This amazing comparison is from Jim Kunstler’s article, “Peak Suburbia“. It is a comparison of the installed base of retail space per head of population.

It shows suburban sprawl and retail overcapacity that is clearly way out of hand. Nearly ten times the retail square feet per head compared to even the UK, world-renowned as “a nation of shopkeepers” (admittedly so labelled in a very different context). Certainly the US is more “spacious” than the European countries and real estate overall is accordingly less pricey, but bricks and mortar are still expensive and energy-intensive.

As Jim says: “I get lots of letters from people in various corners of the nation who are hysterically disturbed by the continuing spectacle of suburban development. But instead of joining in their hand-wringing, I reply by stating my serene conviction that we are at the end of the cycle — and by that I mean the grand meta-cycle of the suburban project as a whole. It’s over. Whatever you see out there now is pretty much what we’re going to be stuck with. The remaining things under construction are the last twitchings of a dying organism.”

I have RTH and XLY puts. Probably should be shorting REITs, too.

TStockmann asked:”How do you think the likely decompression of the risk spread will leave returns/capital costs in other fixed AAA instruments and the Treasury market? Would a crunch push everything higher, or would the constriction at the lower levels push more liquidity into safer returns, factoring in the inevitable economic downturn?”

I expect that Treasury rates will decline all along the curve, because of an anticipated Fed ease and declining inflation expectations. Agencies (except for GNMAs) should be vulnerable because of the conditions of Fannie and Freddie and their exposure to housing. High-grade corporates should be OK for a while, but there is so much debt out there that almost everything other than Treasuries and GNMAs will eventually come under suspicion as the economy declines.

Personally, I have two-year US Treasuries and long Canadian Treasury zeroes.

Inside the great houses of Wall Street tonight the gnomes are busy. Calm and professional, they bustle about, carefully checking and preparing the giant pumps which keep Wall Street afloat. The overhead lights reflect off the massive, gleaming steel shafts, revolving slowly as they idle, quiet now except for the occasional creak of cooling metal as they take respite from the day’s labors. The subdued roaring sound you hear is the precious fuel, coming directly by pipeline from the Federal Reserve, gushing into the tanks that will feed the powerful pump engines tomorrow.

Soon the lights will go out, and except for a skeleton crew, the gnomes will return to their homes for a good night’s rest. They know full well that the fate of their masters, the lords of Wall Street, depends upon them. If they fail, no mercy will be shown to the gnomes or their masters. They will be there as the sun comes up, and you will hear the guttural bark as the great engines are awoken and a haze will form over Manhattan from their exhaust. Promptly at 9:30, the barking idle will turn into a deep roar as the pumps take up the load, keeping reality at bay for another day.

Hat tip to “Seeking Alpha” for pointing out this interesting paper by William White of the BIS.

“The historical record provides stark evidence that a preceding period of price stability is not sufficient to avoid serious macroeconomic downturns. Perhaps the most telling example is that of the Great Depression in the United States in the 1930s. The period was characterised by massive and continuing losses in terms of both employment and output, accompanied by a cumulative deflation process and associated financial distress in response to accumulated debt. Indeed, almost one third of US banks failed over the course of the 1930s. The crucial point is that this outturn was not preceded by any noticeable inflation. Indeed, prices were essentially stable for most of the 1920s and were actually showing signs of measured deflation before the decade drew to a close. Rather, the period was characterised by rapid technological innovation, rising productivity, rapid increases in the prices of equity and real estate and strong fixed investment. Behind these developments were ongoing technical innovations in the financial sector, not least the much greater availability of consumer credit.”

Hmm. Notice a pattern here?

Good article in the WSJ this morning about the corporate version of the subprime loan bundle, the CLO. I read it in the paper version, and I don’t subscribe, so I can’t link.

It is interesting to note that some of the recently announced, but uncompleted, LBOs are now trading at substantial discounts to their buyout prices, indicating that folks are starting to price in some risk that the deal will not actually come to fruition. Also heard on Fleck’s site that banks may be starting to get edgy about adding to their bridge loan book.

Bill Gross’ July investment outlook is well worth reading. “And the U.S. economy? Of course it will be affected. Consumption will be reduced to say nothing of new home construction over the next 12-18 months. After all, attractive subprime pricing has been key to the housing market’s success in recent years. Now that has disappeared. Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas – high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction.”

Updates – evening of 6/26:

From the Telegraph: “The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.”

From Bloomberg: “Planned sales of collateralized debt obligations backed mainly by subprime mortgages are drying up and may shut down amid concerns about the integrity of the market following the near collapse of hedge funds run by Bear Stearns Cos., JPMorgan Chase & Co. said.”

Hat tip to Calculated Risk.