Commercial Real Estate Finance

As I sit here and watch the S&P 500 trade through 1040, I can’t help but wonder, “Are we Japan?”

That’s right, we’re back to the “Inflation/Deflation” debate. Are we going to print endless sums of money and end up like Zimbabwe? Or, are we going to be too conservative with the USD and end up like Japan? Or, are we going to spend like maniacs and end up like Greece?

Assuming we have an answer, what does it have to do with commercial real estate?

Let’s start with Zimbabwe: Runaway inflation in the US, in spite of gold’s persistent resilience, is not a current threat. 10 Year tip spreads remain around 2%, the money supply is either growing slowly or dropping, and the dollar remains the 2nd best (after Japan) safe-haven currency for the world. When the shit hits the fan, the big boys buy Yen and dollars; 180 degrees from Zimbabwe.

The Greeks ran into trouble because markets became concerned about a default. Investors dumped their Greek bond holdings driving up the implied interest rate, making it increasingly difficult for the Greeks to finance their spending. In the US, the opposite is the case. Whether its financial crisis or the prospect for slower growth, the world only buys more Treasuries. It is true that this will one day - if we never change our ways - come back to haunt us. At that point, you’re likely to care much less about the direction of commercial real estate than your immediate supply of canned food and guns.

Japan: Persistent deflation and economic stagflation due to a combination of: 1) letting their banks hang onto bad assets for way too long; 2) insufficiently aggressive monetary policy; 3) inefficient public spending; and 4) a seemly cultural tendency to save rather than spend. Sounds pretty applicable except the cultural view about spending. In the US, however, as state governments cut spending, taxes inevitably increase, and housing prices continue to stagnate, people may actually begin to save for their retirement.

My verdict: there’s a growing chance we end up looking a bit like Japan.

To get a sense of what that might look like, I’ve included a long term chart of the Nikkei.

The recent spat of lukewarm to crappy economic reports and recent market performance is telling me this is our trajectory. For dramatic emphasis, please see this piece by Paul Krugman.