Why looking at the stock market won’t give you full picture of US economy

Between the federal government and the Federal Reserve, about $10 trillion has been pumped into the US economy to prevent a pandemic-fueled economic collapse. Judging by the stock market, you would think we’ve sidestepped a 2008-size disaster.

But stocks, at least in the short run, are rarely a good indication of what’s festering inside the US economy. A better oracle is certain aspects of the bond market, particularly those that are tied to real estate.

And just like in the prelude to the 2008 collapse, when the stock market was at all-time highs, this particular market is signaling a warning sign that the economy is headed for trouble.

In 2008, the canary in the coal mine was declining residential real estate prices that failed to catch the attention of most market participants before it was too late because of a number of factors, including Fed easing. (Sound familiar?)

Now a similar tumult is beginning to infect the commercial real estate market. Delinquencies and defaults are rising on the mortgages of malls, high rises and office buildings, traders in this market tell me.

It’s easy to see why: In New York City, will the much-heralded Hudson Yards complex ever reopen? Millions of upper-income New Yorkers are fleeing the city not just because of the pandemic but rising disorder.

And who wants to shop in a mall when you need to get your temperature checked every time you walk into a store?
It’s not just a New York phenomenon. Does anyone really want to work in downtown Portland, Seattle, or San Francisco any time soon?

The underpinnings of the commercial real estate market — an estimated $16 trillion business — have begun to turn significantly negative, posing an enormous systemic risk to the US economy.

You won’t hear any of that from the industry’s cheerleaders, who are paid to follow the mantra that the business will bounce back when the pandemic recedes. People will slowly return to work in high-density cities and will continue to attract the world’s best and brightest once cultural activities are reopened and the cities can return to normal.

All of which may be true in the long run, but as Keynes put it, “In the long run, we are all dead.” The only way to tell what’s happening in the near term — which could last years — is to look at what’s happening in commercial real estate securities. Their prices are declining, a reflection of real trouble to come.

Of course, predicting the next financial crisis is more often than not a fool’s game. Since the last big one in 2008, I can’t tell you how many “Lehman moments” have been declared by market-wise men, suggesting that a certain set of factors were in place to spark a bank collapse, and then a broader decline in the economy.

Yes, the banks may be better capitalized now and, perhaps unlike in 2008, they aren’t holding as many real estate loans on their books.

Maybe New York’s political leaders will open the city up and help save the commercial real estate market and the economy with it. (Stop laughing.)

But those are all big bets, and ones that more and more smart people aren’t willing to take.

Why Goldman is a target

Goldman Sachs has long been known for its big clients, big bonuses and its reputation as the premier bank for M&A. But lately, it also has become known for speculation that it’s takeover bait.

The reasons mostly come down to size. As CEO David Solomon DJ’s at parties in the Hamptons, the once-powerful Wall Street firm is being eclipsed by rivals. Now even Morgan Stanley is worth more, while JPMorgan is some four times as large.

Goldman’s second-quarter earnings beat forecasts, but it can’t count on Fed pandemic relief to disguise its weakening position.

Sources say there are interested parties, but Goldman doesn’t want to give up control despite its lagging stock price.

If Solomon stopped spinning discs, he might realize that investors are more interested in a sale than who’s running the ship.

Banking on staff return

As New York City recovers from the pandemic, banks are planning a comeback — with a big caveat.

The financial sector employs more than 300,000 in the city who are mostly working from home now. So-called non-essential staff are slated to begin returning to the office in September, with around half of the workforce planned to be back by year’s end.

“We’re finding a lot of our people are going stir-crazy and want to come back even if they’re afraid to take the subway,” said a senior NYC bank exec. “But everything is based on the virus.” In other words, stay tuned.

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