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    The ghostlands of America's Age of Decadence

    An essay I thought some here might like to read. This is most likely how everything is going to play out. So if you are praying for the death of American Consumerism, its almost here! The author is senior director for strategic planning for the Wharton Business School at the University of Pennsylvania.

    Takes about ten minutes to read, so pull up a chair. Don't see it as a wall of text, rather a wall of information.



    GHOST MALLS – COMING TO YOUR TOWN
    by James Quinn
    January 20, 2009

    The illustration of Old West ghost towns is something that every American can relate to. During the great gold rush of the mid 1800’s in California, Nevada, and Wyoming towns sprung up out of nowhere to support the gold mining efforts of those looking to strike it rich. General stores, bars, hotels, brothels, and jails appeared out of nowhere based on demand from delusional prospectors hoping to hit the jackpot. Thousands of malls emerged throughout suburban America in the last twenty years as delusional shoppers thought they could spend their way to prosperity and achievement. Both delusions will end in the same manner.

    When the gold rush ended as quickly as it started, the artificial demand collapsed and the towns were abandoned. These ghost towns sat vacant for decades, slowly decaying and rotting away. As you drive around today, you notice more and more For Lease signs on vacant retail buildings. Strip malls, inhabited by mom and pop stores, karate studios, pizza joints, and video stores have felt the initial onslaught of consumer deleveraging. As the pace of retailer collapse accelerates in 2009, larger malls will begin to go dark. Once bustling centers of conspicuous consumption and material decadence, built upon a foundation of consumer debt, will become ghost malls. Decaying, rotting malls inhabited by rats, wild dogs, and homeless former retail employees, will be a blight on the suburban landscape for decades.

    For the last twenty years the American consumers have carried the burden of the world on its broad shoulders. This has been a heavy yoke, but when you take steroids it doesn’t seem so heavy. The steroid of choice for American consumers was debt. They have utilized home equity loans, cash out refinancing, credit card debt, and auto loans to live far above their means. It has been a wild ride, but the journey is over. They can’t score steroids from their dealer (banks) anymore. The pseudo-wealth created in the last twenty years has begun to unwind, and will increase in speed in 2009.

    Average Americans, who saw their faux paper wealth growing rapidly as their home values increased, took advantage of this by refinancing their mortgages and extracting the equity from their homes and spending it. They mined $3 trillion of equity out of their houses. This spending of seed corn led to the vast majority of GDP growth between 2000 and 2007.

    1 The ghostlands of America's Age of Decadence
    Source: John Mauldin

    Major Banks offered credit cards using your home equity as a way to pay everyday expenses like groceries, cigarettes, beer, gas and clothes. Eating your house was never so easy. The enormous amount of excess home sales and equity extraction led to titanic demand for home furnishings, remodeling services, appliances, electronic gadgets, BMWs, and exotic vacations. This led to immense expansion plans by retail and restaurant chains based on extrapolation of this false demand.

    A permanent psychological change has occurred in American consumers. They have lost $30 trillion in value from their homes and investments in the last few years. No amount of fiscal stimulation will reverse this psychological trauma. The savings rate will increase from 0% to at least 8%. Mike Shedlock recently described the state of affairs. “Peak credit has been reached. That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed.” Now the impact of a retrenching consumer will be felt far and wide, from Des Moines to Shanghai. Consumer spending has accounted for 72% of GDP. It will revert to at least the long term mean of 65%. David Rosenberg, the brilliant economist from Merrill Lynch, describes will happen:

    "This is an epic event; we're talking about the end of a 20-year secular credit expansion that went absolutely parabolic from 2001-2007.Before the US economy can truly begin to expand again, the savings rate must rise to pre-bubble levels of 8%, that the US housing stocks must fall to below eight months' supply, and that the household interest coverage ratio must fall from 14% to 10.5%. It's important to note what sort of surgery that is going to require. We will probably have to eliminate $2 trillion of household debt to get there, this will happen either through debt being written off, as major financial institutions continue to do, or for consumers themselves to shrink their own balance sheets.”

    2 The ghostlands of America's Age of Decadence
    Source: John Mauldin

    Every major retailer in the United States has built their expansion plans on an assumption that American consumers would continue to spend at an unsustainable rate. One basic truth that never changes is that an unsustainable trend will not be sustained. That crucial assumption error will lead to the bankruptcy of any retailer that financed their expansion with excessive debt. Warren Buffet’s wisdom will be borne out,

    “Only when the tide goes out do you discover who’s been swimming naked.”

    There are at least 1.1 million retail stores in the United States according to the Census Bureau. There are approximately 1,100 Malls in the United States, not counting thousands of strip centers. These numbers will be considerably lower by 2011. ICSC chief economist Michael Niemira explained, "In the midst of all this doom and gloom, it's hard to imagine it getting better... But keep in mind, what happens in strong downturns is there's a hefty pent-up demand. It's wrong to extrapolate these conditions for the next year or two." Mr. Niemira will be wrong this time. There is no pent-up demand. If the phrase unpent-up demand existed, it would apply today. Americans have bought everything they’ve desired for the last twenty years. There is no pent-up demand if you own 20 pairs of jeans and 60 pairs of shoes. The over-spending and over-leverage will take a decade to unwind.

    3 The ghostlands of America's Age of Decadence
    Source: Mike Shedlock

    According to the ICSC, about 150,000 stores are anticipated to shut down in 2009, which adds to the 150,000 that closed in 2008 and 135,000 in 2007. Normally, 110,000 to 125,000 new stores open per year. At least 700,000 of retail jobs will be lost. The opening of new stores will grind to a halt in 2009. Some major retailers that have closed or will close include: Circuit City -728 stores; Linens N Things - 500 stores; Bombay Company- 384 stores; Sharper Image-184 stores; Foot Locker -140; Pacific Sunwear - 153. Other large retailers are closing underperforming stores and scaling back expansions plans. By 2011, at least 15% of the existing retail base will have gone to retail heaven. With the amount of vacant stores likely to reach in excess of 200,000 and vacancy rates of new malls already at 28%, there will be no need for the construction of new stores for many years.

    Most of the retailers that are closing, lease their locations from mall developers like General Growth Properties, Simon Properties, Mills Corp., Pennsylvania REIT, Vornado Realty Trust. These developers have a quadruple whammy hitting them in 2009. Many borrowed heavily to finance massive mall expansion. The term of these loans were generally five to seven years. The Wall Street wiz kids and their CDO machine generated the vast preponderance of financing in the last five years. According to commercial real estate expert Andy Miller, the collapse will come more rapidly than the residential collapse.

    “By contrast, in the commercial world, the properties are fewer and much bigger. For example, you may have ten properties in a commercial pool that ultimately works its way into CDOs. Those loans are huge. You may have a shopping center loan in there for $25 million and an office building loan for $30 million dollars. As a result, if you have a default on just one of those loans, you can effectually wipe out all of the subordinate tranches. And that is why when you see the problems begin to appear on the commercial front, it's going to be a much quicker sort of devolution than we saw on the residential side. In the commercial world, most of the financing that happened outside of the apartment business was done by conduits, and there are no more conduits left, and conduits were doing the stupidest loans you could find. They were doing an advertised 80% loan-to-value, which was usually more closely aligned to a 100% loan-to-value. They were dealing with no coverage. They were all non-recourse loans. Many of them were interest-only loans. Those loans are now gone. You can't refinance them, and if you could, the terms would be onerous.”

    4 The ghostlands of America's Age of Decadence
    Source: Mike Shedlock

    Billions of debt needs to be refinanced in the next two years and there is no one willing to make those loans. The major mall developers are so terrified they have made an all out press to get their fair share of the TARP. As retailers go bankrupt, vacancy rates have reached 9.4% for shopping centers, according to CoStar Group. With virtually no demand, rental income is plunging. With cap rates eroding and operating expenses going up, a perfect storm will hit mall developers in 2009. The negative feedback loop will accelerate as the year progresses and will spiral out of control by late 2009 and early 2010. The negative feedback loop will lead to major developer bankruptcies and ultimately to Ghost Malls, particularly in the outer suburbs. The positive feedback loop that got us here, made people feel wealthy, smart, and overconfident. It was awesome! The negative feedback loop is going to suck. The collapse of developers will result in more major write-offs by regional banks that financed their expansion. This go around, many smaller regional banks will feel the major pain. The U.S. taxpayer will be required to step up to the plate again and assume financial responsibility for their own lack of spending. Talk about screwed if you do, screwed if you don’t.

    Mall owners and commercial developers are on the brink of bankruptcy. Commercial developer CB Richard Ellis didn’t sound too optimistic in a recent 10Q filing:

    We are highly leveraged and have significant debt service obligations. Although our management believes that the incurrence of long-term indebtedness has been important in the development of our business, including facilitating our acquisitions of Insignia and Trammell Crow Company, the cash flow necessary to service this debt is not available for other general corporate purposes, which may limit our flexibility in planning for, or reacting to, changes in our business and in the commercial real estate services industry. Notwithstanding the actions described above, however, our level of indebtedness and the operating and financial restrictions in our debt agreements both place constraints on the operation of our business.

    As Americans realize that they don’t “need” a $5 Starbucks latte, IKEA knickknacks, Jimmy Cho shoes, Rolex watches, granite counters, and stainless steel appliances, our mall centric world will end. Major mall anchor retailers Macys, JC Penny, and Sears are in for a heap of trouble in the next few years. As low prices become the only factor that drives retail sales, retailers will have minimal profits in the future, further restricting expansion and renovations. Mall developer General Growth Properties which owns or operates 200 malls added $4 billion of debt in the last three years and is teetering on the brink of bankruptcy. Simon Properties, which owns or operates 320 malls, added $3 billion of debt in the last three years and will be greatly affected by the coming downturn. Many smaller developers will be in even more dire straits. With shrinking cash flow, looming debt refinancing, and dim prospects for a resumption of conspicuous consumption, Mall developers are destined for a bleak future. Picture Clint Eastwood from his spaghetti western days riding a horse through the middle of your local mall with tumbleweeds blowing past the vacant KB Toys and Victoria Secret.

    story end
    © 2009 James Quinn
    Editorial Archives

    Bio: James Quinn is a senior director of strategic planning for a major university. These articles reflect the personal views of James Quinn. They do not necessarily represent the views of his employer and are not sponsored or endorsed by his employer. He can be reached at quinnadvisors@comcast.net.


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  4. #2
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    some dude named Goog already posted this at 1:24pm.

    gun sales are curiously unaffected however.

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    Quote Originally Posted by Blahm View Post
    some dude named Goog already posted this at 1:24pm.

    gun sales are curiously unaffected however.
    Yeah that was a double post.

    As far as guns go, I know of many who went out to buy guns because of the fear that Obama might ban certain firearms.

    I'm also pleased to know that he video game industry is strong, people need that escape.

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    I'll wait to buy guns 'till I'm in Colorado, I'd be willing to bet the laws about what you can buy are better out there than here in Cali.

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    I'm not worried I got hope.

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    I’ve lived through 2 recessions. Retail rentals have been ballistic recently, making them only affordable to the big chains. This is the big chance for the small person to get in and make the bucks when rents tumble and become the next big name. It’s happened before and will happen again as these things are cyclical. The greed of the mall landlords as every time they raised the prices of rent to squeeze out any individual hope and make their mall totally homogenised with every other mall was always folly. They won’t really learn as their memories are very short lived.

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    I can't see it ever ending.
    Today's generation of youth are breast fed on materialism.
    Last edited by HunterKiller_; January 29th, 2009 at 06:39 PM.

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    another World War will get us out of this....
    "If one advances confidently in the direction of
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    unexpected in common hours."
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    Well what makes this a bit different is that the outrageous spike in materialism over the last 30 years has been feed by an equally outrageous availability of credit. Easily available credit cards, mortgage refinancing, etc. This is what's drying up, at least from my understanding. I think what we are/going to experience is possibly unprecedented. Perhaps not in type, but certainly in scope. From the above article
    "This is an epic event; we're talking about the end of a 20-year secular credit expansion that went absolutely parabolic from 2001-2007.Before the US economy can truly begin to expand again, the savings rate must rise to pre-bubble levels of 8%, that the US housing stocks must fall to below eight months' supply, and that the household interest coverage ratio must fall from 14% to 10.5%. It's important to note what sort of surgery that is going to require. We will probably have to eliminate $2 trillion of household debt to get there, this will happen either through debt being written off, as major financial institutions continue to do, or for consumers themselves to shrink their own balance sheets.”
    and this from his essay What Happened to the American Dream

    Deflation when you are a country that has $10.6 trillion in debt will annihilate the debtor. Therefore, Mr. Bernanke has chosen to try and inflate us out of this mess. As an expert on the Great Depression, Ben believes that fiscal and monetary expansion will save the country. There is one significant difference. When the crisis hit the U.S. in1929, total U.S. debt as a percentage of GDP was about 200% and we were a net exporter nation. We enter this crisis with total U.S. debt exceeding 350% of GDP and we have a trade deficit of $700 billion.
    However perhaps such a contraction is exactly what we need as a society to get back to values like hard work and civic duty. My worry is the powers that be are not going to let that happen, to the point of drastically changing the face of Government as people become angrier and angrier at what's been lost.
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    "Today's generation of youth are beast fed on materialism."

    There's something truly ironic about this misspelling...
    No position or belief, whether religious, political or social, is valid if one has to lie to support it.--Alj Mary

    Ironically, the concept of SIMPLICITY is most often misunderstood by simple-minded people. --Alj Mary

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    are you sure it's misspelled? how about the grammar?
    To see the world in a grain of sand, and a heaven in a wildflower, hold infinity in the palm of your hand, and eternity in an hour.

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    It only takes the realization that debt is a bad thing. It should be evident as it is.

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    Quote Originally Posted by Cthogua View Post
    However perhaps such a contraction is exactly what we need as a society to get back to values like hard work and civic duty. My worry is the powers that be are not going to let that happen, to the point of drastically changing the face of Government as people become angrier and angrier at what's been lost.
    This is true. But I don't think all of the anger will come at what's lost. Surely the younger generations will be angry on account of many being told they can have anything they want by swiping their card, and quite a few living under the continually growing idea that we're entitled to things beyond equality and freedom.

    The most anger will likely come from things being taken away, money wasted, and the dramatic decline in USD value that will begin to hit possibly this year or next. With roughly 5% of the global fleet reserves stagnant, a percentage that is growing; People will realize the importance of not only living within their means, but living period. Hopefully the darkest hour will be the finest as many realize that flat screen wasn't so important, and maybe you have to earn your keep after all.

    The recession is a reaction to an ongoing problem, but with the powers that be are continually injecting outrageous amounts of capital and trying to get the lenders lending; it is likely that we face something far worse than a depression. At which case the anger won't be something patched up with a few million road jobs and railway projects. These things don't solve the problem, these things continue the very problems that have caused this mess.

    The best thing, as much as people don't like it; Obama to sit in his office, turn on the cameras, and tell Americans he's not going to do anything.

    If you want something done right, you have to do it yourself.

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    Mark my words, there will be some sort of violent physical reaction to a near-future crisis related to these current events. It is going to define this era. You may ask where I'm getting this wild idea... Let's just say I have a very smart uncle who has predicted every step the economy has taken for the last 10 years. Take that for what you will. Just sit, wait, and store up on canned goods .



    Unless Obama can do something.

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    Unless Obama can do something.
    He's doing something alright... and it doesn't look good.

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    Bases are loaded...

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    Quote Originally Posted by Goog View Post
    Mark my words, there will be some sort of violent physical reaction to a near-future crisis related to these current events. It is going to define this era. You may ask where I'm getting this wild idea... Let's just say I have a very smart uncle who has predicted every step the economy has taken for the last 10 years. Take that for what you will. Just sit, wait, and store up on canned goods .



    Unless Obama can do something.
    Obama can't do anything but make it worse. It's nothing against him, but we've seen time and time again that government intervention beyond the application of law, and sometimes there in, makes things worse. Like I stated before; He would be hated now, but it would be beneficial for him and 300+ Million other people to stop printing/spending this money.

    We'll be facing an inflationary crisis within the coming years.

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    GV: you forget that Obama has something called the "bully pulpit" at his disposal, and from what I've seen he uses it extremely well.

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    you forget that Obama has something called the "bully pulpit" at his disposal
    Well yeah, but just look what he's doing with it. Throwing another 825billion dollars on the fire of failing gross capitalism does not help the situation at all. more bailouts for the rich fucks who created this mess. Obama voted for the last bailout (people have such a short attention span in this country) and now he's pushing his own. in 3 months there will be another one... and then another... "stimulating" our economy into complete collapse. (but seriously enriching some seriously rich people in the meantime.)

    where is the common sense in spending your way out of financial bankruptcy???

    Mass insanity.


    ---

    why are people, governments, bankers surprised when an unsustainable system can no longer sustain itself? and WHY should we expend so much blood and money trying to prevent the unpreventable? This form of Uber capitalism we have embarked on in the last 100 years is not good for the people, is not good for the planet. why should we want to keep it? This country has no soul and no culture other than the almighty dollar... perhaps it's time to stop worshipping it.

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    Bully pulpit? Is he going to speak us out of this mess? This I gotta see.

    The bad reaction is going to come when everybody finally figures out that the Republicans and the Democrats are equally clueless, and neither has the solution. Those of us who are adaptable each carry the solution around with us. Those who can't adapt quickly are screwed.

    There is great need out there right now. He who can fulfill one of those needs for people can charge for the service. You just have to be able to tell a need from a wish. Wishes have been exposed as not being fishes at all. Forget about wishes. Solve needs for the win.

    I've just reinvented myself to serve a desperate need people have and the phone is now ringing off the hook for me. Maybe in a couple of years I'll buy a foreclosed strip mall and make a big assed artist loft out of it.

    I would tend to agree that it is best not to expect the value of the dollar to be stable. Something's going to have to give.

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    Quote Originally Posted by GhostValkyrie View Post
    Obama can't do anything but make it worse. It's nothing against him, but we've seen time and time again that government intervention beyond the application of law, and sometimes there in, makes things worse.
    You must be reading some strange version of history that bares little resemblance to the view of the overwhelming majority of historians and economists.

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    Overwhelming majority? Man what paper do you read I gotta get my hands on it. With numbers like that I shall rule ze vorld.

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    i agree that this economic stimulus is the wrong idea, But i think it is in line with Osama's whole agenda of getting us in so deep that we have no alternative than to give up our soviernty to the U.N. Well that will probly happen anyways.

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    Quote Originally Posted by r.mccabe View Post
    Overwhelming majority? Man what paper do you read I gotta get my hands on it. With numbers like that I shall rule ze vorld.
    Can you find a single historian who claims that Germany's rise from poverty to economic (and military) superpower between the world wars wasn't due to government intervention? Likewise, while some economists think the New Deal lengthend the Depression in the U.S., they're a minority.

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    So I can't help but feel like this is a taste of things to come.

    NYC Budget Axe To Carve Out $1 Billion
    Slew Of New Taxes On Tap, Higher Fees For Services, Plastic Bag Charge; City Workforce To Lose 23,000 Jobs


    * $1 billion in program cuts, affecting virtually every city agency.

    * New taxes and fees, including more taxes on clothing, a fee for plastic shopping bags in grocery stores and higher fees for lots of other city services.

    * The capital budget will be slashed.

    * City employees will be asked to pay part of their healthcare costs.

    * There will be a reduction of 23,000 jobs through layoffs and attrition. That's more than 7 percent of the city's employees.

    Sources say expect fewer cops, firefighters and sanitation workers.
    People are going to start getting angry when they see their water bill is twice what it used to be, crime skyrocketing, hospitals crumbling, and meanwhile money is flowing up and out to giant corporations like a bursting oil well, all with little to no disclosure. It's become painfully obvious who our government really supports and cares for the well being of. The top 1% will get richer than ever before, exchanging their money to euros, buying gold, or investing in places like Dubai as fast as they can get their hands on it. Meanwhile the middle class will collapse into poverty as their purchasing power evaporates, property wealth wilts, jobs vanish, and business and development loans dry up. There's a sort of negative feedback loop that's created that could spiral wildly out of control.

    Obviously that's just a pessimistic vision of mine, but it's not one that is either unprecedented or particularly fantastic. Way wilder shit has happened, even within living memory. Don't get me wrong I like, and voted for Obama. I think he really does want to fix the country/economy, but honestly I think he's been handed a ticking bomb.
    Ia Ia Cthulhu Fthagn

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    the top 1% will get richer than ever before, exchanging their money to euros, buying gold, or investing in places like Dubai as fast as they can get their hands on it.
    but don't worry, they won't be gone long. They'll be back once the economy has completely crapped itself to buy back property and assets at pennies on the thousand dollar.... just like the last depression... and the transfer of wealth will continue...

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    Why they didn't use the stumulus package from the gound up is beyond me. Give it to the poor and middle class and let it trickle its way up rather than down. I say fuck GM and Ford and all the damn banks and let them crumble. The whole system is messed up. When it's predicted that 700,000 retail jobs will dissapear in the next year or so, the loss of a company like GM will be just a blip by comparison.
    I heard the other day that rather than using the stimulus money so they could start lending etc. again, some banks started buying up other banks. WTF??? Then the Gov't get mad at them. G, how bout some restrictions???

    I don't know what Obama can do. He's been handed a turd and asked to polish it.

    but don't worry, they won't be gone long. They'll be back once the economy has completely crapped itself to buy back property and assets at pennies on the thousand dollar.... just like the last depression... and the transfer of wealth will continue...
    I just wonder how long all the money can keep traveling up and up and up before there's a shitstorm.

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    some alternative economic analysis


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