The report estimates that in the next 4 years over $1.4 trillion (with a “T”) of commercial loans will come due and need to be retired or refinanced.  In one half of those cases, the value of the underlying asset is now worth less than the amount owed on the loan.  They are “underwater” and they are a problem.  Losses to the lending institutions could total over $300 billion.  That’s not the amount that will default.  That’s the loss realized after foreclosing on the property, finding a buyer and selling it for whatever can be achieved.

But wait, we ran the Stress Test and our banks have the capital reserves to weather this storm.  Unfortunately, the Stress Test only looked through 2010.  The vast majority of these loans will become a problem for the banks in 2011-2014.  Plus, the Stress Test was only run on the larger banks.  The small and mid-sized banks were never subjected to the Stress Test.

On the plus side, there has been an insane amount of equity raised to acquire these troubled assets.  Once the banks have foreclosed on the assets and they are brought to market, there should be a willing pool of buyers.  The question then becomes, will there be so many buyers that the value get bid up to a point where the “distressed buyers” are no longer interested.  My best guess is that you see an initial round of sales at very attractive pricing.  As buyers flock to this sector, the demand and valuations will go up and the transaction volume will go down.

So, who do you side with?  Keynes or Hayak?

Today I read another article about a “Buy America” clause being added to a House spending bill that precluded any of the $33b of appropriated funds from being used to purchase cars other than those made by GM, Ford or Chrysler.  Yes, those three are American registered companies.  However, Mercedes, Toyota and many other have plants located in the US that employ thousand of Americans.  A portion of a dollar spent on a Toyota will work its way back to the American workforce.  BMW does a great job of keeping the South Carolina economy humming with their Greenville plant.  Conversely, many of the Ford vehicles are assembled in Mexico or Canada and employ their nationals.

So, what is the tipping point where a company becomes American?  For cars, I’d assume the profit margin to be in the 6-10% range.  That means that 90-94% goes to someone other than the manufacturer.  I know the dealers take 10-20% of the sales price, and we’ll assume they are “American” whether the car is a Honda, Ford or Fiat.  The remaining percentages goes to the raw goods and labor to assemble the car.  In some cases, that’s Americans and it some cases it’s not.  Conceivably, you could buy an American car and have 70% of the money go outside the US.

In this global, flat economy trade-restrictive “Buy American” clauses don’t make much sense.  They do, however, make politicians feel proud enough to wear their American flag lapel pins… (which was most likely made in China).

It all puts the real estate investor in a tough predicament.  The impending inflation would drive you towards buying now and locking in your capital costs.  However, with the specter of additional pricing declines on the horizon, investors are reluctant to buy now for fear of overpaying.  So, again, the real estate market remains locked in indecision. 

Here in Richmond, the situation is very similar.  Richmond BizSense ran an article this week talking about the lack of sales activity in this market.  In addition to quoting some fantastic market experts (including your truly), the article does a very good job of laying out the situation that faces both buyers and sellers in today’s market.  No doubt, it’s a tough one.  The companies that can be flexible and creative will do much better than those that can’t.

So, why does this economy need some inflation (some being the key word).  Our economy is driven by consumer spending.  We earn income and then we spend it at an alarming rate.  However, during this recession, consumer spending has all but dried up.  This is partially due to the freezing of the credit markets, but also due in large part to consumer expectations and confidence.  Americans are “on the sidelines” waiting to see what happens before they get back into the spending frenzy.  Why buy today when it will be on sale tomorrow?  What inflation does is add a little urgency to the equation.

If consumers anticipate that things may be more expensive if they wait, they will act sooner.  In the real estate world, investors have been sitting idle because they feel that prices are declining.  If they wait until next week/month/quarter they can get the same property for less.  A healthy dose of inflation should help them realize that prices might not fall forever.

Maintaining a healthy level of inflation (over deflation or stag-flation) will do wonders to get our economy back on track.  Even the expectation of impending inflation should be very helpful.  If anyone needs confirmation of this, take a look at Japan in the mid-1990’s (or call me and I’ll walk you through the interaction).

All in all, this is pretty good news.  Despite the positive results, economists continue to predict that consumer spending will decline going forward.  However, given their accuracy here, I’m not sure that means very much.  The economy still has a long way to go and this is a very good start.  Regardless of whether you are a Keynes and Friedman follower, you have to agree that the consumer spending will have to increase to help pull us out of the recession.  It looks like we are trying…

The website is www.stimulus.virginia.gov .

I think we can all agree 2008 numbers probably aren’t going to be very good (in any industry).  But we have to keep in mind that 2006 and 2006 were very good years for most businesses.  Any comparison between 2008 and 2006 & 2007 is going to be negatively skewed, even more so that the data would suggest.  I could be down 15% from 2007, but still be exceeding an 8% compounded annual growth rate over the past 5 years.  Does that mean my business is suffering badly?  No, it means I’m doing quite well. We need to take a longer term view and put 2008’s numbers into a complete historical context to fully understand their implications.  It may not sell as many newspapers or generate as many clicks or diggs, but it will allow for a more meaningful interpretation of the numbers.

Any statistician will tell you that you need to throw out the outliers before you begin your analysis.  For many industries and many comparisons, 2006 and 2007 were outliers and not indicative of long term sustainable growth assumptions.

This is in stark contrast to the US’s recent release of its PMI numbers – see story below.  The US soundly beat expectations, posted an improvement over December (8.21%) and the media could only focus on the fact that we were contracting and not expanding.  There may still be some pain to endure through this downturn, however, there are some bright spots.  You just have to look very hard in the traditional media to find them.

Keep up the good work China.  You make it and we’ll buy it.

While we are still talking about the indexes declining, they are declining less than before and less than was expected.  This represents at least the second economic report this week where the economy has performed better than expected.  I doubt anyone foresees a “V” shaped recovery.  The slowing rate of decline could be an early indicator that we are finding the bottom of a “U” shaped recovery.