Seattle Offices Increasingly Vacant

Office vacancy increased to 16.5 percent in the third quarter 2009, according to a report today from commercial real estate giant Grubb & Ellis. That’s up 210 basis points from the second quarter.

The brokerage forecasts that vacancy rates will continue to increase and will likely surpass 20 percent by the first or second quarter 2010.

 The Seattle office market experienced the sharpest rise in vacancy since the beginning of 2002, driven primarily by the decrease in demand for space.

G&E also said there is significant variance in asking lease rates among the submarkets within downtown Seattle, ranging from $25.55 per square foot to $34.52 per square foot, which tenants may be able to exploit if they are willing to move laterally for lower rates.

Complete details on this report are available from Grubb & Ellis.

Bernanke’s Remedy: Pump More Blood Into a Corpse

By Mike WhitneyInformation Clearing House” — Credit is everything. Without credit expansion there’s no recovery because there’s no pick-up in overall demand. But credit growth is going backwards. The banks have tightened lending standards and the pool of credit-worthy applicants has vanished. Bank lending is off 14 per cent since October 2008. Private credit is presently decreasing at a 10.5 per cent annual rate. The situation is getting worse, not better.

October 05, 2009 “

From the UK Telegraph:

“Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation…

“Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an ‘epic’ 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

“’For the first time in the post-Second World War era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew,’he said. (Ambrose Evans-Pritchard, “US credit shrinks at Great Depression rate prompting fears of double-dip recession”, UK Telegraph)

Foreclosures, delinquencies and defaults are all up. Foreclosure activity is currently at 300,000-plus per month and rising. A huge shadow inventory is being kept off-market to maintain prices. The drip, drip, drip-effect of excess inventory dumped onto the market will keep housing in the doldrums for a decade. Homeowners are unable to borrow on underwater homes. Everything points to a long-term slump in spending.

Corporations are finding it harder to roll over their debt, bank loans are defaulting at a historic pace, and commercial real estate is imploding. Credit destruction is unprecedented, massive and ongoing. The capital hole is bigger than the Fed and bigger than the Treasury. It can’t be plugged with liquidity alone.

For now, the government can fiddle GDP with $800 billion infusion of stimulus, but what happens when the political will for more deficit spending dissipates? What happens when foreign investors demand the Fed stop writing checks on an overdrawn account?

The Fed has fixed nothing. The banks are still underwater, output is at record lows, and unemployment is climbing towards 10 per cent. Fed chair Ben Bernanke’s multi-trillion dollar rescue programs have kept a wobbly system upright, but nothing more. The economy’s underlying problems are still the same. The Fed’s quantitative easing (monetization) program has sent stocks surging, but done nothing to stimulate the economy. That’s because equities bubbles have negligible impact on aggregate demand; there’s no knock-on effect. The real economy is still flatlining while Wall Street parties on. Bernanke’s plan has been a total wash.

The government cannot deficit spend forever. Eventually, GDP will have to depend on wage growth and credit expansion. Given the political and institutional bias against labor, (and opposition to wages that rise with productivity) the only way to fuel the economy is through credit growth. And there’s the rub. Households have lost nearly $14 trillion in wealth since the crisis began and are in no position to resume borrowing at pre-crisis levels. Consumers are cutting back on spending and paying down debt. They have no other choice.

This is from Bloomberg News:

“Americans plan to refrain from boosting their spending even after the biggest drop in consumption since 1980, signaling concern about the direction of the economy over the next six months.

“Only 8 per cent of U.S. adults plan to increase household spending, almost one-third will spend less, and 58 per cent expect to ‘stay the course,’ a Bloomberg News poll showed. More than 3 in 4 said they reduced spending in the past year.

“Underscoring consumers’ austere attitudes, 77 per cent of respondents said they have cut back on spending during the past year, 59 percent said they have made a bigger effort to pay off debts and 48 percent have put more money aside as savings.” (Bloomberg News)

Savings are up and spending is down. The economy is headed into a long-term funk; the “new normal”. The Fed’s sleight-of-hand programs and Obama’s stimulus elixir haven’t changed the prevailing downward trend. If anything, they have made matters worse. Consider this from Janet Tavakoli, author of “Dear Mr. Buffett” in an interview with Max Keiser:

“Regarding the outlook, my analysis is grim. I am not a doomsayer, I follow the cash, and so far, I’ve been correct, and the government has been wrong. Here’s the situation. We are at greater risk of a total meltdown due to a deflationary collapse than we were in 2007. After the greatest Ponzi scheme in the history of the capital markets, we’ve seen history’s greatest fiscal and monetary expansion, but it hasn’t worked. Debt levels of consumers and business exceed the capacity to repay.” (Janet Tavakoli On The Edge With Max Keiser)

The Fed has done nothing to restructure the financial system so the same problems which killed Lehman and thrust the global economy into a tailspin, persist today. When the stimulus runs out and the Fed ends its $1.25 trillion purchase of (Fannie and Freddie) mortgage-backed securities and $300 billion in US Treasuries, interest rates will rise, housing prices will tumble, and the economy will nosedive. Bernanke will be forced back to the printing presses, the only hope for reversing the deflationary spiral. This will trigger the next crisis, a run on the dollar.

This is from an article by Alice Schroeder of Bloomberg News:

“In all the talk of inflation because the Treasury is printing so much money versus deflation because it may not print enough, there is one type of inflation that is rarely discussed. This is the mega-inflation caused by a sudden currency devaluation. Currency is like any financial innovation, an obligation secured by assets. When the obligation is perceived to have increased far beyond the level justifiable by the assets, which in this case make up a country’s economy, a bubble has formed……Right now, the American economy is worth less than the value implied by the market value of its obligations.” (Gold Tells You U.S. Bubble Hasn’t Popped Yet: Alice Schroeder, Bloomberg)

The system crashed because it was built on the false assumption that an unregulated shadow banking system could generate an infinite amount of credit without sufficient capital. This proved to be wrong. Capitalism requires capital. The trillions of dollars in loans, complex debt-instruments, off-balance sheet operations and derivatives contracts were all stacked atop a tiny scrap of capital which eventually collapsed beneath the weight of the debt. This system (securitization) which created the mess, cannot be restored. It required a strong currency, artificially low interest rates, and credulous investors who were unaware of the inherent risks of illiquid assets. Those conditions no longer exist, nor have they for more than two years. Even so, the Fed continues to pump blood into a corpse hoping for some fleeting sign of life. This is why an even bigger crisis cannot be too far off.

Link to Article

IRS Eases Rules on Commercial Mortgage Loan Modifications

The IRS has issued a new tax rule that will allow commercial real estate borrowers to proactively discuss possible modifications to securitized loans that are at risk of default without triggering tax penalties.

Revenue Procedure 2009-45 describes the conditions under which modifications to certain mortgage loans will not cause the IRS to challenge the tax status of certain securitization vehicles that hold the loans or to assert that those modifications give rise to prohibited transactions.

Commercial real estate interests, including the Real Estate Roundtable, had lobbied heavily for the changes. Until now, the roundtable noted, administrative tax rules applicable to real estate mortgage investment conduits and investment trusts imposed severe penalties for changes made to commercial mortgage pools or investment interests after the start-up date of the securitization vehicle. As a result, borrowers were unable to begin discussions with their loan servicers until they had already defaulted or were within weeks or months of defaulting.

Go to Article

Banks’ commercial real estate exposure probed

WASHINGTON – The Federal Reserve is stepping up its scrutiny of commercial real estate loans at smaller banks, where delinquency rates have risen sharply.

Instead of reviewing individual banks, Fed examiners are comparing results across the industry to better assess broader risks, a Fed official said Wednesday. The official spoke on condition of anonymity because of the sensitive and confidential nature of bank reviews.

Delinquency rates on commercial loans have doubled in the past year to 7 percent as more companies downsize and retailers close, the Fed has said. Small and regional banks face the greatest risk of severe losses from commercial real-estate loans. Those soured loans are contributing to a rising number of bank failures.

Go to Article

Washington on the Economy: The Big Con

By Al Walsh

Obama, Geithner, Bernanke and the rest of the Washington cast of characters are basking in the afterglow of the G-20 summit and parading around the country:  patting themselves on the back for “saving civilization” and pronouncing that “the Recession is over”.

Yeah?  Really?      Let’s reconsider that.

The derivatives mess that was key to bringing the whole house-of-cards down is still with us.   One recent article valued it at over one quadrillion dollars.  We can’t know for sure, because it’s unregulated and no one’s talking.

The banks are still insolvent.  Creative accounting, with the government’s blessing, hides the extent of the rot.  Many experts say that more bank bailouts are coming.

The bank bailout created a whole new debt element that Main Street is expected to pick up the tab for.  One article predicted that the interest alone on the debt could amount to more than our total Gross Domestic Product.

Unemployment is awful and getting worse.  The true figures are much worse than the intentionally deceptive government data says.  The last estimate I saw was 16%+ nationally.  While Obama beats his chest and crows, fresh layoffs are being announced; such as Eli Lilly’s announcement of 5,500 more layoffs over the next two years.  I suppose that when we’ve finally all lost our jobs, the statistics will look great because there won’t be anyone left to get laid off.

The housing market has stabilized a bit, but there are more mortgage resets coming that will drag it down further.  Commercial real estate just continues to decline.

Consumers are expected to pick up demand and buy us out of the recession – but how?  They’re up to their necks in debt, out of work, and broke.  Adding insult to injury, the very banks who created this mess are gouging them with new banking & credit card fees.

There’s good reason why Gold & Silver are rising in value; despite government’s best covert efforts to hold them down.  The dollar’s been trashed, and is becoming a laughing-stock globally.   I just laugh when the Fed ”suits” keep talking about a “strong dollar policy”.  I’m starting to feel like a ”banana republic” citizen.

Wall Street pundits cheer whenever the stock markets show an uptick.  Keep in mind that the vast majority of market trading is institutional; by the very people who have the biggest vested interest in fooling the rest of us.  Gee, there couldn’t be any market-rigging going on, could there?  Nah, we only have free and open markets here in America (and if you believe that I’ve got the proverbial bridge to sell you).  I’m reminded of the time last year or the year before when Goldman Sachs was publicly recommending that investors sell their Gold (while secretly buying it for their own account).

I won’t even get into the growing “anti-business”, socialist tendencies of our government for decades that have done so much damage.  We voted these successive administrations in, and we deserve what we get.

Apparently Obama thinks that he can talk us out of recession by spreading rosy messages.  Mr. President, even if you could pull the wool over America’s eyes - they have few assets left to do anything with.

For decades, the Fed has been pulling our economic “butts out of the fire” of each bubble by pumping out even more money and creating new bubbles.  I think they’ve finally run their string.  Now we have a long way to go to dig ourselves out; the hard way.

I respectfully disagree with you President Obama, and consider it insulting that you think we’re so ignorant as to buy into your big con.

By the way, I sure would like to see that audit of the Fed which has been getting kicked around in Congress.  Actually, I’d like to see the Fed be audited, and then disbanded.  They’ve screwed up our economy and stolen from the pockets of the citizens long enough.  It’s time to put U.S. monetary policy into the hands of a true government agency; and out of the hands of self-serving bankers. While we’re at it, how about an audit of the Gold reserves.  Why all the secrecy?  What do you have to hide?  What have you “gentlemen” been up to for decades that you don’t want America to know?

I love America and don’t want to see the country endure any more pain, but I have to “call ‘em as I see ‘em”, and the fundamentals just don’t add up to the same story as the ‘Washington speak”.

Protect yourselves the best you can fellow citizens.  It’s going to be a long and bumpy ride.

Borrowing from the immortal words of Dennis Miller:   “It’s just my opinion.  I could be wrong.”

Of course, according to former President Carter, I’m just being a “racist” for daring to disagree with President Obama.  I actually feel sorry for the President that he has to endure this buffoon speaking in his name.  There seems to be no end to the silliness.  If only it wasn’t so expensive.

Whose Economic Recovery?

By Danny Schechter

September 10, 2009

President Obama’s highly anticipated health care speech started on a totally different subject: The economy.
“When I spoke here last winter, this nation was facing the worst economic crisis since the Great Depression,” he told Congress and the people at home. “We were losing an average of 700,000 jobs per month. Credit was frozen. And our financial system was on the verge of collapse.”

“But,” he went on, “thanks to the bold and decisive action we have taken since January, I can stand here with confidence and say that we have pulled this economy back from the brink.”

Applause. Applause. Applause.

Are we back from the brink? And what brink is that? On Labor Day, HBO featured a powerful documentary about a GM Plant in Ohio that was shutting down. It showed the workers, teary eyed and forlorn, making the last truck on “their” assembly line. Their faces told the rest of the story as they asked themselves and each other, “What do I do now? What happens to my family and my life?”

They had no answers, and neither, alas, does Barack Obama.

A “jobless recovery” will not give these workers the money to buy into even the cheapest health care coverage, public option or not.

Look around Mr. Obama: the unemployment rate in real terms is over 16%. The consumer economy is shattered. The commercial real estate market is imploding, and, yes, more foreclosures are on the way according to the Washington Post:

A new report foresees another wave of foreclosures, as option adjustable-rate mortgages — an entire class of specialized home loans — will soon reset to higher payments. Estimated to jump by 63 percent on average, the higher rates will likely push many of the already-strained loan recipients over the brink. The loans, also called pick-a-pay loans, are a prime example of the risky lending techniques that created the housing crisis: Borrowers were allowed to pay back the loan with as little as they wanted each month, though that meant many paid less than the interest due…the report says the fallout from the loans could be felt for years, especially in states already hit hard by foreclosures.

Just who is back from the brink?

If you listen to the Fed, the glass is more than half full. If you listen to economists like Simon Johnson, it’s way more than half empty, as he wrote on Baseline Scenario:

In the absence of effective financial regulation – i.e., both during the 1920s and again since 1990 – the Fed has operated in a manner that encourages the formation of sequential bubbles. This destabilization of our financial system is not a minor matter; the damage caused – human, financial, social – is already enormous.

And we are very far from being done.

Don’t take my word for it. Lou Jiwei, the chairman of China’s sovereign wealth fund said recently, “It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose.”

Yes, We Can… Lose, that is, Mr. Lou. And Yes We Are, Mr. Obama. The problem is that we are still in some Bernanke fantasyland, thinking that if we keep saying everything is ok, it will be.

Here’s Washington’s blog on real unemployment as opposed to what the Bureau of Labor Statistics is saying:

… Paul Craig Roberts – former Assistant Secretary of the Treasury and former editor of the Wall Street Journal – and economist John Williams both said in December 2008 that – if the unemployment rate was calculated as it was during the Great Depression – the December 2008 unemployment figure would actually have been 17.5%.

Williams says that unemployment figures for July 2009 rose to 20.6% According to an article summarizing the projections of former International Monetary Fund Chief Economist and Harvard University Economics Professor Kenneth Rogoff and University of Maryland Economics Professor Carmen Reinhart,… unemployment could rise to 22% within the next 4 years or so.

Hello, Mr. President? Why can’t you bring to the discussion of the economy the same passion and fact-based arguments that you brought to the health care debate?

Why can’t you propose serious reforms on the financial sector? Why can’t we jail the financial criminals?

The answer seems to be that Wall Street will be a far more tenacious and resourceful enemy than the health care industry perhaps because they already own much of the Congress.

Remember Senator Dick Durbin’s comment, ‘the bankers run the place.”

Alan Blinder a former vice-chairman of the Fed fears that pressure for financial reform is losing steam in part because of the power of what he calls “The Mother Of All Lobbies.” He writes, “in the case of financial reform, the money at stake is mind-boggling and one financial industry after another will go to the mat to fight any provision that might hurt it.”

Obama acknowledged we are not out of the woods yet. (What woods?) But what are the likely consequences? How long can people live without anything coming in? How long can we live on upbeat projections?

“There is no doubt class antagonism is stewing,” says the editor of the blog Naked Captalism. He expressed a fear of a reaction that will go way beyond flag-waving tea parties:

… I am concerned this behavior is setting the stage for another sort of extra-legal measure: violence. I have been amazed at the vitriol directed at the banking classes. Suggestions for punishment have included the guillotine (frequent), hanging, pitchforks, even burning at the stake. Tar and feathering appears inadequate, and stoning hasn’t yet surfaced as an idea. And mind you, my readership is educated, older, typically well-off (even if less so than three years ago). The fuse has to be shorter where the suffering is more acute.

One is reminded of the title of that movie, There Will Be Blood. Rather than show contrition or compassion for its own victims, Wall Street is hoping to jack up its salaries and bonuses to pre-2007 levels. The men at the top are oblivious to the pain they helped cause. They are getting away with the crime of our time.

And the people – The People – who potentially can challenge all this by action on the ground are being mesmerized by the false hope that recovery is here or right around the corner. How long before they realize you can’t eat optimistic speeches?

Hide and Seek Credit

Edited by Joel Bowman

Sometimes less is not more; sometimes it is even less.

According to a Federal Reserve report released by the Feds this week, consumer credit contracted at an annualized rate of 10% in July.

“Non-revolving debt,” which includes loans for automobiles and mobile homes, plunged by $15.4 billion in July…even as the government’s “Cash for Clunkers” program artificially bolstered auto sales to a pace not seen since the heady days of May, 2008. Revolving debt, such as credit cards, fell by $6.1 billion over the same period.

Less really is less.

How does the situation look on the ground, we wonder? Could it be…gasp…even worse than what the Feds would have us believe? Could it be that the next round of economist forecasts will be off the mark?

Here’s what our humble, unpaid correspondents had to say…

First up, let’s hear from the Rude dentist: “I am the owner of a dental practice. I have been dealing with a bank that bought the community bank I worked with for the previous five years. I had an open 100k line of credit at the community bank that was reduced to 25k when the new bank took over. Of course, they charged doc stamps and changed the terms and this was last year in November.

“A few months later they reduced it to 10k because I was not using it. Then, this last weekend, they added an additional 25k line of credit (that i did not ask for) and because they “valued my business,” said they would only charge me one half the doc stamps and loan origination fees.

“As far as refinancing my home…forget it. It seems this bank is not loaning money, only churning existing accounts for additional fees wherever possible.

“I am looking for a new bank.”

Rude reader Charles writes with a similar story. “We have a 7 acre piece of property assessed at 1.3 million and looking to improve it by renovating an existing retail and residential operation. Current rents will cover payments for a $400K loan, which was denied because we do not have enough business experience.

“On the other hand we applied for a refinance of $125,000 on a home assessed at $210,000 and everything looked good until the bank found out we would use the money to improve this commercial property they then lowered the available money to 85K. There is money but it ain’t easy.”

Rude reader Kenny agrees, “To corroborate your private capital vs. government credit jet fuel story, my brother has several commercial buildings which he has contracts on to sell but nobody can actually get the financing to go through with the deals. Obviously no matter how bullish the end consumer is, if he cannot secure financing he can’t follow through.

“The phrase, ‘Show me the money’ comes to mind.”

“There’s no doubt about it,” writes Mike, an Agora Financial Reserve member. “[There is] absolutely NO MONEY out there to borrow for new projects unless you have the same amount of cash to back it up and no such thing as collateralization for any kind of loan. NO CASH, NO LOAN.

“As for current loans on real estate; banks are doing whatever is necessary to bleed cash out of you for principal paydowns. I came prepared and pushed all the keys across the conference table. They backed up. [The bank] essentially told me to go pound sand. So much for having loyalty to a bank, especially when it was they who were prospecting and throwing cash at me just two years ago.

“What really galls me it that people actually treat bankers as though they are intelligent. They got us into this mess and are keeping us in it. Most of them are just building up cash balances as they’ve figured out that their loan portfolios aren’t worth squat or anywhere near their current balance sheet figures and bad loan holdbacks. I’m sure this is a duplication of every note you’ve received thus far.”

Finally today, for our Rude contingent back home, a quick look at the Australian story…

“Our company is a start-up contracting company working in the electrical supply industry with work guaranteed from a large multinational company,” writes our Aussie correspondent.

“I am currently employed on wages by this multinational company as I am being trained to become a contractor for them. We have work for four years in advance with ongoing negotiations for an eight-year contract.

“After investing $60,000 of our own money to purchase some of the equipment our company requires we were advised by our accountant to purchase the remaining equipment with a bank loan for tax and operational reasons. We could buy the required equipment outright and have $120K of capital tied up which we have been advised against.

“We approached our own bank and were knocked back even though we have money to cover the loan and tangible assets of $5.00 for every $1.00 of the proposed loan.

“We have spent the last five weeks negotiating with all manner of financial businesses and, fingers crossed, may have finally found a company to assist us; but they require additional paper work to be completed.

“There is no doubt in our minds that the banks know the economic bubble is going to burst again and they (the lenders) don’t want to be burnt again. The Government-offered incentives have just been a quick fix with no real substance behind it to sustain it into the future.”

Cash for Clunkers -and- Bernanke “Saving the World”

More economic wisdom from Chris Gaffney and Chuck Butler…

Should be a busy week ahead, and I would expect for most of the data out of the US to continue to confirm a government led recovery is underway here in the US.  In particular, the consumer spending and durable goods orders should show a nice uptick on the back of the cash for clunker program.  But Chuck sent me a note over the weekend which questions the ‘success’ of this program.  Is it really what the US economy needed?  Here are Chuck’s thoughts from San Francisco:
 

“I was sitting here thinking about something that had flashed across the TV screen here in my room, and that is the “Cash for Clunkers” program… I blasted this program two weeks ago, and now that it’s finally done with and $3 Billion was spent to artificially boost auto sales, I will put my final thought on this… Of course I already talked about the obvious things wrong with this program. But here’s my final thought, and that is… I believe the program is going to end up hurting the most vulnerable consumers in the U.S. Middle Class buyers, traded in their “paid for” cars, and leveraged up to buy a new car, when they probably shouldn’t have done so, given the rot on the economy’s vine.

So… Once again, I’m reminded of the words that President Reagan said were the scariest words that could be spoken… “I’m from the government, and I’m here to help”…

The reason I’m all over this program today like a cheap suit, is that this weekend, I heard that Big Ben Bernanke made a claim at the Jackson Hole boondoggle, that “we saved the world”… Oh, Come on Big Ben, isn’t that just a bit dramatic? Does this statement have anything to do with the fact that you are up for re-appointment in January, and you would love to have that thought of you “saving the world” on the minds of the administration?

So… In the end, we’ll see if “he saved the world”…”

I’m with Chuck on this one.  It seems the US government is intent on getting consumers to go back to their borrow and spend habits.  This is what created the bubbles, and the administration seems intent on creating another bubble economy.  US consumers have made some historic cut backs on the amount of debt they are amassing (whether or not these cutbacks are by choice).  The US government should not be encouraging these consumers to go back to their previous ways, but should instead be trying to use the funds to educate and train consumers and to encourage new and innovative companies.  Use this downturn to correct some of the bad habits which we had gotten into.  Yes, it will be painful, but breaking an addiction is always hard and painful.  US consumers need to break our addiction to easy credit and massive debt.  This recession/depression has given consumers a much needed wake up call, hopefully the administration won’t be able to push consumers back into their old habits.

I went running with my wife and her friends over the weekend (trying to take it easy on the back) and got into a discussion about the US economy.  One of my wife’s friends had heard an interview on MSNBC in which an economist stated we were in a classic V shaped recovery.  I let her know that I think the economist was one letter off, and that instead we will see the recovery shaped more like a W.  The green shoots and recovery we are seeing right now will die out as government stimulus slows.  High unemployment, a long slow housing recovery, commercial real estate woes, and rising personal bankruptcies will force the economy into another dramatic downturn.  Central banks who have ‘juiced’ their economies with unlimited credit will have to decide whether to continue juicing, or pull back from the table.

Nouriel Roubini wrote a commentary in today’s Financial Times which agrees with my thoughts.  Roubini said the chance of a double dip recession is increasing because of risks related to ending global monetary and fiscal stimulus.  He believes the global economy still has further to fall, and will bottom out sometime during the second half of 2009.  While some economies such as China, Germany, Australia, and France will likely recover; others such as the US and UK will double dip with another leg down.  “There are risks associated with exit strategies from the massive monetary and fiscal easing,” Roubini wrote.  “Policy makers are damned if they do and damned if they don’t.”

Searching for the Depression—And Finding It!

By Danny Schechter

August 20, 2009 “Information Clearing House” — Last week I was telling a visiting filmmaker from overseas about the financial crisis and how it was getting worse. He looked at me askance. The market had just gone up, he said, and the White House was talking about an emerging recovery.

“I have been in New York before, he said, and it looks the same.”

A lot of the pain is hidden, I told him, hidden behind the deceptive spin in our media or buried in the denial and delusions of many people on the streets who have not taken the trouble to try to understand the nature of the calamity they are living through.

On the elevator, we pass the offices of City Harvest, a charity that collects excess food from restaurants and distributes it to shelters and programs for the hungry. An employee explains that with the restaurant business way off, they have less to donate. What about the demand by the hungry, I ask? With a shrug, he tells me the need is way up. (AP is reporting, “The nation’s food banks, struggling to meet demand in hard times, are turning to prison inmates for free labor to help feed the hungry.”)

Out in the street, you soon notice fewer cabs and town cars. More people are walking or using public transportation, even though the fares recently went up. Even that is deceptive because there are still a lot of tourists in Midtown to complicate the picture. New Yorkers have other things on their minds. There are retail vacancies on every block. Other stores are discounting everything. The fast food places have their specials going for $2-5 dollars. Many of the clothing stories look like good will shops. When a JC Penny opened a store in Midtown, 15,000 people applied for 500 jobs.

As we walked downtown, we passed nearly empty bars and restaurants, a sign that the most customers are staying away. Media reports are now confirming what I saw. The Wall Street Journal reports, “Major retailers reported that American consumers are continuing to hunker down, casting a cloud over the durability of the U.S. recovery and underscoring the importance of overseas demand in restoring the world economy to health. Retailers across the spectrum provided foreboding reports.”

Down where I live, you also pass new buildings with empty stores and unsold apartments. The foreclosure crisis is already hitting New York’s condos and co-ops. You just can’t see it from the street the way you can in a suburban tract. When you read the auction notices, you realize its real. A new wave of foreclosures is expected and not just in poor homes. The middle class and commercial real estate is affected.

Almost every block on 8th Avenue in Chelsea has a new bank branch. It’s like ATM heaven except most are not crowded. There was a report last week that banking industry opened 10,000 branches over the last five years. Most were based in shopping areas or concentrated in affluent neighborhoods. Only a small number are in poorer communities, especially those victimized by predatory subprime lending. The New York Times reported this week that 91,100 NY households hide their savings in closets, in pillows — even in brown paper lunch bags, just not at a bank

Meanwhile, every week, more banks are going bust and being taken over and sold by the FDIC. There are reports that the FDIC itself is insolvent.

And as for the markets, cooler heads prevailed when the wisemen realized that consumer demand has fallen up as defaults and delinquencies rise

Inequality is mounting in social and racial terms. Recent statistics: cited in a Times study: “From the first quarter in 2008 to the first quarter in 2009, the national unemployment rates for blacks rose from 8.9 percent to 13.6 percent, compared to a rise for whites of 4.8 percent to 8.2 percent. In NYC, it was even worse: from 5.7 percent to 14.7 percent, compared to 3.0 percent to 3.7 percent for whites.”

Remember these statistics notoriously undercount those not looking for jobs that are not there. Unless you are following the trajectory of this crisis you might not know that economist Nouriel Roubini, who was among the first to predict it, still sees it as far more serious that most of us realize:

“This is the worst US and global recession in 60 years. If the US recession were—as is most likely—to be over at the end of the year, it will have been three times as long and about fives times as deep—in terms of the cumulative decline in output—as the previous two.” Notice he is not quite predicting its end, using the “If” word to mask his own uncertainty. The Financial Times cautions against optimism taking refuge in the term “caution.”

Here in the Big Apple, The City’s top money man, Controller Bill Thompson says, “108,000 jobs evaporating citywide between August, 2008 and May, 2009. Typically, unemployment continues to climb even after the economy bottoms out and begins to recover. I expect the number of unemployed in New York City to reach 400,000 in 2010, for the first time in decades.”

Still invisible are the impact of cutbacks on city services and the educational system.

Income disparities are growing, according to a new study but how do I show that to my visitor since people with credit cards can still charge it even as credit limits are being cut back and interest rates rise. At the same time, A Bank of America Merrill study shows the Middle class is being hit hardest.

The LA Times reports, “The consumer debt problem in the economy really is a debt problem for the middle class. The need to work off a chunk of that debt will sap middle-class family spending power for perhaps years to come. By contrast, the upper 10% of income earners face a much smaller debt burden relative to income and net worth. Those people should have ample spending power to help fuel an economic recovery.”

And don’t think the end of the recession will bring back many of the jobs that are gone. Economists are now getting us used to a new term: “jobless recovery.”

Already employers are introducing compulsory furloughs, as the Christian Science Monitor reveals: “For millions of Americans, this might be the year of the furlough. Over the course of a month or so, workers—both white-collar and blue—may have to take several days off whether they want to or not. Call it a temporary pay cut—an action that is sold by management as a way to help save some jobs.”

Another new study finds, “Income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression, according to a recently updated paper by University of California, Berkeley Professor Emmanuel Saez. The paper, which covers data through 2007, points to a staggering, unprecedented disparity in American incomes. On his blog, Nobel prize-winning economist and New York Times columnist Paul Krugman called the numbers “truly amazing.”

It’s all amazing, all devastating to our lives and futures, and yet you can’t necessarily see it if you don’t look, or know what to look for. No one is talking about our economic pain—not the right or the left, perhaps because it is not an “event” that you can cover live at a town hall.

It’s there but, for many, it’s invisible and seen as a personal problem, not a social issue. This crisis didn’t just happen; it was caused. Will those responsible ever be held accountable? Out of sight is out of mind. The hope is that if we ignore it, it will go away.

If you think that, think again.

Sell REITs Some More

By Dan Amoss

Economic distress is metastasizing throughout the commercial real estate market.

As I mentioned last week, Kilroy Realty’s (KRC) earnings were ugly. The stock soared anyway. Apparently, investors are focusing on hope rather than substance. Kilroy’s conference call after the earnings announcement did not provide any evidence of a turnaround, only hopes and wishes. CEO John Kilroy describes his hopes for recovery in profitable rental activity on the call:

“Certainly there’s some pent-up demand. We’ve seen a lot of folks that had been close to signing an LOI and then backtracked and decided to stay and do a one-year lease in their existing space. So we do think there’s some pent-up demand with regard to improving people’s facility structures, but there clearly has been a wait and see attitude, as Jeff mentioned, amongst the broad number of tenants throughout Southern California, given the economic conditions.”

That wait-and-see attitude will be around for a long time. “LOI” stands for letter of intent, and it’s an early stage, non-binding agreement about the terms of a potential lease deal. Kilroy management is trying to paint a bullish picture about “pent-up demand” for office space, but this is a ridiculous notion. Potential tenants are just testing the water, and very few of Kilory’s LOIs will be converted into signed leases.

Consider that Kilroy’s core San Diego market is now over 20% vacant. Why on earth would any potential tenant be in a rush to sign a new lease? The signs of a turnaround in demand for commercial real estate are as bogus as the “green shoots,” and are only being temporarily boosted by the government’s destructive fiscal and monetary policies.

We are very far from seeing capacity utilization in office space stabilize, let alone turn back up — especially in Southern California. The analyst covering Kilroy at Stifel Nicolaus hit the nail on the head with this comment in a post-conference call note:

“The primary issue is large tenant move-outs in small tenant markets: Accredited Home Mortgage vacating roughly 182,000 square feet, Epicore moving out of 173,000 square feet, Boeing out of 113,000 square feet of Orange County industrial and Boeing on the fence for 290,000 square feet of El Segundo office space in mid 2010.”

Meanwhile, the only way to explain the recent moon shot in all REIT stocks is short-covering.

According to Goldman Sachs Research, U.S.-listed REITs have raised roughly $13 billion in capital year to date; yet they still need an estimated $40 to $60 billion, even without further reduction in REIT values. There simply is not this amount of dedicated REIT mutual fund money in existence. Those REITs who can raise new equity will keep doing so, flooding the market with new, dilutive shares.

The number of REIT shares outstanding is soaring at a time when property values are plummeting. The MIT Center for Real Estate maintains databases on property values. You can find the data at this link. The estimates of supply and demand for each type of commercial property paint a very bleak picture for rents. MIT notes that the second quarter of 2009 saw an 18% sequential decline in commercial property prices — not year-over-year, but quarter over quarter.

Distressed sellers are pushing down comparable prices, which marks to market every REIT’s portfolio. Furthermore, crashing rental yields are becoming less reliable as indicators of property value. Prospective property buyers — real investors, not the momentum traders chasing after REITs in recent weeks — will adjust rents downward by anywhere from 20% to 30% over the next year or two to factor in the massive excess capacity in commercial space. Finally, the REIT stocks have not even begun to discount the bearish impact of higher Treasury bond yields, which will increase their cost of future refinancing.

Despite the mountains of bearish evidence, the REIT index continues to rally. This has the feel of a blow-off top. I did not expect something like this to happen – a situation in which money would start to flow into the REIT sector, setting off a short squeeze. But I continue to recommend shorting REIT stocks (as well as the lenders who hold large quantities of commercial real estate loans). Specifically, I like SRS, the UltraShort Real Estate ProShares ETF (NYSE: SRS. Current price $11.63) as a way to profit from weakness in the REIT sector. But fasten your seatbelt! SRS is volatile. It delivers twice the INVESE return of the Dow Jones U.S. Real Estate index. In other words, when REITs fall, this ETF goes up a lot. But when REITs rise, this ETF falls a lot.

This ETF isn’t for everyone, just for those investors who believe the commercial real estate sector is ripe for a fall.