The Deeper Dive: A Zombie Office Apocalypse Is Walking Your Way

The landscape is littered with empty buildings and social decay

In the May 23rd issue of The Daily Doom, tilted “The Calm before the Manufactured Storm,” I noted a concern Jamie Dimon, CEO of JPMorgan Chase, has about a second wave of bank failures that will wash over the US later this year:

Jamie Dimon, is said to be in a bit of “panic” … as he warns that commercial real-estate woes will be the next stage in an ongoing banking collapse. He’s right about that….

Major indicators are emerging in housing and manufacturing that signal rising inflation pressures have returned. That means the Fed will be pressured to keep up the inflation fight, even as Jamie Dimon’s feared second wave of bank collapses shows up in the months ahead.

Jerome Powell bent over backwards to make a strong point (as mild-mannered Fedspeak goes) at the last FOMC meeting to make it clear that NO ONE at the Fed sees even the slightest chance of the Fed easing interest rates anytime this year and that most Fed members see the likelihood of one or two additional 25-basis-point hikes after a brief pause. He explained that June’s predicted and now enacted pause was just a slowing of the rate at which the Fed makes rate hikes to give more time for lagging data to start showing what effect the rate hikes are having on core inflation as the Fed continues to crimp down on it. He even said that core inflation has not come down at all, and the Fed must see it come down meaningful before it ends its inflation fight.

The reference in my editorial was toward an article in The Daily Doom headlines in which Dimo predicted more bank troubles to come. The first wave of bank crashes we saw this spring was due to the direct effect of Fed rate hikes on the value of Treasuries that US banks hold in their reserves at the Fed. When banks were faced with runs from the tech wreck the value they needed was not there.

The second wave, said Dimon, will be due to something I wrote about back in my earlier days of “Patron Posts,: which I am now calling “The Deeper Dive.” The Deeper Dive will be a part of The Daily Doom that is a bonus to those who support my writing. This particular Deeper Dive covers a set of headlines that will be going out in the next regular edition of The Daily Doom, and I’m making part of it available to everyone.

In the article referenced in that edition of The Daily Doom, Jamie Dimon warned souring commercial real estate loans could threaten some banks:

Deposit runs have led to the collapse of three U.S. banks this year, but another concern is building on the horizon.,…

“There’s always an off-sides,” Dimon said in a question-and-answer session during his bank’s investor conference. “The off-sides in this case will probably be real estate. It’ll be certain locations, certain office properties, certain construction loans. It could be very isolated; it won’t be every bank.”

Dimon’s “it won’t be every bank” is almost a scarier statement than it is a comforting assurance. It inclines one to ask, “So just how many banks will it be because, of course, it won’t be every bank? It never is.” Instead of “damned by faint praise,” it is a case of “worried by faint assurances.”

The last collapse involved only three US banks but two of those made the top-three largest bank failures in US history, and then Credit Suisse fell and Deutsche Bank slid deeper into questionable territory, and the whole world became a bit worried over what was just four banks that failed in the end.

So, how bad will the next wave be? This is exactly the way I said in my past Patron Posts the Everything Bubble would collapse — in wave upon wave of one crisis falling to the next as a slow cascade that would play out over a few years, not months. I particularly noted the high risks of commercial real-estate defaults and the defaults of zombie corporations teaming up to take out banks that are heavily positioned in those areas. That is now what Dimon is describing as the next wave.

So, let’s just call this the Zombie Office Apocalypse because the center of damage to banks from real estate will come from the badly collapsing office market described below in this Deeper Dive, as well as from the continuing Retail Apocalypse that began a couple of years before Covid and is still turning malls into haunted spaces, also described below.

The massive flow of stimulus money created by the Fed that poured from the government’s neck into corporate coffers (and coffins) during the Covid Lockdowns saved some zombie corps that were on the way out prior to Covid. Lapping up that blood-red money (as in created from government red ink) kept a lot of zombies alive. Now, as the government stops letting blood out of its jugular vein, we’ll start to see some of the zombies die off from starvation.

Commercial buildings in some markets, including tech-centric San Francisco, may take a hit as remote workers are reluctant to return to offices.

“There will be a credit cycle. My view is it will be very normal” with the exception of real estate, Dimon said.

For example, if unemployment rises sharply, credit card losses might surge to 6% or 7%, Dimon said. But that will still be lower than the 10% experienced during the 2008 crisis, he added.

Separately, Dimon said banks — especially the smaller ones most affected by the industry’s recent turmoil — need to plan for interest rates to rise far higher than most expect.

Dimon didn’t go into any deeper detail, so I’ll dig deeper into that detail for you to give a sense of how large the problem is becoming in the remainder of this article.

(These more complex articles in The Daily Doom will be published approximately weekly— giving my supporters more privileged content than they used to get — and will continue to be my usual style of economic articles that dive deeper into the data that I believe will be most critical to the coming economic trends. I think it is fair to say that the laying out of those trends has been pretty accurate over the past five years — dire as they have sometimes sounded. (I mean look at how insanely the world has transformed in just the last three years, beyond what you probably imagined for your full lifetime. If the transformation in three years hasn't been apocalyptic, it sure has been close, and its troubles are still unfolding.) While Deeper Dives will be primarily just for paying subscribers, I will occasionally email some of them to free subscribers, too. The introduction to this first Deeper Dive is going out to every subscriber — free or paid — in order to give even free subscribers a heads up as to what the next big issue is on the horizon and to give them a taste of what Deeper Dives will be. You can read the full exposè of the coming Office Apocalypse for a deeper draft of knowledge if you choose to become a paid subscriber below.)

The Zombie Office Apocalypse is coming.