Juggling Dynamite

Danielle was a guest with Jim Goddard on Talk Digital Network talking about recent developments in the world economy and markets. Here is a direct video link.

The chart below shows payment delinquency cycles for US credit cards by age group since 2000.

Markets are weak when they are highly concentrated. The chart below, courtesy of DailyShot.com, shows the percentage of S&P 500 year-to-date gains that have come from the ten most expensive tech companies.  Today we have the most concentrated (weakest) US stock market in decades.

The same vulnerability is evident in the NASDAQ Index (price below in black over the last two years), where the number of decliners has far outpaced advancers year-to-date (purple line). The gap is unsustainable.

The segment below offers interesting insight into the Chinese real estate cycle as the easy credit era ends. Similar trends are happening around the world, all at the same time.

The May Day Golden Week used to be one of the peak seasons for real estate sales in China. However, this year’s May Day holiday saw extremely quiet sales in property sales offices and second-hand housing transaction venues, with very few transactions taking place. Even first-tier cities like Beijing and Shanghai were no exception. For example, Beijing’s newly signed contracts for commercial residential properties were only 114 units, with a transaction area of only 14,000 square meters. This represents a decrease of over 60% compared to the same period last year when Beijing was almost under lockdown due to the pandemic. The market conditions are poor, and developers in urgent need of capital have to find ways to promote sales, with price reduction being the most effective method. However, under the rule of the Chinese Communist Party, it is not solely up to the real estate companies to decide on price reductions. Recently, a major news story emerged in the Chinese real estate industry. Two property projects in Kunshan City, Jiangsu Province, significantly reduced prices by 30% during the May Day period. As a result, the developers were fined heavily by the local housing and construction bureau and their online signing business was suspended. The real estate companies were required to rectify their actions, which also meant they were not allowed to engage in selling activities for a while. The explanation given by the housing and construction bureau was that unauthorized price reductions disrupt the market and make it difficult to sell neighbouring properties. Such unauthorized price reductions are considered dishonest and lack integrity and have been officially documented as misconduct in the annual integrity file! Here is a direct video link.

Historically it has been typical at the beginning of real-estate downturns for listings to decline as owners try and extend loans rather than sell properties at lower prices. That has happened over the past year with residential and commercial properties. At first, this suppresses inventory for sale and reduces price discovery, stalling the clearing process.

In the first quarter of 2023, investors purchased just $10.7 billion of office property, down 68% from last year (MSCI Real Assets data).

There’s a reason that real estate downcycles tend to take 4 to 6 years to bottom. In the next phase of the downturn, cash-strapped owners cut their losses and list properties to reduce overhead and raise cash. That’s starting now; see Rise in Distressed Sales Signals New Chapter For Beleaguered Office Market:

Property owners are starting to unload troubled office buildings at fire-sale prices, a sign that the office market slump is moving into a new phase where more landlords are ready to capitulate.