The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance

Reggie Middleton's picture

Note: all links have been fixed. Enjoy and have a good weekend!

As I sit back and contemplate the content and delivery style that would be best suited for my upcoming keynote speech at the ING Real Estate Valuation Conference in Amsterdam (this is my first presentation to a large group where English is not the primary language), I am bombarded with news bits and bytes that confirm what I've been modeling, warning, fearing and preparing for - for nearly 2 years. That is almost 23 months to the date. What is it, you ask? It is the market's return to the adherence of fundamentals and global macro forces versus following the whims of the concerted efforts of central banks around the world to openly manipulate real asset, equity and bond markets on a global basis.

Really, sit back and think about it. Put some thought into figuring out how difficult it is to successfully manipulate real estate (commercial and residential), stock and bond markets in just one major country. Then give the same thought to how difficult it would be to do the same in nearly all of the developed nations who participated in this crisis. The mere attempt to do so has loaded them up with debt at a time of marginal if not negative GDP and economic upside, a disgruntled populace ripe to ripple from the causes of social unrest rising from the rife economic conditions that the aftermath of incessant bubble blowing has wrought, and last but not least - fundamentally overvalued investment markets.

Was it really worth it? Is it going to last? I believe, and am rather confident in this belief, that we will be FORCED to finish what was started in 2008 - and that is the (re)commencement of the down leg of a major asset cycle. We had several concurrent booms (real estate - both residential and commercial, credit, fixed income, and equity) and an incomplete bust that failed to totally let the air out of the bubble. To make matters substantially worse, governments (on a global basis, mind you) wasted the resources of their countries and taxpayers in an attempt to fight the markets and the normal economic cycle by both re-inflating said bubbles (all of them to some extent) while simultaneously indemnifying and pumping full of undeserved capital, the massive agents of leverage which initially were the conduits of the bubble blowing pressure. As a result of being the conduits, they were also the foci of the deleveraging forces that culminated in the bust. These agents, at least a very large portion of them, have proven themselves to be financially incompetent and undeserving to remain as an ongoing concern from an economic perspective. Their political and lobbying clout said otherwise, and they have siphoned capital and staying power from the public sector through regulatory capture and now the poison that was the over-leveraged, "new guard" FIRE sector has now infiltrated entire countries and sovereign nations.

Those who may not follow me may think this is naught but fancy prose on a down day in the markets. Well, I have been preaching this publicly since 2007 and before the markets broke. I have named, on an individual basis and months ahead of the event, those agents that should have fallen - and for the most part did fall if not for massive government intervention, ex. Bear Stearns, Lehman, GGP, Countrywide, WaMu, etc. - see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?, and I am saying now that the last two years of faux, government/central bank "purchased" recovery is simply unsustainable while the majority of the underlying issues that caused 2008 to happen are still present, and most of them are worse now than they were back then.

The market collapse commenced in 2007, and gained momentum in 2008, maximizing its velocity and strength in the 1st quarter of 2009. This collapse was not the result of the indicators that we hear bandied about so often in the mainstream media. It was not borne from stagnating GDP, slow retail sales, lots of snow nor high unemployment. As a matter of fact, all of these factors were literally on fire in 2006 through 2007. The market collapsed because the overinflated real asset market had finally reached its peak. Since this overinflated market was financed primarily with debt, upon its deflation accelerated destruction of equity and capital commenced. Once you lose 10% of market value on a cash investment, you lose 10% of your equity as well. If you are levered 2x, that 10% market drop equated to a 20% wealth loss. 5% downpayment housing deals, equate to deeply negative equity values at a 10% market correction. So, if one were to sit back and realize that 125% LTV (or a negative 25% down) housing deals didn't just exist, they were relatively plentiful by historical standards, and derivative structures allowed certain corporate players (ex. the monoline insurers) to employ 90x+ leverage, there is no wonder what happened when the housing market dropped 36% and the CRE market dropped 42%. Believe me, dear readers. They are not finished falling.

Then .GOV got into the bubble blowing business, and all of a sudden all is well...

Commercial real estate is literally close to its bubble highs. Hard to believe, but just glance at the chart.

With the US, much of Europe and major portions of Asia stuck in a liquidity trap borne from a developed reliance on unsustainably low and highly manipulated interest rates, the direction of yields really have no way to go but up. If I am correct in that plunging real assets brought upon the recession and associated market collapses, and manipulated interest rates worldwide have no where to go but up while said real asset prices have been artificially elevated at levels that defy the fundamentals, then what happens if when said rates break the chains of their erstwhile wanna be masters and resume their march to the north?

Gross Dumping Treasuries Leads Managers Calling Three-Decade Rally's End

"It's not a question of dissing the United States or questioning the credit of the United States, but simply a maturity reflection," Gross said. Treasurys are "mispriced relative to the inflationary environment and the growth we see ahead and there are better alternatives in order to capture yield."

Gross primarily based his evaluation on the reduction in yields caused by the Federal Reserve's buying of close to $2 trillion in Treasurys, with more slated before the second leg of the program—often called QE 2—comes to an end.

"When a trillion and a half dollars worth of annualized purchasing power disappears I simply question as to who will buy them and at what yield," he said. "We're suggesting at these yields it might be problematic."

Anybody who has the least bit of doubt regarding this assertion needs to read this article immediately: As excerpted...

As you can see above, CRE drops in value whenever yields spike more than the + delta in NOI. Looking below, you can see that US CRE actually runs to the inverse of the 30 year Treasury.

That visual relationship is corroborated by running the statistical correlations...

The relationship is obvious and evident! In addition, we have been in a Goldilocks fantasy land for both interest rates and CRE for about 30 years. CRE culminated in the 2007 bubble pop, but was reblown by .gov policies and machinations. The same with rates. Ever hear of NEGATIVE interest rates where YOU have to PAY someone to LEND THEM MONEY!!!

So, BoomBustBloggers, where do YOU think rates are going to go from here? Up of Down???

Put simply, residential mortgages become less affordable leading to housing becoming less affordable. Cap rates skyrocket, save a commensurate increase in NOI, which I really don't see happening in an era of rampant unemployment and stagnant economic growth.

What many may not realize is that the housing market and the CRE are inextricably linked. The 10 city Case Shiller index and the CoStar US Cap Rate Index have a startly -94% correlation. That's as close to perfectly symmetrical as one can expect to get (lower cap rates mean higher prices, and vice versa, while higher Case Shiller numbers mean higher prices). If CRE and residential real estate are really that tightly correlated, then realize what we are in for in terms of residential real estate, besides higher interest rates.

In preparation for the ING conference, I have codified and modeled all of the various elements that I discuss on BoomBustBlog, namely the import and export of financial, economic and sovereign risk contagion. We adjust the pathways of apparent pure financial contagion and correlation with a plethora of real world factors.

Then we plugged them into our proprietary cross-exposure model, and then used global cap rate analysis to transform said risks into a spread over the risk free rate of each respective county, and finally plugged said figures into individual discounted NOI style models. I went into the process in a little more depth here: The Coming Interest Rate Volatility, Sovereign Contagion, Geo-political Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global Real Estate Through This Mess.

We back tested the results with regression analysis, and the accuracy of the results shocked even me - and I'm a pretty confident fellow...

It would appear that we are on to something here... That is, unless... You know, "This time is different!" I will go into this topic depth (and in English) in Amsterdam on April 8th. Anybody interested in attending should contact Jacob at the following link:

For those who have not been following my opinion and analysis regarding real estate and macro conditions surrounding it, here are my latest articles:

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NoClueSneaker's picture

Reggie should estimate the size of the bubble in commercial RE in German cities. 75% of the highest prized boxes are permanently empty, and changing owners every 6 months. No further comments ... :-(

Buck Johnson's picture

Have a good time at the seminar Reggie, also I agree with you and never saw it that way.  I didn't think that essentially what the Fed and the rest of the world did was interrupt the process from 2008 and it's now coming back in full force.

TuffsNotEnuff's picture

Commercial real estate is literally close to its bubble highs. Hard to believe, but just glance at the chart.

Yes, indeed.

Econometric models are not able to deal with this situation. It is irrational.


Grand Supercycle's picture

'market collapse commenced in 2007, and gained momentum in 2008'

'recommencement of the down leg of a major asset cycle'

'we had several concurrent booms... and an incomplete bust that failed to totally let the air out of the bubble'

Really ?

Where have I heard this before ?


Waterfallsparkles's picture

The higher the bubble the more taxes they collect.  Inflation in the past ment higher income.  Higher income higher taxes.  Not that that ment any more money you had to spend because as the dollar went down your spending power also went down.  In effect most Americans lost ground.

Plus, in the States the higher the property taxes the more the State could collect in property taxes.  Just amazing.  A pet peve of mine.  I bought a property for $70,000. in 1989 and in 2010 my property taxes were $8,500.  That means I have to buy my property back from the State ever 8 years.

Oh well, at least I got that off my chest. 

Inflation is a backward way for the Fed and the private Banks of the Fed and the Government to rob you of your assets and feed them to the same.

Geoff-UK's picture

Dupe post, regrets.

JimS's picture

All traders know this axiom: when trading don't panic, be cool and calm, but if there's going to be a "Panic", be the first out the door. (something to that effect) We are rapidly approaching a real Panic. Reggie is spot-on, and timing is everything. I hope I can get out the door before the "Great Panic" begins.

hamurobby's picture


He who panics first, panics best.


spinone's picture

Better a bit early than a bit late!

Geoff-UK's picture

My eyes, my eyes!  The chart porn is too much!

Lets Hang Parliament's picture

"this is my first presentation to a large group where English is not the primary language"

Don't worry about it Reggie - they speak better English over there than most of us Brits!

ING do run a pretty big property portfolio so make sure you can swim as they have a lot of canals in Amsterdam and we'd hate to lose you!

linrom's picture

What am i missing: CRE and 30-year rates are both correlated to credit expansion.

JimS's picture

Credit expansion is great, until you got to pay the rent. Many of these business are going to have a tough time paying the rent, thus CRE is going to get blasted trying to pay the "rent".

anony's picture

So I should NOT consider buying that duplex condo in Sarasota at this time, but wait another 2-3 years?

gwar5's picture

Great stuff Reggie. Have a good one in Amsterdam.

We should have taken the medicine in 2008.... but NoooOO!

We are so fucked in CRE. 

Treeplanter's picture

What do us low tech, comparatively illiterate guys short here?  TBT?  Any suggestions?

JimS's picture

I would suggest something like MarketEdge, and look at their various short indicators. Then you can use puts on a number of stocks in those groupings. Pick a dozen, or so, of likely candidates, go out to April, wait for about 2-3 weeks, then be ready to roll out into May contracts. Keep doing that, monitoring all the time. Some will be home runs, without a monster amount of capital.

JimS's picture

The reason I pick the second closest contracts is that you avoid big premiums. Other than that you could go out to 3 or 4 months. I would stick to "near-the-money" puts, as that lowers the premium as well.

Ancona's picture

Reggie Middleton for President.

Fucking awesome [as usual]

baby_BLYTHE's picture

Reggie is the man!

Joeman34's picture

Reggie, from what I read of your work, you're adept at telling people where not to invest.  Do you ever publish investment ideas?  Just wondering where you're finding real value at the moment.  Thanks and good luck in the 'dam...

InconvenientCounterParty's picture

Slide 1:

I suggest you panic.

hehehe. I'm not sure you are going to be the "Belle of the Ball" Reggie. Good luck.

6_7_42's picture

Hey TD!

Seems all the links RM posts are broken.

geno-econ's picture

Can not think of a better gualified person to make the presentation in Amsterdam . Enjoy a boat excursion including canals just outside Victoria Hotel ,and not too much time watching store fronts on other side of canal---unless it is for economic research purposes , in which case we expect a full report upon your return. Bon Voyage Reggie

kaiserhoff's picture

Nothing wrong with a little window shopping;)

lincolnsteffens's picture

I'm with you Reggie, worse means up and then get out of the way.

Ferg .'s picture

Great article as always Reggie , always a pleasure to read . Best of luck at the conference .

alien-IQ's picture

Great work again Reggie. Have fun in Amsterdam.

RowdyRoddyPiper's picture

Here is an nice address of a "coffeeshop" in the Jordaan...A great way to experience Amsterdam; a most civilized city.

CH1's picture

Roddy, if Reggie returns a stoner, I'm gonna blame YOU! :)

mirac's picture

Reggie is probably correct on this...but as some one once said, "Timing is everything."

Translational Lift's picture

You can be right longer than you can remain solvent......

kaiserhoff's picture

And B.S. Bernanke's juggling act gets tougher every day.  Ponzis bring their own rewards.  Enjoy Holland, Reggie.  Life hath its compensations.

dbradsha's picture

For heavens sake. Look at the indexs 100% since the lows. Look at the action this week - Spain, Employment, Earthquakes - still the indexes go up and BTFD. Look at real estate, something you Reggie have been banging on about for ages - up up up. Look at the foreclosesure crisis - up up up. You'll only be right when you're right but for heavens sake why cant someone give some analysis as to why the markets are behaving like they are, what mechanism is Bernanke using, why , who or what drives the dip buying in the last hour every hour. Give us something useful. Please

duncecap rack's picture

I think this is a good question. I have wondered about this too. The money is supposed to be sterilized I thought. Somehow the expanded balance sheet of the fed is supposed to show up in the "excess reserves"  of the big banks. At least that is the reason the Ben Bernank gives for why QE does not cause inflation. How does the money end up lifting the s&p? And in a nice straight line too (until recently)- just like the commodity markets. What is the mechanism for this sterilzed money to inflate everything so uniformly? I don't think it is just the decreased value of the frn because the line started at Jackson hole before the money for QE2 started to flow.

hamurobby's picture

Bens money may get sterilized, but his "bad" dollars have chased out the original "good" dollars that were holding the notes, and is now out seeking yield. Those dollars will probably never return to treasuries, regardless of yeild. By the time rates are acceptable again, there will be a sovereign debt crisis.

hamurobby's picture

I expect to see Ben tap the brakes very soon to scare some old money back into the 10yr. He needs to keep CONgress and their interest happy so they will vote him back in again.

equity_momo's picture

Its very simple : Feds balance sheet expands = asset prices climb in NOMINAL terms.  Feds balance sheet is about to stop expanding at the rate required to maintain nominal asset price appreciation. Commodity prices being the reason. House prices are irrelevant - they were just a bubble used to inflate consumer confidence. 10 years before it was Tech stocks as the proxy.   Housing is done. Toast. Forget about it. But it will not be a driver of the stock or bond market. Its not a leading indicator.

FreedomGuy's picture

How far can the Fed balance sheets expand? Infinite? If so, they could theoretically end up owning virtually everything. Just print enough FRN's and make infinite ledger entries as you buy up everything from government debt to real estate. Add to that the fact that government can buy up businesses like GM and there's no limit. Somebody show me I am wrong and where the limits are.

Kayman's picture

The Speed limit is monetization of debt. 

Ben is a crack addict- always looking for another hit.  His schooling in economics seems to have missed that:

ECONOMIES OF SCALE (in money printing) RUNS INTO


$10 trillion of Ben's paper isn't worth $1million in real savings.

But he is too smart to see it.

Diogenes's picture

It ends when everyone gets wise and refuses to accept their worthless paper. This is already happening. Most of the followers of this board have exchanged their savings (paper) for gold and silver. The biggest bond fund has gotten out of US bonds. China stopped buying US bonds a year ago. It ends in hyperinflation. The inflation trend has already turned up.

Stares straight ahead's picture

I agree, but what happens then?  The end of the Roman Empire: A return to feudalism and the dark ages? Hippy communes, mad max scenarios or pastoral farm scenes?  Has anyone a theory about what happens in the end-end game?

CH1's picture

Yes, but not time to explain it. :( The best I can do now is to suggest that you read this:

If the state survives this passage with people still worshiping it and believing that it magically provides, the future is VERY dark. If people finally get over that BS and see to things themselves, the future is very bright. The in-between possibilities are getting fewer and fewer.

InconvenientCounterParty's picture

timing is important --so is sleeping at night. I'm not sure you can have both.

velobabe's picture

safe travel, reggie. enjoy getting out of amerika. be careful!

Debtless's picture

Nothing's going to change. The banks print money, and have a no-fail backer.

It takes blood for change to come - the US isn't ready for that yet - too many have far too much to lose.

Michael's picture

The Federal Reserve Corporation is the root cause of all our war and monetary problems throughout history.

Northeaster's picture

"too many have far too much to lose." -


+2...Two children that is. If those dynamics were to change, we have a new ball game.


Enjoy your reads Reggie.

JethroBodien's picture

Reggie you are loosing credibility in my mind. Everything you tout is an underlying symptom of a much greater disease. That disease of course if the fractional reserve monetary system.

Any proposed solution that excludes this fundamental problem is doomed to fail.