Over the past several months, Mike Maharrey and I have posted numerous articles that conclude the same way… the Fed is bluffing and when something breaks, they will fold. On every podcast, Mike has walked through exactly why this is inevitable. Back in September, I laid out the math that showed why the Fed would fold and laid out a series of risks that may cause such an event. One of those risks was “What if the financial markets freeze because there is a credit event somewhere?”.
It appears the government lockdowns in response to the COVID-19 pandemic has hastened the deflation of the commercial real estate bubble.
According to CoStar Group, an estimated $126 billion in commercial real estate will be forced to sell at distressed prices over the next two years. That will eclipse the amount of distressed commercial property sold during the first two years after the 2008 financial crisis.
As pundits and politicians continue to speculate about economic recovery, hundreds of companies large and small are struggling under loads of debt, filing for bankruptcy and closing their doors.
In September, 54 more large companies filed for bankruptcy, according to S&P Global intelligence. A total of 509 companies have gone bankrupt this year as of Oct. 4, exceeding the number of filings during any comparable period since 2010. That was piled on top of the 54 companies that filed for bankruptcy protection in August.
Venture capitalist Chamath Palihapitiya made waves when he said during a CNBC interview that the government should not bail out companies impacted by the coronavirus shutdowns. “On Main Street today, people are getting wiped out. Right now, rich CEOs are not, boards that have horrible governance are not,” he said. “What we’ve done is disproportionately prop up poor-performing CEOs and boards, and you have to wash these people out.”
During an interview on RT, Peter Schiff said he’s been saying the same thing since day one.
There were more signs of a retail apocalypse in the first quarter of this year.
Defaults by retail companies rated by Moody’s hit an all-time high in Q1. There were a total of nine defaults among Moody’s-rated retail corporates. According to Wolf Street, total corporate defaults in Q1 were up 22% from last year, and the nine retailer defaults accounted for nearly 1/3 of them.
As Wolf Street put it, these are not mom-and-pop stores. These are retailers large enough to be rated by Moody’s – “corporations that make up the core of the Brick-and-Mortar Meltdown.”
Could we be on the verge of a retail apocalypse?
February marked the third straight month of declining retail sales. Analysts had not expected another drop, but they got one nonetheless. Sales fell 0.1% in February. Analysts had expected an uptick of 0.3%.
This is not good news for a retail sector that is already teetering on the brink.
Toys R Us filed for bankruptcy earlier this week, a wicked head-shot to a retail sector that’s been reeling for months.
The TRU filing ranks as the second-largest US retail bankruptcy ever, according to S&P Global Market Intelligence.
Toys R Us had $6.6 billion in assets at the time of filing. Only Kmart was bigger. It had $16.3 billion in assets when it went bankrupt in 2002. Crushing debt pulled the giant toy seller under. According to a Bloomberg report, the company has piled up more than $5 billion in debt. Toys R Us reportedly pays more than $400 million a year on debt service alone.
The company says it plans to continue operating and secured a$3.1 billion operating loan to stabilize operations.
Puerto Rico officially plunged into bankruptcy this week. Years of accumulating debt and misguided government policies finally reached their inevitable end.
The bankruptcy means more pain for the people of Puerto Rico, as well as bondholders who have virtually no hope of ever getting their money back. But beyond that, it serves as a giant, flashing warning sign, because the truth is, the financial condition of the the US isn’t fundamentally different than that of her island territory.