Treacherous Terrain

Dear Reader,

Chris here, filling in for David today.

Being from the balmy southern part of these United States and having only spent one winter in New England (I’m starting my second now), I find it quite an adventure to make the trek to work on days like today.

Braving what I consider blizzard-like conditions (but what a local would probably just call Wednesday), I set out on my journey early this morning and hiked the 10 yards or so to reach my snow-covered car. The reason my car was not directly outside my house was because the rear-wheel-drive vehicle sans snow tires could not make it the entire way up the driveway last night when I came home. So I left my ride precariously parked on the icy incline, hoping it would remain there through the night.

After reaching my car and spending a considerable amount of time brushing the snow off all the windows, I was all set to go. Ever so gently I backed down the snow-covered drive and onto the frozen, snowy road.

As the strange cold white substance falling from the sky impaired my vision, and every tap of the accelerator caused the rear of my vehicle to fish-tail this way and that, I was finally on my way. My heart raced, and adrenalin flowed through my body throughout the entire (ten-minute or so) drive to my place of work. And upon finally arriving fully intact… I felt alive.

What I just described is something New Englanders do every day, and because they have spent a lifetime navigating such treacherous roads, they are much more capable to deal with lousy conditions than me. So it is with business. In these tough times, who do you think is more capable of navigating the treacherous terrain and leading us to economic growth – the entrepreneurs and businessmen and women who have spent their lives doing so, or a group of salaried bureaucrats that doesn’t know the first thing about business or producing something of value for society?

Speaking of bureaucrats and in honor of the third day of the Copenhagen climate conference, let’s take a second to profile a few of the top White House officials who are drafting President Obama’s climate policy. It’s probably worth mentioning that at least three of the top officials are known supporters of socialism who have advocated using environmental activism to spread the wealth of the United States and other so-called “rich” countries.

Meet the “Experts”…

Carol Browner – “Climate Czar”

Carol Browner's official title is “Assistant to the President for Energy and Climate Change.” She formerly served as Environmental Protection Agency administrator during the Clinton administration and was Florida secretary of the environment.

Browner was a member of the Commission for a Sustainable World Society at Socialist International, a group that Discover the Networks reports is the "umbrella for 170 'social democratic, socialist and labor parties' in 55 countries."

The Washington Times explained Browner's group called for "global governance" and asserts rich countries must shrink their economies to address climate change.

Cass Sunstein – “Regulatory Czar”

According to Cass Sunstein, administrator of the White House Office of Information and Regulatory Affairs, global climate change is primarily the fault of U.S. environmental behavior and can, therefore, be used as a mechanism to redistribute the country's wealth.

In a recent paper penned by the Obama czar, he advocated that U.S. wealth should be redistributed to poorer nations. (Doesn’t the U.S. government already do this to a substantial degree?) He also wrote, “It is even possible that desirable redistribution is more likely to occur through climate-change policy than otherwise, or to be accomplished more effectively through climate policy than through direct foreign aid.”

Furthermore, in his 2004 book The Second Bill of Rights, Sunstein used the precedent of the Great Depression to point out that historic economic crises "provided the most promising conditions for the emergence of socialism in the U.S."

John Holdren – “Science Czar”

A longtime climate-change alarmist who has advocated ideas such as enforcing limits on world population growth, Holdren's official titles are: Director of the White House Office of Science and Technology Policy; Assistant to the President for Science and Technology; and Co-Chair of the President's Council of Advisors on Science and Technology.

Apparently, Holdren's name was in the e-mails hacked from the Climatic Research Unit at East Anglia University in the U.K., which show that some climate researchers declined to share their data with fellow scientists, conspired to rig data, and sought to keep researchers with dissenting views from publishing in leading scientific journals.

FrontPageMag.com noted Holdren has endorsed a “surrender of sovereignty” to “a comprehensive Planetary Regime” that would control all the world’s resources, direct global redistribution of wealth, oversee the “de-development” of the West, control a World Army and taxation regime, and enforce world population limits.

Whether you like them or hate them, it’s important to know what they stand for.

Commercial Real Estate Continues Decline

This next bit from Commercial Mortgage Alert (www.CMAlert.com), a weekly update on real estate finance and securitization, is quite important so I’ve elected to reproduce the entire article below.

The percentage of commercial MBS loans in special servicing climbed sharply to almost 9% last month, fueled largely by the transfer of the $3 billion loan on the Stuyvesant Town apartment complex in Manhattan.

There were $65.2 billion of loans in special servicing at the end of November, a net increase of $8.2 billion, or 14%, from October, according to Trepp.

Three giant mortgages accounted for more than half of the increase: the Stuyvesant Town loan, a $967.2 million mortgage on a hotel portfolio controlled by CNL Hotels & Resorts and a $344.6 million loan on a hotel portfolio owned by investor Ty Warner. But eight other loans of more than $100 million were also transferred.

The $8.2 billion monthly increase was the second largest ever, after a $12.4 billion spike in May following the bankruptcy filing by General Growth Properties. The latest transfers drove up the special-servicing rate to 8.95%, from 7.91% at the end of October. The net number of loans in special servicing climbed by 8%, or 266, to 3,585.

The special-servicing rate has now climbed for 19 months in a row and stands 22 times higher than the record low of 0.40% in August 2007. The bulk of the increase has come this year. Loans in special servicing have climbed by a net $52.7 billion, or 423%, from $12.5 billion at the end of last year. The number of loans in the hands of special servicers has almost tripled, from 1,275 at the end of 2008.

The recent revival of securitization activity could tamp down future loan transfers by providing some borrowers with a way to refinance maturing loans, said Manus Clancy, a Trepp managing director. "Six months ago, there was no escape hatch for the billions of dollars of loans coming due - now there is a small one," he said. "That may take some pressure off the surging special-servicing numbers."

But, Clancy added, the market still faces stiff headwinds. Real estate fundamentals don't appear to be improving. Rulings in the General Growth bankruptcy case could encourage other borrowers to play hardball with servicers on loan modifications, which could push additional loans into special servicing. And a court ruling that rent increases in Stuyvesant Town were illegal could put other large New York apartment properties at risk of default. "So the outlook is a mixed bag," Clancy said.

The transfer of the Stuyvesant, CNL and Warner loans drove up the shares of multi-family and hotel loans in special servicing. Some 13% of multi-family CMBS loans are now in special servicing, by balance, up from 10.1% at the end of October. On the hotel side, 17.3% of the total are in special servicing, up from 14.7% at the end of October.

Retail mortgages continue to account for the largest percentage of loans in special servicing - 31.8%, or $20.8 billion. Multi-family mortgages come next, at 22%, or $14.4 billion, followed by hotel loans, at 19.2%, or $12.5 billion.

Hotel loans' share of the special-servicing universe is significantly higher than that property type's 9.9% share of overall CMBS collateral. By contrast, office loans account for only 10.7% of mortgages in special servicing, versus a 30.2% share of outstanding collateral. The difference partly reflects the fact that hotels are susceptible to economic downturns more quickly than office buildings, which tend to have long-term leases. But the rate of office loans being transferred to special servicing has picked up in recent months.

Takeaway: the fallout in commercial real estate is starting to gain steam.

North Korea Learns the Value of Paper

In a tragic but predictable chain of events in North Korea, chaos reportedly erupted last week after the government of Kim Jong Il revalued the country’s currency, sharply restricting the amount of old bills that could be traded for new and wiping out personal savings.

According to an article from The Times:

Shops and markets in North Korea have been closed and all cash transactions frozen after the Government’s shock announcement of a devaluation of its currency in an effort to crack down on the country’s burgeoning free-market economy.

In the capital, Pyongyang, yesterday only the few shops and restaurants permitted to trade in foreign currencies — patronised by the privileged elite and the city’s small foreign population — were open for business. All other enterprises and services based on cash, including markets, long-distance bus services, barbers’ shops, saunas and bath houses, were suspended until the revaluation of the won is completed next week.

There were reports of public outrage and confusion after the announcement of the measure, which requires North Koreans to swap existing won notes for new ones at an exchange rate of one to 100 — effectively knocking two zeroes off their value. Because of a cap of 100,000 won per family (£475 at the official exchange rate), anyone with significant holdings of cash will have their savings wiped out.

“Loud sounds of weeping in every house have not ceased since the news was released,” a South Korean website quoted an inhabitant of Sinuiju, a city on the border with China, as saying. “Weeping and fighting between couples has not stopped anywhere. The atmosphere of the city is terrible now.”

Read the full article here.

What happened in North Korea is sad (much of what happens there is), but there is a lesson to be learned. The intrinsic value of a fiat currency, whether it be the North Korean won or the U.S. dollar, is zero. Truth be told, I’m of the opinion that nothing really has intrinsic value because the whole notion of value is inherently subjective. But I digress. The point is, why put your faith and savings in a paper experiment destined for failure when you can invest in what has stood the test of time as a medium of exchange and store of value, i.e., gold?