Will commercial real estate trigger the next financial crisis?

The latest inflation figures in the United States look relatively positive, with a slight decline in annualized inflation rates. However, only three items of the CPI components declined in December. Persistent inflationary pressures that threaten to undermine the rate-cut narrative that financial markets have adopted are present below the surface. Investors expect the Federal Reserve to pump the monetary laughing gas machine, anticipating further rate cuts and monetary easing to support multiple expansions.

However, in this wave of fervent optimism, there are dark clouds looming on the horizon: another wave of regional bank troubles added to the burgeoning crisis in the commercial real estate market.

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The Fed Cannot Cut Rates as Fast as Markets Want

Market participants started the year with aggressive expectations of rapid and large rate cuts. However, after the latest inflation, growth, and job figures, the probability of a rate cut in March has fallen from 39 to 24%. Unfortunately for many, headline figures will support a hawkish Federal Reserve, and the latest comments from Jerome Powell suggest rate cuts may not come as fast as bond investors would like.

For the Federal Reserve, the headline macro figures show a strong economy, solid job creation, a low unemployment rate, stronger GDP growth, and persistent inflation. The real economy shows a weaker picture.

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Why Americans Do Not See a Strong Economy

The euphoria with the fourth quarter Gross Domestic Product (GDP) figure makes no sense. The headline champions say that real GDP increased at an annual rate of 3.3% in the fourth quarter of 2023, according to the Bureau of Economic Statistics (BES). An increase in real GDP of $1.5 trillion with an increase in public debt of more than $2 trillion is not a strong economy. It is a bloated economy. Furthermore, there is nothing positive in consumption when personal saving as a percentage of disposable personal income was only 3.7% in December and disposable personal income in 2017 has basically stagnated. American consumers are buying fewer things with their salary.

We cannot forget that one of the biggest drivers of the fourth quarter increase in real GDP was an abrupt reduction in the GDP deflator, which came at 1.5%, less than half the previous reading of 3.3%. This is a massive boost to real GDP from a reduction in the inflation estimate that most Americans have not seen at all.

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Milei Told the Uncomfortable Truth in Davos

Big corporations and global leaders adhere to and assume the growing interventionism and the advance of socialism because, for politicians, it is an excellent way of perpetuating their power and control over citizens, while multinationals tolerate it because they have enough financial muscle and size to absorb the pernicious effects of the massive rise in public debt and monetary imbalances, public spending, taxes, barriers to trade, and progress.

They all know that the burden of interventionism falls entirely on small businesses and families, destroying the middle class in the process. The wealthy can escape the negative impact of monetary debasement and confiscatory taxes. People with salaries and small entrepreneurs cannot.

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