In 1975, before cell phones, personal computers, the internet, social media, Miami Vice, and most video games, a sort of kinky, weird, post-apocalyptic movie set in 2024 came out. It was called A Boy and His Dog, and starred a young Don Johnson. Working on an unrelated substance post, I just learned that movie was set in 2024. Well... we didn't have World War III, or World War IV. Civilization is still around, we didn't live through the end of the world. But the real world in 2024 was something they couldn't possibly have imagined back in 1975. Which was crazier? A Boy and His Dog or real life 2024? You decide, and let me know on Facebook.
The year 2024 in review by NBC News. I'd say the real 2024 was a hell of a lot crazier than a talking dog helping a guy get laid. Sometimes truth is stranger than fiction.
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Here's a real fight between male gorillas, in the wild, in Rwanda. We're humans, male silverback gorillas can weigh up to about 600 pounds (270 kilos), and are much stronger than us. There's a reason we have a saying "the 800 pound gorilla in the room," about huge issues we all ignore. This post is not about gorillas, it's about the economic realities of the next few years in the United States of America. But I'm starting this post with the economic "800 pound gorilla in the room."
We have far too much debt in our economic system. That's the huge issue everyone ignores on a daily basis. Nearly all average people have far more debt than they can handle. Home mortgage debt, student loan debt, auto loan debt, credit card debt. Businesses large and small also have huge debt loads in many, if not most cases. Local governments, villages, towns, cities, and counties, have debt issues. States have huge loads of debt. And yes, the United States of America now has over $36 trillion in debt, it just crossed to $36 T recently, according to the U.S. National Debt Clock, as I write this.
Not all debt is bad debt, debt allows us to buy houses we could never afford buy paying cash for, it allows us to buy newer and better cars, go to better colleges, and businesses routinely use short term debt to buy merchandise, while giving their buyers terms to pay for items sold, allowing a smoother flow of goods and services all around.
More important, the U.S. dollar is backed by debt, not gold, since 1971. We're over 50 years into the largest fiat money experiment in human history. Our entire economic system runs on debt. Our system NEEDS debt to keep functioning. But there's an amount of debt where things function smoothly, and an amount of debt where nearly everyone struggles to pay their bills, month to month, and everything slows down to a breaking point. We're in the latter, right now.
This country has an amount of debt that is dramatically slowing down consumer spending. Consumer spending makes up about 70% of the economy. This is the huge, underlying issue everyone is ignoring as we head into a new presidential administration that wants to make massive changes in many areas. Their game plan has largely been created by Right wing, highly religious, "conservatives." I put that word in quotation marks because they don't believe in conserving money like decades ago, they definitely aren't for conserving the environment, "conservative" in today's world seems to imply fundamentalist Christian social beliefs. Conservatives aren't really into "conserving" much of anything, except the status quo.
On January 20th, 2025 Donald Trump will be sworn in as president, a 78 1/2-year-old man who quite admittedly loves McDonald's French fries... and salt. But this post is about what life will be like for Americans in the next few years, not fundamentalist social views or Trump's health. In less than two weeks since the election, the stock indices hit new highs, and then dropped back quite a bit, and now are climbing higher. Gold dropped over $200 per ounce from its recent all time high, and is now bouncing back a bit. The U.S. dollar has surged higher, compared to other major currencies, which makes life and business harder for many other countries, including our allies. Despite having The Fed lower their Fed Funds rate 3/4% in the least couple months, overall interest rates have been trending up. The 10 Year U.S. Treasury, a common bookmark for interest rates is at 4.41% as I write this, a much higher return than through all of the 2010's.
While small and mid-sized business owners tend to lean Republican, and believe the economy will take off in a Trump presidency, in reality there are all kinds of mixed signals in the financial world, contradicting each other. Here are the major trends I see playing out now, and into the future months and years.
Inflation- Inflation has been trending down, from a high 9.1% CPI, to around 2.5% recently. Truflation, a wider, nearly realtime inflation indicator, got down to 1.01% annual inflation rate on September 13th, 2024, but has surged back up to 2.84% since. The investment world, the big players, see a Trump presidency likely to push inflation back up. That's a recent trend change, and has kept going up since the election, about two weeks ago. But there are major trends pushing overall inflation downward at the same time, particularly stagnant or dropping values in both commercial and residential real estate in some areas.
Consumers are broke-Advanced Auto Parts is the latest large business to announce mass store closings and layoffs because consumer sales are slowing, and everyday people are broke. McDonald's, Starbucks, and several other major corporations have been saying the same thing for about six months now. As I mentioned above, most consumers are saddled with high levels of debt these days, and working hard to pay day to day expenses and keep current on their various debt payments. Consumers spending is about 70% of the U.S. economy, and I see nothing coming in the next couple of years to change this issue. To increase consumer spending, either wages have to increase by an unprecedented amount, quickly, or TRILLIONS of dollars of some forms of debt need to be written off. I don't see either of these ideas as having a chance in Hell of happening anytime soon. This issue alone, broke consumers, makes the strongest case for a recession that has either started, or will start soon. We have been slowly, steadily dropping into a recession, and it would have happened either way, under a Harris or a Trump presidency. But how the government reacts and responds would be quite different.
Commercial real estate collapse- The collapse in prices of commercial buildings, across the U.S., has been going on for around a year now. Buildings worth tens of millions or hundreds of millions of dollars have been selling for up to 90% discounts, in some cases, for several months now. This is happening nationwide, to these large office buildings, along with many vacant retail stores and malls, which have been struggling for the last decade or more. Here's a 20 story building in Denver that recently sold at an 80% discount. One of the tallest buildings in Texas sold in May for more than a 90% discount. Here's an office building in San Francisco that sold for nearly 80% off of it's peak value. You get the idea, this isn't just happening in the few biggest major cities. The overall values of many retail stores, malls, and office buildings are dropping all over the country. Lower values mean lower tax incomes for cities, which means those cities will ultimately have to reduce services somewhere, to compensate. Like broke consumers, there is no quick fix to this problem, and it is a part of our transition out of the fading Industrial Age era and into the building Information Age society, which needs different types of buildings in different places. This trend will just have to play out over many years, probably two or three decades, just like the closure of factories did in the late 1970's through the 2000's.
Residential real estate slowing down- In this video by Nick at Reventure Consulting (from mid-November 2024), he shows multiple homes that have dropped tens of thousands in value, to a $400,000 loss in a home's value in one case, over the last two or three years. Much of Florida's residential real estate, in particular, is turning down quickly right now. I think most of us know that home prices vary tremendously across the United States right now. For example, the median home price is now $1.2 million in Los Angeles, California. Yet, there are cities that have gone downhill in recent decades, mostly from the loss of factories and high paying manufacturing jobs. There are many areas where homes are for sale for incredibly low prices.
I won't pick on the well known cities of Detroit, Michigan, Gary, Indiana, or Youngstown, Ohio, which are known for these issues. Here's a house for sale for $59,900 in Mansfield, Ohio, where my grandparents lived until I finished 8th grade. I spent a lot of time in Mansfield as a kid, going to the now closed Richland Mall, playing on my grandparents' swing set, and getting yelled at by my drunk German grandpa. Mansfield was a thriving Midwest industrial city when I was a kid, in the 1970's. Now, like most of rural, small town, and mid-sized city America, it's struggling. There are probably 150 or 200 mid-sized and small cities in the U.S. that have been struggling since the early 1980's, and Mansfield is just one of them. If all these towns and cities really had the potential for large numbers of people move in and live really well, Americans would flood back into those cities. If that happened, new businesses would rise up in those towns and cities, and the overall real estate prices would rise in those places, and even out across the country. But that is not what's happening, over the long run. Though the pandemic reversed the migration flows for two or three years, the long term trend is that Americans, overall continue to migrate to the larger metro areas.
These are just three of the really big, long term trends, that are playing out now, and will continue well into the future, regardless of what President-elect Trump, or any other politicians do. Trump's much trumpeted ideas for tariffs could easily lead to higher prices and more inflation, or a full blown trade war with China, neither of which helps working Americans.
Yes, stock prices, and particularly crypto prices, are rising right now, which helps the relatively small number of Americans who own large stock portfolios. But stocks are largely overvalued overall by long term standards, which is why people like Warren Buffet, one of America's best investors, have been selling large quantities of stocks, and is now sitting on over $320 billion in cash. He is waiting for good opportunities to invest large sums, and can't find them at this time.
There are huge negative trends economically right now, and some very positive trends in some markets, and these mixed signals will most likely continue well into the next year or two. Future actions by the new administration will have some effect on the economy, and we'll have to see how the overall picture plays out. But it's not going to be smooth sailing, or the unbounded upward trend that most Republicans are now expecting. Finding true organic growth in the economy at a large level has been a problem since the Great Recession (aka the GFC) of 2008. It's going to be a weird and tumultuous road ahead economically, and some actions by the Trump administration could make it worse for average Americans.
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This 60 Minutes segment, from February 2024, gives a pretty good overview of the basic idea of this post, the current state of cities. There's a HUGE crisis brewing right now in commercial real estate. Anyone who follows financial markets or real estate knows about it. There's no "if" about it, it's something that will wreak a lot of havoc on many levels, at some point. It's happening now, and the biggest crisis moment hasn't hit yet. Everyone knows it's coming, it will affect the whole economy, and every single person's life in some way. And no one really knows what to do about it, this issue is that big
Black Swans and White Swans
What is a "White Swan" event? In 2007, Nassim Nicolas Taleb wrote a book called The Black Swan. The basic idea of a Black Swan Event is something that has a very low probability of happening, but has a huge impact if it does happen. A meteor 100 yards wide hitting your city is an example of a Black Swan Event. The chances of it happening are very, very, very low. But if a meteor that size did hit your town, it would leave a crater several city blocks wide, and cause massive devastation for miles in every direction, on people, businesses, infrastructure, and the local economy. It would be catastrophic to a city. By its very nature, a Black Swan Event is unexpected, it's something almost nobody sees coming.
His basic idea concerning investing, as I understand it, is to protect yourself (and your investments) against potential black swan events. Having fire and flood insurance on your house, because of the tiny chance those things might happen, is an example of protecting yourself, and your house, against the small chance of a fire or a flood. If those things happen, the insurance covers the value of your house, so you can rebuild. So that's the "Black Swan" idea in a nutshell. The Covid-19 pandemic is a great example of a Black Swan event. Yes, a few virologists, and Bill Gates, knew something like that would happen eventually. But to almost everyone, it was completely unexpected, and had devastating consequences, killing over 7 million people worldwide, and over 1.2 million in the U.S. (source: Worldometer). That's the largest recent example of a Black Swan Event.
By contrast, a "White Swan Event" is something that has a high probability of happening. It will still be catastrophic, but we see it coming, we have time to prepare, if we want to. The commercial real estate crisis is happening, slowly, steadily, and the whole business and economic world sees it coming. But no one really seems to know what to do, other than slow the process down as much as possible. But it's still going to be a major crisis at some point. Soon.
This is a huge issue, it will affect your bank, maybe even your own checking account, and it will affect the value of the home you own, or the home or apartment you rent. It's big, it's complex, and the crisis is moving really slowly, which makes it easy to ignore in our busy, everyday lives. But, like it or not, it is going to happen, we know it's coming. How will it affect your life? How can you either deal with your part of this crisis, or maybe even profit off of the chaos? That's the question a lot of smart people in real estate, banking, economics, and finance are trying to figure out these days.
This is a blog post, not a book, and commercial real estate a complicated, complex issue, so I'm going to try and explain the big picture in as little writing as possible. I'll start with the really big picture, and work down to how this affects the offices and apartment buildings in your own city or town, in your own neighborhood. As I'm writing this blog post, there's a junk hauling truck across the street, and a few guys have been carrying the fixtures and "guts" out of a recently vacant, second floor office, and throwing them in a truck, while I've been sitting here. This is happening in every city and town across the U.S., and many other parts of the world as well.
The Big Picture. If you have read any of my economic posts over the last 5 or 6 years, you know I have this Big Picture concept that I call The Big Transition. The basic idea is simple, The Big Transition is the concept that our society is in a long transition phase, we're moving out of the Industrial Age, and into the emerging Information Age. That's it. The basic idea is that simple, the Industrial Age began to fade about 65 years ago, very slowly at first. This idea was first explained well by the late futurist Alvin Toffler, in his 1980 book, The Third Wave. You can click the link for more detail on that. But let's keep it simple right now. The Industrial Age society began to break down many years ago, slowly, and the Information Age began to emerge. We are in a long transition phase between the two, at least 80 or 90 years total. That's where this crisis begins.
The Spatial Fix
The next part of the commercial real estate crisis is called the Spatial Fix by geographers. This is another big concept most people are not familiar with. But here's the simple, underlying idea. Every type of society, over decades, builds the types of buildings and infrastructure it needs to function. The Industrial Age began 350 or 400 years ago, emerging from the Agricultural Age, where most people lived and worked on farms. Over those 350+ years, factories were built, smaller businesses rose up around the factories, and around the mines, and the natural resources the factories needed. Small towns, and cities of many different sizes, emerged. Houses were built in those towns and cities, and eventually the suburbs, where factory and office workers lived. In the bigger cities, lots of large office buildings were built as well, forming the skyscrapers of the downtown districts of the larger cities. That was the Spatial Fix out of the Agricultural Age, into the Industrial Age. The Spatial Fix is the changing from one set of buildings and infrastructure to another. In our case, the Spatial Fix is the shift from the buildings and Infrastructure needed for the late Industrial Age to the buildings and infrastructure needed for the early Information Age.
In our late Industrial Age, the 1970's, for example, people lived in houses and apartments, worked in the factories and offices, shopped in grocery stores, shopping centers, and malls for their goods, and drove on local streets in town, and larger, interstate freeways between the cities and states. Every town, even small ones, had at least one factory, often more, and these were spread across the country, in towns of many sizes. Cities built the basic infrastructure and services needed, like electricity, water, and sewage systems. They also hired people for local government jobs, like police, firefighters, city workers, and trash collectors, that were needed to keep the city going.
This Industrial Age version of the United States peaked in about the 1960's and 1970's. Then, a whole range of new technologies came into play, big mainframe business computers, data processing, satellite and cable TV, wireless phones, industrial robots, cell phones, personal computers, the internet, and so on. Technology began to take over a whole bunch of human jobs, and change the way we worked and lived our day to day lives.
Because of all this technology, we were able to live much different lives. This is the key point here. We could communicate with millions more people, much cheaper and easier, with cell phones, the internet, and social media. We could share information in talk, text, photos, and video. We could move digital money around much faster than gold bars, dollars bills, or checks in previous eras. Our entire ways of life began to change as one technology after another became operational in our lives. This allowed all kinds of different types of new businesses, jobs, and work to emerge.
But there is a huge problem with this. We still had the basic buildings and infrastructure for Industrial Age life, but much of the technology of the emerging Information Age. When the factories began shutting down across this country, in the late 1970's and early 1980's, many cities became much less functional, they lost their main employers of many residents. We, as everyday people, had some of the technology of the coming Information Age, but we didn't have all the needed technical and physical infrastructure of the Information Age built yet. We had a new system with old hardware, in a sense. Our society and our way of life has changed much faster than our physical buildings and infrastructure. High technology became one of the best paying industries, but tech companies tend to cluster in a small number of large cities, they are not evenly spread out across the nation, like industrial factories were. That complicated the transition even more.
This led to two very different types of urban problems. The initial tech hub cities, originally Silicon Valley (San Jose/San Francisco Bay area), Boston, Seattle, Los Angeles/SoCal, Austin, Texas, Raleigh/Durham/Cary, and the Washington D.C. area, they saw huge growth in tech businesses, and had lots of high paid workers rise up in their regions. These high wages caused home prices and rents to soar. All those tech businesses used a lot of office space as well. Over time, more tech grew up in New York City, as well. So these regions struggled to find enough qualified tech and creative workers and good office buildings. Home prices and rents rose to levels that were hard for workers making average levels of pay to afford. So we had cities with thriving tech business, a thriving office real estate market, and high home prices and apartment rents.
Then there's the rest of the country. Most cities and towns across the U.S. had the opposite problem. Most of the factories that people worked at shut down, or their jobs were taken by industrial robots or other technology. Millions of low and medium skilled workers lost good paying factory jobs. Real estate prices dropped in those cities, and many residents left to find jobs in larger metros. Many places became "Eds and Meds" cities, with the local colleges or universities (education), and hospitals (medical), becoming the largest employers in the area.
Some cities lost tens of thousands of residents over a decade or two. Extreme cases, like Gary, Indiana, for example, wound up with over 10,000 empty houses, high crime, and plummeting real estate values. Why? Gary was built around a single huge steel mill, and the mill shut down. The thriving Industrial Belt of the Great Lakes region, where I grew up as a kid, has turned into the Rust Belt. Now 20-year-old UrbEx explorers make YouTube videos, wandering around the remains of the crumbling factories. Those were factories that I remember being busy, often working two or three shifts, when I was a kid. This change has already wreaked havoc on most of these towns and cities.
There are probably 150 or 200 American towns and cities struggling to re-invent themselves, bring in new employers, and create good paying jobs for their residents. They have reasonable rents and home prices, but they haven't been able to create large numbers of high paying jobs for 30 or 40 years. As people moved out, less people went shopping, and more people shopped online, aided by the internet, digital banking, and other technologies.
This combination of factors led to the Retail Apoclaypse, with somewhere around 30,000 individual stores closing down, between 2010 and today. All of those stores closing led to dead malls and dead shopping centers. I was born a few miles from the site of Rolling Acres Mall, in the video linked., and the first dead mall to really get famous back in about 2014. Remember The Big Transition idea? We're moving from the fading Industrial Age into the emerging Information Age. More people shop online now, and we don't need as many brick and mortar stores, so lots of stores started closing down. Not all stores are closing, but a lot of them are, particularly in the towns and cities that lost factories years ago. Following the closure of the factories, and outward migration of hundreds of thousands of people from former industrial cities, retail business slowed down in those towns and cities. Yes, this is an over-simplification, but it's a major factor in most of those store closures.
This is all part of the Spatial Fix. In the 1970's, we had all the basic infrastructure needed for the late Industrial Age. But we didn't have the infrastructure needed for the Information Age that we were about to head into. We had factory buildings that were no longer needed. We now have malls and shopping centers that are no longer needed in many places. We have tens of thousands of houses in small towns and mid sized cities that are no longer needed.
At the same time, we needed to build cell phone towers so our cell phones would work. Those got built. Also at that time, we needed to build huge data storage centers for computer systems and the internet. Those got built. The Spatial Fix is the process of old buildings (houses, factories, office buildings, government buildings, colleges, urban infrastructure) becoming obsolete, while new types of buildings and infrastructure get built in the places where they are needed and make sense. This is a very slow process, it takes decades to happen. We needed cables laid for cable TV, and later, we needed fiber optic cable networks for the initial internet. Those got built. Huge tech campuses for tech companies like Apple, Microsoft, and others, got built. Now we are getting thousands of satellites launched to fill in the blank spots of internet service. Those are part of the Spatial Fix, new types of infrastructure getting built, so the Information Age can keep growing and evolving.
We need LOTS of affordable housing in the tech hub regions. Not just apartments for growing number of homeless people, at least 90% of the population needs "affordable" housing, at many different levels of affordability. Not many people want unaffordable housing. So we need types of housing, from apartments for a few hundred dollars a month, to big, $600,000 houses for growing families of people working high paying jobs. We have huge mismatches in where houses are, that are no longer needed, and where we need lots more houses and apartments at reasonable prices. For example, right now, you can find a 3 bedroom, 2 bath house in Gary, Indiana for sale for under $25,000. I'm not kidding. It's not just Gary, Indiana. Here's another 3 bedroom 2 bath house for sale, for under $25,000, in Mansfield, Ohio. That's the city where my mom grew up, and where I visited a lot as a kid. On the other end of the spectrum, you can find a 3 bedroom, 2 bath house in Cupertino, California, close to Apple Headquarters, for just under $3,000,000. This is the difference between a once thriving Industrial Age city, and a current tech hub, Information Age city in today's world. We have lots of houses in places we don't need them anymore, and not enough affordable houses in places where we do need them.
Part of The Big Transition is the old buildings and infrastructure becoming obsolete for its original purpose, and the transforming or building of all the new types of infrastructure needed, IN THE RIGHT PLACES for the growing and emerging Information Age. This is a time of huge mismatches. We see it in those three homes linked above, and we see it in the job market. It takes decades for a society to sort out these mismatches, and work through all the underlying issues. Part of the problem is that civic leaders, read politicians, don't think long term at all, as a general rule. These underlying issues never even hit their radar. They may try to start jobs programs or get federal funding for a place like Gary, Indiana (or the 150-200 cities with similar issues), and then promote homeless programs in Cupertino (the San Jose, CA region). Politicians allocate money to deal with the symptoms of major problems, but rarely deal with the real, underlying issues. In most cases, they don't really understand the true, underlying issues for long term problems. They are too busy campaigning and fundraising to read a bunch of 400 page books on complex issues. You never hear politicians mention the deep, long term, underlying issues, because it's not good political fodder. Talk about negative issues doesn't get them votes and campaign donations.
As a society, we've dealt with closed down factory buildings for about 45 years now. We've been dealing with dead malls, dead shopping centers, and dead retail stores for about 10-15 years now. You see where this is going? The commercial real estate crisis we are facing right now is just the next step in the overall, nationwide, Spatial Fix. The pandemic accelerated the work-from-home idea, which had been progressing slowly for many years. Now, with a lot more people working from home, another major shift has occurred. Which means we have too many office buildings, and too many industrial buildings, and even too many luxury apartments, in some regions. Like the factory buildings of the 1980's, and dead malls of the 2010's, we need to see how we can adapt as many of these office buildings as possible to different uses going forward.
Office buildings, in general, are hard to turn into apartments, because there are not enough water lines, sewage lines, and other, similar issues. What else can older offices, particularly the smaller and mid sized buildings across the small and medium sized cities of the U.S., be re-used for? If we don't find good answers to this question, then there will be a hundreds more buildings that will become abandoned across the country, in Red States and Blue ones. This will hit cities of all sizes, all backgrounds, and on all levels.
But commercial real estate, the current crisis part of the Spatial Fix, between Industrial Age buildings and Information Age buildings, creates a bunch more issues. This is where the real crisis comes in. First of all, the value of a commercial real estate building depends on how much money the building earns, and less about its physical location, like in residential real estate. When an office building goes from a 5 % vacancy rate to a 20% vacancy rate, the value of the building drops dramatically. Next, office and commercial buildings are usually bought with short term loans, and the owners just pay the interest of the loans, then roll the loan over in 3 or 4 years. They never pay down the principle, like people do with home mortgages, so they have no equity, unless the value of the building goes up. Now, we have buildings with less offices rented out, so the value is going down. The loans are made mostly by the small and mid-sized regional banks. In addition interest rates on loans have risen by about 3% to 4% in the last two years.
So now we have hundreds of office buildings worth less than they were a couple of years ago. Some of these are worth less than the loans now on them. Those 3 and 4 year, interest-only loans are coming due. Since the vacancy rates are up, the owners have less money in general. The banks want more money put up, perhaps millions of dollars, since the buildings are worth less, AND they have to make the new loans at higher interest rates, which means the interest payments on the loans will double or triple in many cases. This means office building owners are going into the bank, which is asking them for more money up front, AND much higher payments on the new loans. The building owners, who are already struggling because the they lave less businesses paying rent in the buildings, often can't afford to run the building with the new higher loan payments.
Now we get to another aspect of modern commercial real estate. Usually each building is set up as its own corporation, and if the building owner stops paying their commercial mortgage payments, all the bank can do is take the building back, they can't go after any of the building owner's other assets to make up the money they lost on the loan. So hundreds of office buildings are now worth much less, maybe 40% to 80% less, since fewer offices are rented out. The current building owners can't come up with more money to create equity in the deal, and they can't run the buildings with the new, higher loan payments. And, in many cases, these building owners, even huge corporations like BlackRock, Brookfield, Vanguard, and similar major commercial real estate businesses, can just hand these big buildings back to the banks. "Here's the keys, we're out! Good luck!" This is already happening, and will happen to hundreds of billions of dollars worth, maybe even trillions of dollars worth, of current commercial real estate over the next few years.
We will soon have banks owning buildings that were worth $10 million in 2021, and may be worth $3 million in 2025. Or buildings that were worth $100 million in 2021, and are worth $25 million in 2024. Banks are in the business of making loans, not running large, complex office buildings, except their own headquarters. So we will get to the point where banks take over these huge buildings, and have to write down losses on those loans, and a many other loans, since most of their other buildings they have loans on will also go down dramatically in value. The banks across the U.S. (and most other major countries), are already struggling. These huge losses will make dozens, probably hundreds, of regional banks insolvent. Even the Big 5 banks will get hit with huge losses, because they have a lot of exposure to huge REIT's (Real Estate Investment Trusts). So a bunch of banks are on the verge becoming insolvent, even if they've been running their banks well, generally speaking. These losses WILL be too much for the system to handle, and we will have another major banking crisis, like we had back in 2008. It's coming. We know it's coming. This has been slowly playing out for over a year already.
Now we get to the point of how this will affect you. If you own several of the types of commercial real estate, there's a good chance it will go down in value, at least for a few years. If you own a business, these bank losses and higher interest rates could lead to higher rent on the building you rent. If you're just an average working person, your bank might become insolvent, and get shut down. Now, you are covered for up to $250,000 by the FDIC. But there's a chance many accounts may be frozen, temporarily, as banks go under, and as each banks issues get worked out. Having your bank account frozen for a week or two would be tough for most people, even if they lose no money. This whole commercial real estate crisis is happening. It's a super low-motion train wreck. And it will stress the already struggling economy, causing a deeper, and most likely, a longer recession. We see this crisis coming, a big White Swan event. It's not going to be easy for anyone.
Now, the final major ripple effect. Cities and towns of all sizes get a big chunk of their revenue from commercial real estate taxes. When buildings go down in value, or sit vacant, they pay less taxes or no taxes at all. So this crisis will lower the money coming into cities, of all sizes, to handle all of their day to day businesses. Yes, cities like New York, Los Angeles, and Chicago will have the biggest losses in value, and will have to furlough or lay off the most workers. But these huge cities have a wide base, and many other sources of tax revenue and stronger political backing. They will struggle, but will, ultimately, be able to survive this crisis better than many of the small and medium size cities and towns across the country.
So far, most of the action to deal with this crisis has been behind the scenes. Banks have been extending loans on buildings, keeping the building owners in business, hoping that the economy would take off, and interest rates would drop back down to near zero, so the buildings would have more space rented out again. That's not going to happen. Not in time to avoid this mess.
Again, this is all part of the Spatial Fix, The Big Transition from the Industrial Age society we're leaving, into the Information Age we're heading into. The late futurist Alvin Toffler dubbed this The Third Wave, and wrote about the various aspects of this issue, from 1980 until 2007. We are moving into another type of society, both technologically and socially, and there's no one group of people that made that happen. This transition began slowly, way back in the 1950's. But now we're in the critical mass part of the transition, where change happens much faster, and on many more levels at once.
There are tough times ahead for almost everyone. That's "baked into the cake" at this point. But, this huge transition period also opens up all kinds of new opportunities, as well. Do you have ideas on how to create more affordable housing in the major metro areas? We need lots of it. Do you have ideas on how to transform old factories, malls, retail stores, or office buildings into new uses for the 21st century? There are huge opportunities for anyone who can figure those issues out. Do you have ideas on how to revive the small and mid sized cities, many of which have been struggling since their factories shut down, 30 or 40 years ago? More opportunity. Do you know how to train out-of-work workers to learn new skills to earn a living in the 2020's? There's a huge number of opportunities there. This whole mess we're heading into is riddled with opportunities to build a better future. That's important to keep in mind.
There you go, this is my best take on the White Swan Event that is the commercial real estate and banking crisis, that we are now facing, as a nation, and as a world. Yes, it seems overwhelming. But it's also the grounds for a lot of future potential to build a better world going forward.
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I'm writing this post a little after 8:00 am, Pacific time, on December 5th, 2023. This clip above is talking about Bitcoin hitting $42,000 per Bitcoin yesterday, and hovering around $41,000 and change. Bitcoin bottomed out, in the last trough, in December of 2022 at around $16,600 per Bitcoin. As I write this, Bitcoin is $42,304. So Bitcoin is up about 155% in less than a year. Why? It continues to attract investors as a store of wealth, a "digital gold," as some people call it. But mostly, financial giant BlackRock will probably get the approval for a Bitcoin spot price ETF (exchange traded fund), possible as early as January 8th, 2024. If not in January, that ill most likely happen in mid March, 2024. That will allow major institutional investors (hedge funds, pension funds, etc.) to invest in the ETF, based on the price of Bitcoin, as easy as investing in any other stock or ETF. That's BIG. BlackRock has also applied for an Ethereum spot price ETF, as well, so the same could happen for Eth, most likely at a later date.
This post is written for entertainment and education purposes only, and should not be taken as investment advice. Do all needed due diligence, and consult needed professionals, before making any investment decisions. Please read the disclaimer linked below.
But Bitcoin is not even the big news in the market today. The real news is another huge decline in bond rates. The benchmark U.S. 10 year treasury bond, was paying 4.98% in interest on October 18th, 2023. To put that in perspective, on January 5th 2020, pre-pandemic, it paid 1.79% in annual interest. In August of 2020, that rate of return dropped to about .53%, one half of one percent interest paid on your money each year. That's not much.
The bond market is HUGE, much bigger than the stock market. This is where the Big Boys (and Big Girls) play, where institutions with billions of dollars (euros, yen, yuan, kroner, whatever) put large portions of their money. Now, bonds have an inverse relationship between price and interest rates, which is tricky to get your head around. When prices go up, when buying bonds is popular, the interest rates go down. When investors sell bonds to buy other things, the interest rate paid goes up. So, in the last month and a half, enormous amounts of global money have been going into bonds, and that has pushed the interest rate on the U.S. 10 year bond (a good gauge of the overall market), from almost 5% interest, down to 4.17% right now.
At the same time, gold prices have soared. They had hovered around $1,950 (per troy ounce)for a long time, then dipped down to around $1,850. Now gold is up to $2,013. It spiked up to $2,148 the day before yesterday.
What does it mean when the biggest institutional investors in the world pour hundreds of billions of dollars into gold and U.S. government bonds? They're scared. This is called a "flight to safety." The most sophisticated investors in the world are running for cover. They know a global recession is here in places (like Germany), and that's it's coming to pretty much everywhere else. They smartest investors in the world are hunkering down for a financial storm, an economic hurricane. They're protecting their wealth from loss, until the storm blows over, and the big damage is done. Then they'll look for new opportunities, when things settle down.
Here's what that means for all of us regular people. Here's how I see the next couple of months playing out:
Stocks- The U.S. stock market is at or near all time highs, about the same levels it was at two years ago. But now our dollars are worth about 20% less, due to all of the inflation. So stocks are actually worth less than they were in 2021. It's December 5th. On Friday, December 8th, the window for most companies to buy back their own stock closes, because the next earnings season is approaching. So the biggest driver in stock prices, businesses buying back their own stock, will mostly shut off this coming Friday. I expect stock prices to really begin dropping next week.
Virtually every economic indicator has been flashing red, recession warnings, for months now. The stock market has ignored this. Starting next week, it looks like reality will begin to set in. After the holidays, reality will REALLY set in on stocks. I personally expect 30% to 50% drops in stocks in the next few months, overall.
Gold- Back in July, somewhere, I said I expected gold to pop up to around $2,150, maybe $2,200, and then back off. I think we are near peak gold prices now. It may get to a solid $2,200 for a week or two, maybe. But I DO NOT think gold will soar to $3,000 an ounce. Sorry gold bugs. I like gold, over the long term, but our inflation is turning into disinflation now, and probably outright deflation come January. I think gold will settle at a new level, a bit over $2,000 an ounce, and stay there for most of 2024 and into 2025. Silver? It should pop higher, maybe to $35-$40 and ounce, but it's stuck at $25 right now. I don't see it soaring either. Silver is also a good hedge against future inflation, and affordable to average people, at $25 (plus premiums) an ounce. But I don't see it taking off in 2024.
Interest rates- Here's the good news, for average people, interest rates, overall, should drop quite a bit in 2024. The Fed will begin lowering rates, because of the recession that we are already in (in my opinion), but that hasn't been officially recognized yet. A banking crisis will force The Fed's hand, in early 2024, and interest rates will probably drop 1% to 2% in 2024, generally speaking.
Credit- The bad news about interest rates dropping is that this recession will hammer the banks, who are already in sad shape. The banks have totally tightened credit. They will tighten more, making it harder for everyone to get loans. Cash is king in 2024. It will be hard to get mortgages, car loans, and credit cards, because there will be a record level of defaults and foreclosures as the recession becomes obvious in early 2024, and continues to play out. So even though interest rates will drop dramatically, it will still be hard to get loans, unless you have excellent credit, and a low debt to income ratio. This goes for businesses and individuals. Alternative financing options will be huge in 2024. Non-traditional ways, owner financing, etc., will be the way to purchase big items (which will be at huge discounts).
Crypto- Crypto hardcores are chomping at the bit right now. Crypto winter is over, and we're well into crypto spring. Even though we are heading into a massive recession, huge amounts of money will pour into crypto in early 2024, because of the BlackRock ETF's, (Bitcoin and most likely Ethereum), and potentially Bitcoin ETF's by other companies. Major crypto coins will be the only "major asset" giving good returns in 2024, in my opinion, though even Bitcoin is not a "major asset" to most investors yet.
All investors, large and small, will be drawn to crypto, because that's where the good returns will be. Also, the Bitcoin halving happens in about April, which also usually leads to higher Bitcoin prices, in time. You can research that for more info. In this post, about three weeks ago, I wrote about the Bitcoin ETF, and the case for Bitcoin going forward. Bitcoin was $36,366 per BTC. Bitcoin has gone up $5,938 per BTC, or over 16%, in three weeks. Just sayin'. I think we'll see $100,000 per Bitcoin in 2024, almost certainly. I, personally, think the next peak will be in the $150,000 to $180,000 per Bitcoin range, maybe in 2025. $200,000 isn't out of the question, taking all things into account. It'll plummet after, to a new higher low. But that's the area where I think it'll peak.
Real estate- Want to buy a house from a disgruntled Millennial who paid $40K over asking price in 2021 because of the FOMO hype? What to buy a former Air BnB home at 50% off because the owner has 12 of them that aren't renting? 2024 is your year. If you have CASH. Want to buy a 20 year old office building for 80% off, or a dead mall? 2024 is your year... if you have CASH. Otherwise, forget real estate and watch the crash from a distance. It's going to be brutal.
Collectibles- If you're into any kind of collectibles, keep and eye on Craigslist or eBay, there will be lots of people selling collections of one kind or another, after getting laid off, in 2024. So, IF you know that particular market, from sports cards and comic books to exotic cars, there will be deals to be had... if you have CASH.
OK, that's my outlook on the financial world, overall for December 2023, and into January, and farther into 2024. This post is written for entertainment and educational purposes, and should not be taken as financial advice. Do your own research. Do your own due diligence. Consult professionals wherever and whenever needed, before making any investment decisions.
Buckle up. We've now have four years of warm-up craziness. Now things are about to REALLY start going nuts.
