Forewarned is Forearmed

I begun to smell blood again!

Chinese authorities are considering imposing restrictions on overcapacity in industries ranging from cement to steel. Investors are shifting funds into safe haven assets and Shanghai and Nikkei indexes are dropping. Sterling continued to slide, Canadian dollar on volatile price action as commodity markets are on edge, possibly for significant swings in either direction.

Trader friends at Singapore are telling me that they are not willing to place large bets on the direction of FX. Nymex Henry Hub natural gas traded down, which will have consequences for the exchange rate over the coming months.

Flood of cheap money into a diverse range of asset classes has drive valuations in many market mind-boggling highs. As now it is becoming clearer that this momentum is not to last, one asset class after another is likely to fall into victim to rapid price deflation as markets continue to struggle to determine the fair value.

Commercial real estate, which to my mind, has been largely remained under the radar may come as another surprise. Once, it was driven to spectacular highs around the world and now it has begun to show signs of rapid deterioration and the negative economic implications are of considerable concern.

Commercial real estates tend to lag unemployment by up to 12 months, implying that dramatic job losses sustained in most major economies over the last year and a half are just starting to affect property values. I already seeing skyrocketing vacancy rate.

Commercial real estates are generally purchased with relatively high levels of leverage, and loan-to-value ratios in the 85% range were common prior to the financial markets crash in 2007. A quarter of all loans held by US institutions are commercial property related.

Further losses are expected. If it does, it may feel more like a boot and forewarned is forearmed!