Lenders And Buyers Of Last Resort
The hyper-bubble has been inflated by the abundance of easy liquidity in the financial system, which has been provided by the ultra-loose monetary policies of the central banks.
Central banks manipulate interest rates, money supply, and asset prices to create boom and bust cycles that benefit the elite at the expense of the masses. They are also complicit central banks in the creation of a debt-based system that enslaves people and prevents them from achieving financial freedom.
The current state of the market is a farce that relies on the intervention of the federal reserve to wholly sustain itself. Without a genuine price signal, the market cannot function as a mechanism of efficient allocation of resources and risk. The federal reserve has to manipulate the interest rates and inject liquidity into the system to prevent a collapse of the market illusion. This is a precarious and unsustainable situation that undermines the credibility and stability of the market.
One of the essential features of a market is the ability to discover the true value of the goods and services exchanged. Price discovery mechanisms are the processes that facilitate this function by aggregating information from buyers and sellers and reflecting it in the market price. However, in some cases like with western markets, these mechanisms are absent or distorted, leading to a situation where the market price does not reflect the true value of the goods and services. This is not an authentic market, but a distorted one that fails to allocate resources efficiently and fairly. Such distortions can arise from various factors, such as monopoly power, asymmetric information, externalities, regulations, or interventions. These factors can create barriers to entry, reduce competition, manipulate demand or supply, or interfere with the signals that prices convey. Therefore, it is important to ensure that price discovery mechanisms are functioning properly and that the market price reflects the true value of the goods and services.
Inflation is coming as unprecedented money printing by the central banks and the massive government spending will lead to a loss of purchasing power and a devaluation of the currency. The stock market will continue to rise as more money is pumped into the system, creating a bubble that will eventually burst. But the current economic situation is unsustainable and that populations should prepare for a major crisis.
The main causes of inflation are the following: 1) The Federal Reserve's money printing and debt monetization, which devalues the dollar and erodes its purchasing power. 2) The massive fiscal stimulus and spending by the government, which adds to the deficit and the national debt, and creates artificial demand for goods and services. 3) The supply chain disruptions and shortages caused by the pandemic, which reduce the availability of goods and increase their prices. 4) The rising energy costs and geopolitical tensions, which affect the production and transportation of goods and services and increase the cost of living. 5) The low interest rates and easy credit, which encourage borrowing and spending, and create asset bubbles in stocks, bonds, real estate, cryptocurrencies, etc. Inflation is a hidden tax that hurts the middle class and the poor and benefits the wealthy and the elites.
Commercial Real Estate Chaos
The commercial real estate (CRE) sector is facing a looming crisis that could have severe repercussions for the economy. The CRE prices have been soaring since 2012, driven by a combination of lax lending standards, wild speculation, and excess liquidity. As Greg Mannarino said in a recent article “Commercial real estate investors were given easy access to credit by the major institutions, and that is all it took! And as usual a loss of touch with reality became real.” These factors have created a massive hyper-bubble in the CRE market, which is now vulnerable to a sharp correction or collapse.
The lending standards for CRE have been relaxed in the aftermath of the global financial crisis of 2007, as banks and other financial institutions sought to boost their profits and market share. And these CRE loans have become easier to obtain, with lower interest rates, longer maturities, and higher loan-to-value ratios. The borrowers have also benefited from the availability of non-recourse loans, which limit their liability in case of default.
The CRE speculation has been fueled by the expectation of high returns and capital appreciation in the sector. While investors have been attracted by the low vacancy rates, high rents, and strong demand for office, retail, industrial, and multifamily properties. The CRE speculation has also been supported by the influx of foreign capital, especially from China and other emerging markets, which have been looking for safe havens and diversification opportunities.
The hyper-bubble has been inflated by the abundance of liquidity in the financial system, which has been provided by the ultra-loose monetary policies of the central banks. The quantitative easing (QE) programs have injected trillions of dollars into the economy, lowering the cost of borrowing and increasing the asset prices. This abominable hyper-bubble has also been sustained by the low interest rate environment, which have reduced the opportunity cost of holding CRE assets.
So as the CRE hyper-bubble is now at a tipping point, as the economic and financial conditions are changing rapidly. Also, the COVID-19 pandemic has disrupted the normal functioning of the CRE sector, reducing the demand for office space, retail outlets, hotels, and other properties. The social distancing measures, lockdowns, and work-from-home trends have accelerated the shift to online shopping, e-commerce, and telecommuting, which have reduced the need for physical locations.
This saturated “market”" is also under pressure from the “tightening”" of monetary policies, as the central banks are scaling back their QE programs and raising their interest rates. The Federal Reserve has already started to taper its bond purchases and is expected to hike its policy rate in 2023. The higher interest rates will increase the cost of servicing the CRE debt and will reduce the attractiveness of CRE investments. The higher interest rates will also lower the value of the existing CRE assets, as they will make them less competitive compared to other income-generating assets.
As the CRE hyper-bubble is therefore at risk of bursting or deflating, possibly trigging a wave of defaults, foreclosures, bankruptcies, and fire sales in the sector, the crisis could also spill over to other sectors of the economy, such as banking, construction, consumer spending, and employment.