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.

Online Spreadsheets (professional and institutional subscribers only)