The credit cycle is alive and well. But credit cycles typically move with multi-quarter time lags, and that’s longer than the attention span of most. Moreover, massive government subsidies slowed the monetary impacts more than average this time. Nevertheless, twenty-three months since this epic tightening cycle began, wheels are coming off all around for those still looking and able to see them. And, as in 2008, the contagion is global.
Downcycles in real estate- the most widely owned and highly leveraged asset worldwide- have historically led to the harshest economic contractions, especially where the preceding price inflation cycle was greater than average.
Thanks to an unprecedented 13 years of near-zero interest rates and policy-encouraged gambling, the latest asset inflation cycle was one for the history books. The unwind and opportunities therein promise to be, as well.
Eyes wide open–evidence is mounting everywhere. Adhering to a value discipline is the most significant precursor to long-term financial success, and why Benjamin Graham observed decades ago: “Successful Investing is more a trait of the character than of the intellect.”
See German bank braces for wave of bad loans in ‘greatest real estate crisis since the financial crisis‘:
Shares of PBB, the second German bank to warn of mounting losses on commercial real estate in two weeks, have slumped 17% since Friday. The stock has tumbled more than 25% so far this year and 40% in the past six months.
Germany’s biggest lender Deutsche Bank said last week that it had allocated €123 million ($133 million) during the fourth quarter of last year to absorb potential defaults on its US commercial real estate loans. That’s more than quadruple the amount it set aside during the same three-month period in 2022.
Banks as far apart as New York, Tokyo and Zurich have also reported mounting losses on lending to the troubled commercial property sector in recent days.
On Wednesday, New York Community Bancorp attempted to reassure investors that it has enough cash to stay afloat after the stock shed about 60% of its value over the past eight days and ratings agency Moody’s downgraded the bank’s credit grade to junk.
Also, see Canadian Tire profit falls nearly 68% as consumers wary amid uncertain economy:
As one of the country’s largest retailers, Canadian Tire is broadly exposed to the consumer economy, which is under significant pressure. Housing sales have slumped, and people’s shelter costs are up as higher interest rates are making mortgage payments more expensive.
Canadian Tire has seen traffic to its stores fall off, and its financial services division has been recording higher writeoffs in its credit-card portfolio…
In addition to its retail sales, Canadian Tire’s credit-card business also provided clear signals of a strained consumer. Credit-card writeoffs – reflecting debt that the company believes it cannot collect – jumped by 30 per cent in Canadian Tire’s financial services division in 2023, compared with the prior year, to $544.2-million. The company’s past-due credit-card receivables also appear to be climbing: In the fourth quarter, past-due bills accounted for 3.6 per cent of receivables, up from 3.3 per cent in the prior quarter.
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