Are The Conservative Dutch Immune To Contagion? Are You Safe During An Earthquake Because You Keep You Keep Your Shoes Tied?

Reggie Middleton's picture

More BoomBustBlog predictions rising to the forefront. As clearly stated in the Pan-European sovereign debt crisis,
this is a pandemic contagion. The media's focus on specific countries
must be mollified and modified. Reference the first five posts of the
aforemetioned series, published a year and a half ago...

  1. The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one.

  2. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect

  3. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be..
    attempts to illustrate the highly interdependent weaknesses in Europe’s
    sovereign nations can effect even the perceived “stronger” nations.

  4. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

  5. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!

Now, reference today's Bloomberg headlines - Spanish, French Debt Auctions Disappoint; Yields Rise: Yield spreads of Spanish and French 10-year government bonds over German equivalents hit euro-era highs on Thursday.

And from a very impressive and knowledgeable brother across the blogoshpere known as Ed Harrison, Chart of the day: Contagion spreads to the Netherlands | Credit

Yesterday, I showed you that contagion had spread and default probabilities were blowing out right across Europe. Every single name on the list for sovereign credit default wideners was European and names like Austria, Estonia, and Slovakia showed marked deterioration, with default probabilities over 10%.

is no different. The Netherlands is the notable credit to deteriorate
today. Their default probability has just crossed the 10% threshold.
Take a look.

At the risk of repeating myself, I have to note that this is a rolling crisis through the euro zone. It will eventually infect every country until we get a systemic solution: full monetisation and union or break up. The longer the ECB waits, the worse things will get. No euro zone sovereign bond is safe.

Ed is absolutely, unequivocally correct - and not just because he agrees with me either (although that may be the primary reasonCool).

1455 EST: There’s nothing wrong with the Netherlands. It’s
indiscriminate selling. Warren Mosler reported this morning that he received this message from a AAA bond trading desk:

Our Trading Desk reports “mayhem” in the AAA Eurozone markets

- France 11bps wider

- Netherlands 6bps wider

France now 178bps over Germany

Increasing talk/fear of Eurozone break up and capitulation trades in AAA markets are widespread.

We are seeing no real demand for anything – even Germany.

Tomorrow’s Shatz auction looks a big ask with a yield of 30bps and no risk appetite out there.

These are not high yield punters here. They are AAA bond managers who thought they were buying safe assets. Because of the sovereign debt crisis, no eurozone sovereign bond is safe. So now there is panic.

actually addressed this issue directly to Dutch investors and bankers
in April. There may be more of a reason to panic than is being indicated
above. If you haven't seen it, view the entire keynote speech delivered
to the real estate investors in Amsterdam at ING's Valuation Conference
in April of this year.

 ... Yes, real estate will take its fair share of banks down, again. Reference in detail, my post

that I have (quite honestly) issued my most sincerest thanks, let's
attempt to remedy the shortcoming of the limited amounted of time that I
had. You see, after the 3 minute hit ended there was a brief discussion
of commercial real estate in which I didn't get to participate, thus I
will take the liberty of doing so through this medium....

... Hmmmm! I walked through this in explicit detail in “When the Patina Fades… The Rise and Fall of Goldman Sachs???
and I did it without being privvy to Goldman’s financial innards. Long
story short, practically all of the major banks are lying about the
value of some of the largest assets on their books.

many institutional and/or retail investors will be able to ferret out
such? Or more importantly, why should they have to? It is the reporting
company’s responsibility to report, not to obfuscate. The big problem
with this “hide the market marks” thing is that markets tend to revert
to mean. Unless said market values fundamentally catch up with
said market prices, you will get a snapback. That is what is happening
in residential real estate now. That is what happened in Japan over the
last 21 years!!! That’s right, it wasn’t a lost decade in Japan, it was a
lost 2.1 decades!

has been the first balance sheet recession that the US has ever had,
but there is precedence to follow. Japan had a balance sheet recession
following their gigantic real asset bust. They made a slew of fiscal and
policy errors, which essentially prolonged their real asset recession
(now officially a depression) for T-W-E-N-T-Y  O-N-E long years! For those that may have  a problem reading that, it is 21 long years. What did the Japanese do wrong?
  • They refused to mark assets to market
  • They attempted to prop up zombie banks
  • They failed to promptly clean up NPAs in the banking system
  • They looked the other way in regards to real estate value shenanigans

... The retail investment banker Davidowitz had similar choice comments on this space: Davidowitz On Overt Optimism In The Retail Space And Mall REITs, Stuff Which We Have Detailed Often In The Past. The Dutch have a VERY similar problem on thier hands, but not all are paying attention.

is footage never released on the Web, but I felt that this is an
opportune time to drill down into the Dutch market and explore the
ramifications of this malaise as it relates to real estate and

Listen up people, HERE ARE THE NASTY FACTS!!!

Real estate is a highly rate sensitive asset class. Capitalization rates (the popular method of pricing real estate) is explained in Wikipedia as:

Capitalization rate (or "cap rate") is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value.[1] The rate is calculated in a simple fashion as follows:

 \mbox{Capitalization Rate} = \frac{\mbox{annual net operating income}}{\mbox{cost (or value)}}

going into a CRE class, when interest rates go up, cap rates generally
go up as well and the value (or cost to purchase) of the property goes
down in sympathy unless the rise in interest rates is offset by a
commensurate or greater rise in net operating income. Now, either
everybody believes that unemployment is going to drop towards zero  in
an era of US austerity (reference Are the Effects of Unemployment About To Shoot Through the Roof? then see Budget AusterityGoldman Sees Danger in US Budget Cuts - CNBC) at the same time that historically low interest rates that actually went negative are going to get lower (see the Pan-European Sovereign Debt Crisis) ---- or cap rates are about to skyrocket. I'll let you decide!

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...

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!!!

BoomBustBloggers, where do YOU think rates are going to go from here?
Up of Down??? Let's ask Portugal or any of the other PIIGS group. I have
shown, very meticulously, how Portugal can not only afford the path
that they are on (record high interest rates) but the losses that will
come when they restructure (default) - for all to see. I have done the
same with Spain, Ireland and Greece (for subscribers only). See The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog followed by
The Anatomy of a Portugal Default: A Graphical Step by Step Guide to
the Beginning of the Largest String of Sovereign Defaults in Recent
(December 6th & 7th, 2010).

Here is the contagion
effect we are experiencing today, clearly foretold to the ING clients
and banking executives in April of this year, from the banking
perspective as opposed to the real estate perspective. Same difference,
though... What was not caught in this video is the fact that the Dutch
will bear the highest per capita costs for bailing out their more
profligate brethren. You can imagine how enthused thery were to hear
that tangy fact :-)

So, what's next? The US Follows Japan Into A Balance Sheet Recession: What Do Investors Know and Why Is It That Policymakers Appear Clueless? 

the Netherlands be very far behind? Will any country with a high debt
load, high NPA/GDP ratios and underwater real estate truly trail very
far? I doubt so, but hey... What the hell do I know? I simply called
nearly every twist and turn of this debacle from the beginning of the
real estate crash in the US to this point in the Pan-European sovereign debt crisis. See "Who is Reggie Middleton?" for more.

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AngryGerman's picture

dutch will make it illegal to smoke weed by non-dutch in all their provinces by 2013. they already started in the south. this means that around 95% of their tourism industry will collapse. enjoy the economic downturn bitches. good bye the low lands!

Estimates for 2011 (source: WTTC): 

GDP Direct Contribution: EUR12.8bn (2.1% of total GDP) GDP Total Contribution: EUR37.1bn (6.0% of GDP) Employment Direct Contribution: 345,000 jobs (4.7% of total employment) Employment Total Contribution: 639,000 jobs (8.6% of total employment) Visitor Exports: EUR15.1bn (3.0% of total exports) Investment: EUR3.5bn or 3.2% of total investment

do the math yourself. when they ban it, it will have significant impact on their economy.

Ghordius's picture

scraping the bottom?

are you in any way really "German"? Ever been in the EZ at all?

do you have any clue about this Dutch law, it's background and how it will be enforced?

do you have any idea about weed, where you can get it in Europe and how much it is relevant for tourism in the Netherlands?


All in all this is a further propaganda article for EuroBonds, EuroTax and full monetization. And we know who would profit from all this...

AngryGerman's picture

you implying that the oldies in bergen an zee and texel spend more than the crowd in amsterdam in the summer?

it's a typical geert move: windowdressing being active.

Ghordius's picture

no, you are implying that only because the Dutch will "outlaw" weed for foreigners - they want to do this to have a better police handle on their foreigners (due to their current xenophobic undercurrents) and as a bow to global attitudes - there will be a "hunt for the hapless tourist wanting to smoke a spliff in peace".

this is preposterous, akin of saying that Amsterdam is the only place where you can find a joint in Europe. The Dutch Police is one of the European Masters in the Art of Looking The Other Way.

Tourism in the Netherlands has the following reasons: Business, Culture, Shopping, Partying, Sex, and, lastly, Drugs (of which weed is only a small part)

I strongly suspect from your attitude that your are an American Cousin with very little experience of the EZ - I might be mistaken on this but this "legal/illegal = will happen / will not happen" atttitude strucks me as very typical US. Or your comments are meant for US consumption.


AngryGerman's picture

"The Dutch Police is one of the European Masters in the Art of Looking The Other Way." - That's true, although I would not attribute this to skill but to incapability. And the tendency of Dutch authorities to come down hard on tolerated (you are also right there, it's not legal) soft drug consumption does not originate from the police agencies, but from politicians. See Maastricht, Rotterdam in the past.

Of course the Netherlands are not the only place in Europe where soft drugs are available. However, the laid-back attitude there have made the country to one of the two main entry points of soft (and hard) drugs to enter the continent (the other being south-east Austria/Slovenia). This was only possible by Dutch authorities allowing an unregulated market for soft drugs to establish themselves. The tail of producers/importers/distributers will have a harder time continuing their business once the legal facade get rendered more restrictive in operations.

That being said, let's break down your list of tourism: You can count business as such, although it is questionable in how far non-randstad areas benefit from it (whereas they benefit strongly from drug tourism, see Maastricht). Culture: same. Shopping: same, and nothing that cannot be found elsewhere nowadays. Partying and sex: you don't want to make me believe that there is no relationship with drugs there, do you?

In short, the political turn towards conservative values, not only represented by Wilders, bears the risk of implementing policies that take away the speciality of the Netherlands. It always has been heralded as a liberal, free-thinking country, but these days are long gone. When this is no longer, what makes the place then special? And when you saying that drugs play only a small part in the economy, it wouldbe interesting to see what the effects on the shadow economy will be. Again, you should expect a sharp drop in tourism, especially in the high-spending 16-45 year segment. And I don't think the police will look the other way when there is not only such a strong political pressure, but also braod consensus from the public that these policies are right.

Ghordius's picture

so let's see - it's 2013, the coffee shops still open, the locals with a Dutch ID can buy their spliffs, and you think that if a non-north-african-looking tourists walks in and politely orders (speaking easy) a joint either the publican or the local plain-clothes policeman immediately jump on him?

still preposterous, including a drop of 95% (or any sharp drop) of tourism

I repeat, the law is targeted on "improving the policing" of the Dutch Immigrants, not at tourists (and carries  of course racist undertones)

sorry, I repeat, you write with an American Mindset (this is not a slur), either because it's yours or because it's the one of your target audience

in the greatest part of the EZ the police does not go after every "crime", in a "nevertheless, it's the law" attitude

if the conservative values would be so preponderant in this matter, the coffee shops would be closed, period.

and most hard drugs enter the EU through Spain and Italy anyway

LMAO's picture

... Yes, real estate will take its fair share of banks down, again. Reference in detail, my post Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate.

Are you shitting me Reggie!

Surely you must be mistaken, I mean; The SWF of the alleged BEST run country in the world, yes that's right the fucking Norwegians are at it again, are diversifying heavily into the "new Coke of the century" namely Real estate.

Especially France, in particular Paris, seems to have some attractive crap to sell at give-away pricing.

I mean WTF Reggie; please don't tell us ignorant Norwegians that this is nothing more but a cleverly designed cover up made to look like a sound investment (after all nothing less should be expected from a SWF) but really is more like a sort of Marshall Plan to help out the French banking industry.

Yeah fuck, let's take some of that toxic French waste out of those poor bastards' hands.


AUD's picture

Watch out. I'm convinced that the RBA was left holding the US mortgage debt bag in 2008. The so called SWF here in Australia put much if not all of its 'reserves' in bad debt & needed a line of credit from the Fed to stay afloat.

LMAO's picture

Watch out.

Thanks for the friendly warning, unfortunately the dormant Norwegian population and their clueless politicians are only watching. There's no oversight or whatsoever regarding the dealings of said SWF. It's all cloak-and-dagger.

Hannibal's picture

Silver tanked. Buying more. Thank u Blythe

SwingForce's picture

Who in their right mind would ever sell? (/sarc)

Georgesblog's picture

There are many points raised by this question. First, since Corporatism respects no national boundaries, anyone with small change in their pocket looks like food to the central bank predators. Second, if you have change in your pocket, less than a dollar, you are among the top 5% wealthiest people in the world. If you have more than a dollar, you're in the top 2%. The point is, people had better learn how to stay out of the line of commercial fire.

AUD's picture

Reggie, the short end can stay at zero & the long end has further to fall & big profits still to give.

SwingForce's picture

Thank god I have a DVR and I can FastForward through the commercials. Dutch what?

eatthebanksters's picture

Reggie you are so right...I'm a veteran of 31 years in the (commercial) real estate biz....I am a broker and was a certified general appraiser (I let the certification expire)...cap rates basically translate into what is the yield on the full price of the real estate.  The real formula for deriving cap rates can be found in Wallace Smith's textbook on real estate valuation (I forget the title but he was one of my profs at Berzerkely in the 70's when we did things the old fashioned way).  In a nutshell if real estate returns move in relationship to other capital market assets based upon risk adjusted returns, then as bond prices fall and yields go up, you should see the same theing hapen in real estate...yeild requirements will move up and thus prices will have to fall.  I can't think of a scenario where the opposite would happen, because if bonds take a shit then so does the business world which means higher vacancies, lower rents and lower NOI, etc...not a pretty picture.  Keep up the good work.

vast-dom's picture

Yes. And Bill Gross was so right too, just timing way off. Yields will soar across board and borders. 

SwingForce's picture

You guys talk CRE and we guys think IYR. How about some facts and differences?

Zer0henge's picture

Well played sir.