation of recession is the light switch phenomenon: business suddenly dries up, as if someone turned a light switch off. This is especially visible in discretionary purchases, which include everything from smart phones to vehicles to eating out.

Other telltale signs of recession include:

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A Recession Survival Guide

We know that after 10 years of expansion, a recession is baked in. Trees don’t grow to the moon, etc.

We also know that some people will hardly notice the recession while others are devastated. I addressed this in The Recession Will Be Unevenly Distributed(January 10, 2019). A retiree on Social Security and a bit of income from Treasury bonds isn’t going to be affected much, and a power couple in Washington DC who are high up the food chain in the federal government will also shrug off the recession.

What we don’t know is what kind of recession we’re going to get. It’s been almost 40 years since the U.S. experienced a “real recession,” i.e. a downturn that was severe and not limited to narrow slices of the economy.

The recession of 2008-09 was over before it started, and the damage was largely limited to the speculative housing-mortgage sectors and finance and everyone who was over-leveraged in the housing market.

The recession of 2000-02 was limited to the tech sectors that were exposed to the dot-com meltdown and investors in speculative dot-com companies.

The recession of 1991-92 was brief and shallow by historical standards.

The “real recession” of 1981-82 laid waste to numerous sectors and spread devastation throughout the economy. Interest-sensitive industries were crushed, and this impacted sectors such as government that are typically impervious to recessions.

Even further back, the Oil Shock recession of 1973-74 was also an economy-wide upheaval.

Those pundits who aren’t denying a recession is baked in are busy assuring us it will be a mere slowdown. What the well-paid pundits of the status quo can’t or won’t discuss is the economy’s fragility and vulnerability to self-reinforcing declines.

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Gentrified Urban America Will Be Hit Hard by the Recession

A number of macro dynamics have set up gentrified urban America for a big fall in the coming recession. What does gentrified mean? Gentrified means only the gentry (top 10%) can afford to enjoy the urban amenities as commercial rents and the cost of doing business in desirable urban areas have skyrocketed along with residential rents.

As a result, low-margin businesses have been squeezed out of desirable urban neighborhoods along with lower-income residents. The top 10% is the only demographic who can afford to live in gentrified urban America.

As noted in What’s Really Happening to Retail?Only Amazon-proof businesses can now survive in brick and mortar. And that quickly boils down to high-cost, high-margin food and drinks–cafes, bars, restaurants– and mega-corporate chains: Walgreens, Starbucks, Chipotle, etc. and smaller chains that cater to the needs/obsessions of the top 10%: fitness centers, etc.

On a per capita basis, America is grossly over-supplied with commercial real estate. But within the desirable urban cores, commercial rents have soared due to the relative scarcity of commercial space. As a result, landlords and property managers are asking exorbitant rents, and many are leaving spaces empty rather than rent them for less.

The net result is desirable urban zones are being homogenized: niche retailers and other small service providers can no longer afford the rents (unless they also own the building) and the only businesses that can afford the nosebleed rents are high-margin food-beverage establishments or corporate chains.

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The Recession Will Be Unevenly Distributed

The coming recession will be unevenly distributed, meaning that it will devastate many while leaving others relatively untouched. A few will actually do better in the recession than they did in the so-called “recovery.”

I realize many of the concepts floated here are cryptic and need a fuller explanation: the impact of owning differing kinds of capital, fragmentation, asymmetry, opacity, etc. ( 2019: Fragmented, Unevenly Distributed, Asymmetric, Opaque).

These dynamics guarantee a highly uneven distribution of recessionary consequences and whatever rewards are generated will be reaped by a few.

One aspect of the uneven distribution is that sectors that were relatively protected in recent recessions will finally feel the impact of this one. Large swaths of the tech sector (which is composed of dozens of different industries and services) that were devastated in the dot-com recession of 2000-02 came through the 2008-09 recession relatively unscathed.

This time it will be different. The build-out of mobile telephony merging with the web has been completed, social media has reached the stagnation phase of the S-Curve and many technologies that are widely promoted as around the corner are far from profitability.

Then there’s slumping global demand for mobile phones and other consumer items that require silicon (processors) and other tech components: autos, to name just one major end-user of electronics.

The net result will be mass layoffs globally across much of the tech sector. Research is nice but it doesn’t pay the bills today or quiet the restive shareholders as profits tank.

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Could Stocks Rally Even as Parts of the Economy Are Recessionary?

We contrarians can’t help it: when the herd is bullish, we start looking for a reversal. When the herd turns bearish, we also start looking for a reversal.

So now that the herd is skittishly bearish, anticipating a recession, contrarians start wondering if a most hated rally is in the offing, one that would leave most punters off the bus.

The primary theme for 2019 in my view is everything accepted by the mainstream is not as it seems. Everything presented as monolithic and straightforward is fragmented, asymmetric and complex.

Take “recession.” The standard definition of recession is two consecutive quarters of negative GDP. But is this metric useful in such a fragmented, complex economy? What we’re seeing develop is certain sectors are already in recession, others are sliding while others are doing OK.

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