• A former CIA advisor predicted that US Dollar hegemony will end on August 22nd
• On that date, the BRICS alliance will announce a rival gold-backed currency
• As the new currency is adopted, analysts predict the value of the dollar will plummet and gold will surge

End Date of US Dollar Supremacy Predicted

Before summer is over, US dollar supremacy will disintegrate. That is, according to James Rickards. He is an investment banker and former CIA and Defense Department advisor.
Rickards predicts that the status of the US dollar as the world’s reserve currency and medium for exchange will formally collapse on August 22nd. On that date, the BRICS alliance will announce the launch of their new currency, signaling the end of the American empire.

Rickards isn’t alone in his assessment. Many analysts have been speculating about a new global currency to challenge the US dollar’s role as the world’s reserve currency. In late March, Former Goldman Sachs chief economist Jim O’Neill said that the US dollar’s dominance is destabilizing global monetary policies. He added that a BRICS currency, challenging the U.S. dollar’s dominance, would bring stability to the global economy.

Reasons for Collapse

Rickards bases this prediction on several factors. One is the weaponization of the dollar against Russia amid the conflict in Ukraine. Other countries saw what happens if they run afoul of US policy. They want to take preemptive measures to avoid the impact of sanctions. By abandoning the dollar, the potency of sanctions is diluted.

A second factor is the United States’ $31 trillion national debt. Economists foresee a time where interest on the astronomical debt consumes the entire budget. The US would enter a ‘doom loop’ of endless borrowing at higher and higher interest rates. With no money to spend, the economy will collapse, and the dollar will become worthless.

And a third, most notable factor, is the BRICS group plan to enter the next phase of dedollarization – the launch of a rival currency.

“On August 22, about two-and-a-half months from today, the most significant development in international finance since 1971 will be unveiled,” Rickards wrote. He cites that date because it is when the BRICS Leaders Summit will unveil plans for substituting the dollar in global trade. Of note, August 22, 1971, was the day the US dropped the gold standard.¹

Rickards believes the rollout of a major new currency could weaken the role of the dollar. The US dollar would be displaced as the dominant trade and reserve currency. This change could occur within just a few years. The currency shift would affect world trade, direct foreign investment and investor portfolios in “dramatic and unforeseen ways.” Rickards warned the currency could set off an “unprecedented geopolitical shockwave.”

Who Are the BRICS?

At its core, the BRICS alliance consists of Brazil, Russia, India, China, and South Africa. Eight other countries have applied for membership. Twelve more have expressed interest in joining the bloc. Of note, Saudi Arabia is one of those countries. Saudi Arabia helped make the US dollar the supreme currency through the petrodollar system. Requiring oil to be traded exclusively in dollars cemented US dominance. With Russia and Saudi Arabia as BRICS members, two of the three largest energy producers with be aligned (the US is the other member of the energy Big Three). The new currency could seize the preeminent role in the energy trade and the benefits that go along with it.

The BRICS countries make up 30 percent of the world’s surface. They produce 50 percent of the globe’s wheat and rice. And they control 15 percent of the planet’s gold reserves. It accounts for 40 percent of the world population. Economically, the BRICS control almost a third of the world’s GDP.

In other words, the BRICS are a substantial and credible threat to Western hegemony. Their new currency has the resources and infrastructure to succeed. And as it is embraced by the globe, it will be able to eventually overthrow the dollar’s preeminence.

Rickards explains that the new currency must offer a safe store of value to be successful. For people to adopt it, the currency should rival the security found in the US bond market. To achieve this credibility, the BRICS are proposing to tie their currency to gold.

He sees “this entire turn of events—introduction of a new gold-backed currency, rapid adoption as a payment currency, and gradual use as a reserve asset currency—will begin on August 22, 2023, after years of development.” The dollar will be effectively removed from a large portion of global trade. Its value will decrease. The effects of which could result in collapsing stock prices, hyperinflation, and a shrinking economy. ²

Gold

The BRICS currency plan could spark a new bull market for gold. The Russian government confirmed the new currency will be backed by gold.

Gold has been playing an outsize role in the dedollarization movement since 2022. Central banks worldwide have been buying gold at a historic pace to diversify their reserves away from the US dollar, as seen below:

³

Analysts see a gold-backed currency as the next natural step in the new currency’s evolution. Many see China’s record gold purchases as an attempt to bring credibility to the yuan.

The global fiat money system could be in for a major disruptive shock. A gold-backed currency may lead to a sharp devaluation of many fiat currencies. As a result, it could catapult up goods prices on those fiat currencies.

The launch of a gold-back BRICS currency could fundamentally shift the entire global economic order. Uncertainty will increase as the dollar loses its dominant role. And assets denominated in dollars, like stocks and bonds, face a major devaluation. Retirement funds that aren’t diversified away from such assets are sitting on huge potential losses. For those who want to secure the value of their portfolios, now is the time to investigate gold. A Gold IRA from American Hartford Gold can protect the value of your funds and reap the rewards of a rising gold market. Learn more before August 22nd arrives. Call us today at 800-462-0071.

Notes:
1. https://mronline.org/2023/06/09/ex-cia-advisor-predicts-date-when-u-s-dollar-hegemony-will-collapse/
2. https://mronline.org/2023/06/09/ex-cia-advisor-predicts-date-when-u-s-dollar-hegemony-will-collapse/
3. https://sophisticatedinvestor.com/wp-content/uploads/2023/07/COMM-central-bank-demand-04062023.png

• Investment guru Jeremy Grantham warns there is a 70% chance of a stock market crash after the ‘superbubble’ bursts
• Stocks will drop to their true value after too much money in the system overinflated prices across sectors
• Precious metals can safeguard portfolio value and position you for post-crash buying opportunities

Superbubble Warning

Legendary investor Jeremy Grantham warns that the current stock market is on the verge of a major crash. According to Grantham, there is a 70% chance of a crash occurring within the next few years. He believes the market is experiencing a “superbubble” on the brink of implosion.¹

But what exactly is a superbubble? A market bubble occurs when prices are too high based on historical metrics. A superbubble takes this concept to an extreme level. It refers to a situation where excessive speculation sends asset prices to multiple times their true value.

Superbubbles have led to catastrophic market crashes in the past. These include the stock market crash of 1929, the 1970s economic downturn, and the dot-com bubble of 2000. The events resulted in drastic drops in stock prices, ranging from 50% to a staggering 90%.²

Reasons for Warning

A combination of factors is fueling this current superbubble. The primary cause was too much money being pumped into the financial system. This abundance of dollars flooded into various asset classes, commodities, bonds, and goods and services. Easy access to fiat currency over the past 15 years, especially since the 2008 financial crisis, created this liquidity. The response to the 2020 pandemic further accelerated this trend. Reckless government spending and central bank printing becoming the norm. As seen in the chart below:

³

Grantham had previously predicted the dot-com crash and the housing bubble implosion. He diagnosed a “superbubble” spanning stocks, housing, and commodities in January 2022. He declared last September that it was likely in its final stages, and a historic crash seemed imminent. The S&P 500 and Nasdaq ended the year deeply in the red — but have rallied 16% and 32% respectively this year. The recent AI-driven surge in the stock market is providing a boost. But Grantham argues that it won’t prevent the superbubble from bursting. It is only delaying the inevitable. He suggests that the S&P 500 could experience a brutal 44% drop from its current level.⁴

Grantham points out that there are striking similarities between the current situation and previous crashes. He thinks conditions resemble the ones in 1929 and 2000. He sees a dangerous mix of overvalued stocks, bonds, and housing, combining with a commodity shock and a hawkish Federal Reserve.

The collapse of a superbubble occurs in several stages. First, there is a setback, followed by a slight rally. Finally, the market reaches its low point as fundamentals break down. The S&P 500 exited the longest bear market since 1948 at the beginning of June. Some analysts, such as those from HSBC and UBS, are already predicting a painful second half of 2023. They see an economic downturn deflating the AI boom and exposing the vulnerabilities of the superbubble. UBS analysts noted equity prices can fall as they confront “slowing growth and stickier inflation.”⁵

Even though the stock market has experienced a rally in recent months, it doesn’t necessarily mean that the bear market is over. History has shown that bear markets can have temporary rallies before experiencing further downside.

How to Prepare

Considering these warnings, it’s crucial to be cautious and prepared for a potential market crash. Grantham himself has bet on bargain assets and positioned against expensive growth stocks. Some analysts see the upcoming downturn as a generational opportunity to make money. But it is vital to preserve your wealth to take advantage of buying opportunities.

In times of market uncertainty, assets like gold have often been considered safe havens. Looking back at previous crashes, gold prices experienced notable increases. That’s because investors sought safe-haven assets. For example, during the crash of 1929, gold prices rose by about 27.5% within a year. Similarly, during the dot-com bubble burst in 2000, gold prices increased by approximately 11%.

Based on his track record, Jeremy Grantham’s warnings should be heeded. Ultimately, the fate of the current superbubble rests on economic conditions, investor sentiment, and market dynamics. As the saying goes, “history doesn’t repeat itself, but it often rhymes.” By learning from past market crashes, you can navigate the uncertain waters and make informed decisions to safeguard your wealth. Now is the time to carefully evaluate your portfolio. Is it diversified and protected against risk and loss? To learn more how a Gold IRA from American Hartford Gold can secure against a bursting bubble, talk to us today at 800-462-0071.

Notes:
1. https://www.businessinsider.in/stock-market/news/the-stock-market-has-70-chance-of-crashing-in-a-few-years-according-to-legendary-investor-jeremy-grantham/articleshow/101492341.cms
2. https://www.moneyshow.com/articles/tradingidea-59462/explained-the-american-economy-is-now-a-super-bubble/#:~:text=A%20superbubble%20is%20when%20asset,due%20to%20extreme%20speculative%20conditions.
3. https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
4. https://markets.businessinsider.com/news/stocks/jeremy-grantham-gmo-superbubble-ai-stocks-housing-market-bubble-crash-2023-7
5. https://www.foxbusiness.com/markets/us-stock-market-faces-more-challenges-second-half-2023-ubs-warns

• A Central Bank Digital Currency (CBDC), aka the digital dollar, would be a national currency controlled by the Federal Reserve
• Citing threats to personal and economic freedom, Congress is pushing back against the implementation of a CBDC
• Gold is proving itself to be an effective defense against the threats posed by CBDCs

Recognizing the Central Bank Digital Currency Threat

Congress is on the same page as the American people when it comes to the ‘digital dollar.’ Both view the electronic currency as a pitfall rather than a prize. Elected officials are pushing back against plans for a central bank digital currency (CBDC). They are driven by concerns over privacy and economic freedom.

The Cato Institute think tank surveyed Americans on CBDCs. The survey showed only 16% favor adopting a CBDC while 34% oppose. But that opposition increases after learning about the potential risks of a CBDC, as seen in the chart below.

¹

Contrary to supporting arguments, CBDC is not a just another form of money. A CBDC is a digital national currency. But it is very different from existing digital forms of the US dollar and cryptocurrency. Relying on cryptography to store and exchange value, cryptocurrency is independent from government. The rise of CBDCs could require the end of cash and cryptocurrency.

Unlike cryptocurrency, a CBDC solidifies government control over money and payments. A central bank like the Federal Reserve creates the CBDC. They then handle and control all transactions. By extension, the government can then determine who gets to use money and precisely how they use it. True, paper money is a Federal Reserve liability. But the government can’t control dollar bills once they are in circulation.

A CBDC also unravels the current public-private partnership between regulators and banks. A CBDC can remove banks from the financial system. And when the government is the only bank in the land, getting a loan could become a political as well as an economic decision.

By automatically monitoring transactions, CBDCs are de facto surveillance tools. China is already using their ‘digital yuan’ as a tool to control their population.

Opposition to CBDC

Rep Alex Mooney recently introduced H.R. 3712, the Digital Dollar Pilot Prevention Act. The bill closes the Federal Reserve’s Central Bank Digital Currency pilot program loophole. Rep. Mooney said, “CBDCs would threaten the liberties of law-abiding Americans and are being used by authoritarian countries right now to crack down on dissent.”²

Republicans stated the Federal Reserve needs Congressional approval to issue a CBDC. The pilot program gained attention last year after the Fed partnered with major banks to test potential CBDCs. Now, Republicans want a law to prevent the Fed from issuing a CBDC under the guise of a ‘pilot program.’

The National Association of Federally-Insured Credit Unions (NAFCU) declared support for Rep. Mooney’s bill. NAFCU said the Federal Reserve should halt all studies into CBDCs until there are clear regulatory guidelines. Such guidelines should be written by Congress and stakeholders like banks and credit unions. NAFCU fears a CBDC could upend the payments industry. Critics say a CBDC makes the Federal Reserve both a regulator and a competitor for deposits. Some financial institutions fear a massive bank run as investors convert their deposits to CBDCs.

Governor Ron DeSantis announced legislation in March against CBDCs. The bill prohibits adopting the use of CBDC as money within Florida’s Uniform Commercial Code. DeSantis said, “The Biden administration’s efforts to inject a Centralized Bank Digital Currency is about surveillance and control.”³

Gold to the Rescue

A CBDC amplifies power of the Federal Reserve to an unprecedented level. In the name of stimulating the economy, the Fed could use CBDCs to stop savings and retirement planning. They’d do this with negative interest rates or issuing money that expires if it isn’t spent within a limited amount of time. A CBDC lets the Fed create or remove money from the system. There would be no need for their current ad hoc interest rate hikes to try and tame inflation. With a click, they could simply erase the oversupply of money from your savings.

In contrast, gold stands as a safeguard for personal and financial freedom. Physical gold offers tangible benefits. It is a secure, long-term store of value. Gold provides a hedge against inflation and currency devaluation.

Gold ownership remains confidential, protecting personal privacy. Moreover, gold offers independence from cyber threats and technological failures. Individuals can protect their financial destiny and personal freedom by diversifying with gold. Contact us at 800-462-0071 to learn how a Gold IRA can protect your retirement savings from the dangers of the digital dollar.

Notes:

1. https://www.cato.org/survey-reports/poll-only-16-americans-support-government-issuing-central-bank-digital-currency#68-americans-would-oppose-cbdc-government-could-monitor-what-people-buy
2. https://mooney.house.gov/congressman-mooney-introduces-the-digital-dollar-pilot-prevention-act/
3. https://www.flgov.com/2023/03/20/governor-ron-desantis-announces-legislation-to-protect-floridians-from-a-federally-controlled-central-bank-digital-currency-and-surveillance-state/

• The Federal pause on student loan repayment is coming to an end
• The Supreme Court is deciding the legality of Biden’s loan forgiveness
• Economic hardship caused by renewed payments may be enough to tip the economy into recession

Student Debt Comes Due

America’s higher education bill is coming due, and the economy may pay the price. For more than three years, federal student loan borrowers haven’t had to make monthly payments. Those payments hover between $200 and $300. All told, borrowers are set to resume paying about $10 billion a month. As we speak, the Supreme Court is weighing the merits of Biden’s loan forgiveness. While politicians and borrowers await the Supreme Court’s ruling, analysts fear the economy will suffer, along with retirement funds, no matter what the Court decides.¹

²

Student Debt Paused

In March 2020, President Trump implemented a student-loan payment pause to give relief during the pandemic. Biden has continued to extend the pause. He most recently extended it 60 days after June 30. In other words, 60 days after the Supreme Court issues a final decision on the legality of Biden’s plan to cancel up to $20,000 in student debt. This most recent extension will most likely be the last. The end of the pause was written into the debt ceiling deal with Speaker of the House McCarthy.

Some economists saw the pause as a boon to the economy. The Education Department estimated the pause put $5 billion back in borrowers’ pockets. Money that would have gone to debt payments went into consumer spending instead. Marshall Steinbaum is an economics professor at University of Utah. He said, “it’s pretty clear the payment pause has been very stimulative to the macroeconomy.” Conversely, he followed up by saying the government is going to be put in the position of trying to collect debt that can’t be repaid. And that squeezing borrowers will be bad for the economy. Resulting in what Steinbaum called, “a pretty severe fiscal contraction.”³

Supreme Court Decides

Eight million borrowers stand to receive loan forgiveness. The Supreme Court will issue a decision about the legality of the student debt relief this month. Lawmakers aren’t waiting for that decision. They’ve already passed a bill to overturn Biden’s debt relief and end the payment pause.

⁴

Tipping the Scales into Recession

The economy, while fragile, is recovering from the pandemic. Some analysts think resuming student loan payments may jeopardize that recovery.

Mark Zandi is the Chief Economist at Moody’s Analytics. He said, “In a typical economy, the impact of restarting payments wouldn’t tip the US into recession. But in the current environment with the economy as weak as it is, recession risks as high as they are, a couple of tenths of percent can matter.”⁵

The odds of entering a recession are being debated now. A resilient labor market and strong consumer spending, even after aggressive rate hikes, are giving some hopes of a ‘soft landing.’ Deutsche Bank holds no such hopes. They’ve declared that an economic downturn is 100% inevitable. They base this opinion on a few factors. The short-term benchmark fed funds rate stands at the highest level since 2006. But inflation’s still twice the Fed’s goal. Fed Chairman Jerome Powell warned that more rate hikes will likely be necessary to further cool inflation. Deutsche Bank thinks a recession is needed to finally break ‘sticky’ inflation. Their chief economist stated, “Avoiding a hard landing would be historically unprecedented.” ⁶

Goldman Sachs sees the end of the pause as a break-even situation. If the Court rules in favor of forgiveness, Goldman Sachs estimates $400 billion in loan balances would be erased. If the Court rules against relief, Goldman predicts the decrease in disposable income would create a drag on public spending. Their calculations show a return to loan payments will equal the loss of consumer spending.⁷

Borrowers themselves are much less optimistic. A Credit Karma survey found that 43% of borrowers do not feel financially stable and 21% had no savings. A similar survey found that 53% of borrowers said their financial stability depends on loan forgiveness or the federal forbearance period. 26% were using money that would have gone to loan payments for bills and necessities.⁸

The Federal Reserve Bank of New York found missed debt payments are higher than before the pandemic. This could be a sign of more financial problems for borrowers once the federal forbearance ends.

Economic Impact of Repayment

While general spending may decrease across the board, retailers will be particularly hard hit. UBS and JPMorgan both warn of a coming “ice-age for retail” because it caters to millennials, the largest holders of student loan debt.

The resumption of student loan payments alone won’t crash the economy. But they may be the straw that breaks the camel’s back and pushes the US into a recession. A recession would bring increased unemployment and reduced corporate earnings. Stock prices, and in turn, retirement funds, could drop as a result. Government relief or not, that bill is going to be paid one way or another. Someone else’s education may result in a drop in your retirement savings. To preserve the value of your retirement funds before this happens, investigate the benefits of a Gold IRA. Contact an American Hartford Gold specialist at 800-462-0071 to learn how you can protect your savings.

Notes:

1. https://www.foxbusiness.com/economy/student-loan-repayments-slam-big-name-retailers-fall
2. https://finance.yahoo.com/news/student-loans-how-will-the-restart-in-payments-affect-the-economy-experts-are-split-182305006.html
3. https://www.businessinsider.com/what-will-happen-to-economy-when-student-loan-payments-resume-2023-5
4. https://finance.yahoo.com/news/student-loans-how-will-the-restart-in-payments-affect-the-economy-experts-are-split-182305006.html
5. https://www.businessinsider.com/what-will-happen-to-economy-when-student-loan-payments-resume-2023-5
6. https://www.usatoday.com/story/money/economy/2023/06/15/recession-inevitable-deutsche-bank/70327467007/
7. https://finance.yahoo.com/news/student-loans-how-will-the-restart-in-payments-affect-the-economy-experts-are-split-182305006.html
8. https://finance.yahoo.com/news/student-loans-how-will-the-restart-in-payments-affect-the-economy-experts-are-split-182305006.html

• The Federal Reserve opted not to raise interest rates at their most recent meeting
• The pause is most likely temporary, with the Fed suggesting future rate hikes later this year
• Pause or no pause, interest rates will continue to inflict pain on Americans

Fed Pauses Rate Hikes

After raising rates at its fastest pace in 40 years, the Federal Reserve announced they are hitting the pause button on hikes for now. This marks an end to 10 straight increases. Beyond failing banks and bear markets, the Fed’s inflation taming policy has impacted regular Americans. Rate hikes have driven borrowing costs above 5%. The cost of auto loans, credit cards, and mortgages have all risen higher – leaving consumers with less cash to spend. So, while this pause won’t add to the pain, it is unlikely to help.

¹

The pause may even be short lived. The Fed left a return to hikes on the table, saying additional rate hikes are probable later this year. The decision to skip a rate increase this meeting was unanimous among officials. The Fed will assess further information and its impact on monetary policy before making future moves. Economic indicators, including the job market and credit conditions, will play a crucial role in determining the size and timing of future rate hikes. Tightening lending standards by banks and potential limitations on accessing credit could dampen economic activity, hiring, and inflation.

Some analysts think renewed rate increases could be disastrous. High rates exposed vulnerabilities in the financial system. Resuming rate hikes could shake public confidence by causing more damage like failing banks. Or they could trigger a something that sets the economy into a tailspin. Laura Rosner-Warburton is a senior official at MacroPolicy Perspectives and a former staffer at the New York Fed. She said, “Keeping rates at these levels will pull more skeletons out of the closet.”²

A Pause is No Help

Greg McBride is the Chief Financial Analyst at Bankrate.com. “A pause won’t bring borrowing rates lower, particularly for variable rate debt such as credit cards and home equity lines of credit that have increased in step with the Fed’s 10 previous interest rate hikes,” McBride said. Right now, the average APR on a new credit card offer is a towering 23.98%, according to LendingTree. And they are predicted to creep higher in the immediate future, even with the pause.

“Elevated inflation and a strong labor market mean the Fed is nowhere close to cutting interest rates, so borrowers will continue to be dealing with high interest rates for months to come, even if the Fed doesn’t hike rates further,” said McBride. ³

An Uncertain Federal Reserve

The Federal Reserve may be taking a pause to figure just what exactly is happening with the economy. The Fed started their aggressive rate policy to fight inflation. They know rate hikes can take more than a year to have a full impact. According to some data, that policy is working. Inflation had spiked at 9.1% in June last year. It has fallen to 4% according to the May Consumer Price Index report. Meanwhile, the labor market is booming, home prices are holding up, and consumers are still spending.

⁴

But the data isn’t so clear upon closer examination. The most recent US employment report provided a confusing mix of information. Companies added a strong 339,000 jobs in May, but households reported higher unemployment.

Inflation, meanwhile, has steadily dropped, but key services sectors — where wages are one of the biggest expenses — are still seeing higher price increases than the Fed would like. The slowing of inflation might have as much to do with easing supply chains and depleted government spending as it does with higher rates.

Mortgage rates shot up, putting a significant dent in the market. New listings are down 23%, and pending sales are down 17%. But a housing shortage, combined with the fact that so many homeowners locked in low rates during the pandemic, has meant that prices haven’t dropped significantly. People looking to move have fewer options, and people who own aren’t eager to give up their cheap rates.⁵

Navigating the Future

Despite the Federal Reserve’s decision to pause interest rate hikes, struggling consumers should not expect immediate relief. High borrowing costs across various sectors, coupled with inflation concerns and uncertainties in the economy, will continue to pose financial challenges. Taking proactive steps to pay down debt and manage financial obligations can help individuals navigate these difficult times. So can safe haven assets that protect purchasing power during times of high interest rates. A Gold IRA from American Hartford Gold can preserve the value of your retirement funds as Federal Reserve policy plays out. To learn more, contact us today at 800-462-0071.

Notes:

1. https://www.wsj.com/articles/fed-holds-rates-steady-but-expects-more-increases-b1be87f2?mod=article_inline
2. https://www.politico.com/news/2023/06/12/fed-rate-hikes-pause-00101349
3. https://www.foxbusiness.com/markets/a-fed-pause-likely-wont-help-struggling-consumers
4. https://www.wsj.com/articles/fed-holds-rates-steady-but-expects-more-increases-b1be87f2?mod=article_inline
5. https://www.politico.com/news/2023/06/12/fed-rate-hikes-pause-00101349

• $1.5 trillion of commercial real estate loans are coming due in two years
• Banks fear commercial mortgage holders will default due to high interest rates and low occupancy
• A crumbling commercial real estate can drag the economy into recession

Commercial Real Estate a ‘Ticking Timebomb’

A potential disaster is waiting to strike the US economy. The commercial real estate market is on the edge of cliff. It is about to be pushed over by rising interest rates and declining occupancy. And it just might take down the economy with it. With recent turmoil in the banking industry, experts foresee another mortgage crisis leading to a potential recession.

The US economy faces an economic time bomb with approximately $1.5 trillion in real estate mortgages set to mature within the next two years. This impending wave of maturities is adding to the stress of high interest rates and low occupancy. ¹

The Federal Reserve has raised key interest rates by 5 percentage points since March 2022. Interest rates have more than doubled for some types of commercial mortgages. High rates were blamed for the recent series of bank failures. Those crashes were tied into their overweight investment in commercial real estate.

Continued office vacancies are making matters worse. The significant increase in remote work since the pandemic has kept offices empty. This shift in work dynamics has reduced the demand for office spaces. Commercial landlords are now left in a vulnerable position.

In addition, many of the landlords are on the hook because they have interest-only loans. Unlike traditional home loans, commercial mortgages often require borrowers to only pay the interest during the loan term. The entire principal comes due at the end. Interest-only loans as a share of new commercial mortgage-backed securities issuance increased to 88% in 2021, up from 51% in 2013.

²

The risk seemed minimal at the time. Interest rates were low and property values kept rising. Owners could expect to simply pay off the loan with a new one when the bill came due. Now, many landlords are no longer able to get new loans big enough to pay them back. Fitch Ratings estimates that 35% of commercial mortgages won’t be able to refinance. While many malls and hotels face high default risks, the situation is particularly dire for office owners.

Banks Respond

Banks recognize the danger facing them. They can see the rising risk of default from office tower and mall owners. Decreased demand and lower rental prices are contributing to a decline in property valuations. Banks fear being left with less valuable collateral and insufficient security in the event of default. Such defaults would expose them to potential losses and destabilize their loan portfolios.

Banks are determined to reduce their exposure to the teetering commercial real estate market. They are cutting back on commercial property loans. Doing so could lead to a slowdown in new office construction and impede the market’s recovery.

Some banks are selling off property loans at a discount even when borrowers are up to date on repayments. Wells Fargo is cutting its losses by preparing to offload debts at discounted prices, even from borrowers who have remained current on their repayments. Of its $142 billion in commercial real estate loans, Wells Fargo chief executive said, “We will see losses, no question about it.”³

HSBC is in the process of pawning off hundreds of millions of dollars’ worth of loans at a discount. They are also winding down direct lending to property developers. And PacWest unloaded $2.6 billion worth of construction lending contracts at a loss in May.⁴

As large banks cut their losses, the banking crisis for regional banks continues. Roughly 70% of bank-held commercial mortgages still sit on the balance sheets of both regional and small lenders. These banks may be more vulnerable to the effects of a commercial real estate crisis. Another round of bank failures may occur in the not-so-distant future.

The FDIC is monitoring the potential crisis. They said, “The banking industry continues to face significant downside risks from the effects of inflation, rising market interest rates, slower economic growth, and geopolitical uncertainty.”⁵

Effects of the Crisis

As the fear of delinquencies rise, commercial real estate stocks are down. An index of publicly traded commercial real estate investment trusts (REITs) has fallen 18.1 percent since this time last year. Fewer commercial buildings are being sold more than three years after the coronavirus surfaced in the US.

The prospect of widespread default and plummeting demand could stifle construction and development in major US cities. Fewer lenders are betting on a quick recovery. With the crumbling of commercial real estate’s crucial role in the economy, a chain of events may be in motion that could end with recession. The 2008 mortgage crisis resulting in stocks dropping by 50%. Retirement savings were devastated. With a potential repeat crisis, the time is now to protect your assets. A Gold IRA from American Hartford Gold can safeguard the value of your portfolio from another market crash. Contact us today at 800-462-0071 to learn more.

Notes:

1. https://www.dailymail.co.uk/news/article-12162843/Potential-time-bomb-economy-looms-1-5-trillion-real-estate-mortgages-come-due.html
2. https://www.wsj.com/articles/interest-only-loans-helped-commercial-property-boom-now-theyre-coming-due-c3754941
3. https://www.ft.com/content/3e905e3c-697c-4109-bd9a-605e75a0cfa4
4. https://www.ft.com/content/3e905e3c-697c-4109-bd9a-605e75a0cfa4
5. https://www.dailymail.co.uk/news/article-12162843/Potential-time-bomb-economy-looms-1-5-trillion-real-estate-mortgages-come-due.html