This Will Be Our 2008 Market Collapse

A storm is brewing…

… in one of the world’s largest assets.

Soon, this storm could turn into a full-blown, Category 5 hurricane.

And if that makes landfall, we could have major problems on our hands.

We’re talking about the increasingly fragile global commercial real estate (CRE) market.

This is a $35 trillion market. It’s about thirty times the size of the global cryptocurrency market.

In other words, the entire global economy (and your portfolios if you’re not prepared) will feel it if CRE starts to crumble.

Unfortunately, most investors haven’t a clue what’s happening below the surface. Even fewer are prepared for what lies ahead.

Today, we’re going to tell you exactly what’s going on. By the end of this newsletter, you’ll understand why CRE could be the pin that pops the global debt bubble.

We’ll even show you what steps to take to protect your hard-earned wealth.

But we want to first welcome you to The Discount. Each week, we dive head first into the biggest issues facing traders and investors… and explain how they impact your portfolios.

This issue is about the giant powder keg that is Commercial Real Estate (CRE).

Let us explain…

Right now, there’s 1 billion square feet of empty office space in the United States.

If you stacked all that empty space in a single office tower, the building would stand 48,000 stories tall!

Needless to say, this is an issue…

This year, $175 billion in office debt is set to mature. Next year, another $150 billion in debt will mature.

All told, $1.4 trillion worth of commercial real estate debt needs to be refinanced by the end of 2024.

There’s just one big problem.

Borrowing money has gotten a lot more expensive.

If you’ve been reading The Discount, have been at all connected to the markets, or even shopping for a house, you know exactly what we’re talking about.

Over the past year, interest rates have skyrocketed.

The U.S. 10-year treasury yield, for instance, has surged from 0.5% in April 2020 to 3.7%.

Rates on mortgages, credit cards, and commercial loans have also skyrocketed.

This means it’s going to be very expensive to refinance all this CRE debt.

The Fed is not slowing down their “Paul Volcker Hawkishness” stance on rates, even when the damage has already been done.

By the time the institutions start to significantly de-leverage and it hits the news, it will be too late.

We’ll likely wake up one day with the market down 10% and that will be just the beginning.

But luckily… you follow us and we will keep you informed weekly and daily (more below).

The Dominoes are already Starting to Fall…

To re-state the obvious…

Thanks to the rise of remote work, employees no longer go into the office like they used to.

Companies require far less office space.

Office vacancies are now near historic highs. That’s causing a ripple effect across the industry.

In February, defaults on commercial real estate loans jumped to 5.2%... the highest level in fourteen years.

This trend has only accelerated since then…

In April, Brookfield - one of America’s largest office space owners - defaulted on a $161 million loan.

Just last week, Starwood defaulted on a $213 million commercial loan for an office building in Atlanta… after the city’s vacancy rate hit 22%.

This is playing out across the country…

According to MSCI Real Assets, $24.8 billion of office buildings are currently under “financial distress.”

And that’s just one segment of the CRE market!

Another $22.7 billion worth of retail properties are also under distress, as well as $13.5 billion of hotels.

All told, nearly $70 billion in commercial real estate is at risk. That’s a 13% spike from the first quarter.

This is only going to get worse. But don’t just take our word for it.

According to McKinsey & Co., nine major cities will lose $800 billion by 2030 in office building valuations.

What Causes CRE to Collapse?

If CRE is one giant powder keg, rising interest rates are and have been the fuse…

Earlier, we told you how rates have surged over the past three years.

That alone is causing problems. But there’s no guarantee that rates are done climbing, again due to the Fed’s blind (or intentional) hawkishness.

In fact, we think they could head significantly higher in the years to come.

To understand why, look at the chart below.

It shows what the 10-Year U.S. Treasury yield has done since the early 1980s.

As discussed previously, the 10-Year Yield recently broke the downtrend that it had been in for four decades.

This is a major move. It suggests that we’ve begun secular, or long-term, period of rising rates.

Now, obviously this large, quick spike is NOT sustainable no matter what the Fed might lead you to believe. And whether they want to crash the global economy or not to tame inflation, it’s happening nonetheless.

We believe the damage has already been done and the high interest rate environment will continue to put stress on the global financial system.

When the real crash / downturn hits, this will lead to another rate cut cycle which coincides with a retracement of the breakout area from the secular downtrend (refer to the chart above…this is why we love charts…charts are truth!).

After that, the long term secular interest rate trend should continue it’s uptrend as the amount of money the Fed will have to pump into the system (M2) to get institutions out of this mess, will likely commence a MASSIVE inflationary cycle.

This will lead to double digit rates eventually as the Fed will have to hike again.

It really isn’t rocket science.

But this interest rate game of cat and mouse leads to big booms and big busts. So you must stay informed and be on guard.

You see, The 10-Year U.S. Treasury Yield is a benchmark interest rate. As it goes, it is as well across the global economy.

And if rates start rising rapidly again or even just sustain this level, the problems currently facing the CRE market will only magnify.

Said another way, we are likely in the very early innings of the CRE crisis. Markets are enjoying near all-time high valuations (and we’ve captured these gains in our Telegram channel - link below), and the public really isn’t paying much attention.

Ultimately, a tidal wave of defaults could rip across the asset class… creating big problems for the broader economy and stock market.

So, what should you do about this?

Well, we’re not looking to short CRE just yet at The Discount. That’s because this crisis is looking more like a slow-motion train wreck… than a flash crash (for now). Also, institutions have front-ran a lot of the CRE stocks already which are at historic lows.

Our focus is instead on protecting our wealth over the long run, and cashing in on short-to-mid term trends with swing trades.

We like to diversify in terms of time frames.

1. Long Term

2. Mid Term

3. Short Term

There are several asset classes that we simply buy on discount and hold them. Hence “The Discount”.

We do view everything as a trade, so eventually we take profit, but the long term trades we don’t stress over the month-to-month.

Our mid-term trades have been outstanding with recent wins of over 100-400%+.

If you remember our weekly “The Inverted Yield Curve: Harbinger of Gloom & Doom” you will have insight into how we time the market with our long term trades. If you have a 401k or long term investments, this is a must read.

Also, the yield curve has been inverted for over 12 months now. So for your long term trades / investments, it’s time to pay attention…

We will be launching The Discount Portfolio soon. Here you can track all of our long term, mid-term, and short-term trades in real-time, with common-sense analysis for each position we take.

A service that anyone, from beginner-to-advanced, can easily understand and take advantage of.

Until The Discount Portfolio launches, we update everyone in our Telegram Channel on trades we are taking, currently in, and keeping our eye on.

Be sure to subscribe via email, if you haven’t already, to receive the notification when our portfolio service launches.

 Don’t forget to follow on YouTube for video breakdowns of the markets each week as well.

For now, stay tuned and have a great rest of your weekend.

See You Next Sunday!