First, a big caveat — this post is NOT going where you think it’s going. It’s only peripherally about vinyl record sales.
Second, I’ve made my peace with digital music. Thanks to somewhat degraded hearing (not deaf, but you know…) I don’t pick up the subtleties of vinyl records. Don’t get me wrong, I’m absolutely in love with rock music, particularly some of the new stuff that’s better than we give it credit, but my ears are not dexterous enough to appreciate vinyl. That said, vinyl record sales in 2017 are expected to top $1 Billion. I’ll let that sink in for a minute, because back in the day, my expenses on turntables, speakers, headphones, etc, dwarfed my actual expenditures on vinyl records. Add it all up, and this is a huge business. There continues to be a huge amount of money in this world, and inventive people who figure out ways to market to the demands of folks who have that money, or who have needs in the 21st century, will prosper.
Which leads me inexorably to entrepreneurism. The story 0f the internet revolution has been one of entrepreneurism. I won’t belabor it, only to note that a bunch of college-age kids (often drop-outs — I’m looking at you, Bill Gates) took IBM, DEC, Wang, Amdall, and a bunch of others out back of the barn. I was in the supercomputer biz in 1990-1994 (as an academic, running a scholarly program) and I can tell you NONE of the big-ass suit-and-tie companies I was working with then are still in biz, save for Intel that saw the writing on the wall and got out of supercomputers and back into chips where they belonged. In short, great strides foward in our economy have been made — indeed, have always been made — by entrepreneurs, usually working tirelessly in the shadows.
Which leads me to Robert Henlein. If you haven’t read him, he’s one of the deepest of the deep thinking science fiction authors. Among the top four or five on everyone’s list. Naval Academy (which is where I met him, as a 19-year-old midshipman, 40+ years ago), then a masters in engineering, washed up by 30 with tuberculosis, he dragged himself up to become a masterful writer. Stranger in a Strange Land alone has spawned an untold number of PH.Ds. In creating his fictional worlds, he noted that new colonies always thrived quicker and better than the monther planet. Why, you say? Because it takes a certain gumption, a certain spirit, a certain amount of energy, to jump on a boat on the high seas (or, in his case, in outer space) and take a risk on a new place. The western U.S. thrived because disillusioned Civil War vets — blue and grey — struck out for a new land with new opportunities. Heinlein, an early 20th century Coloradan, saw that first hand.
Which leads me to the wet-foot-dry-foot rule, and all that accompanies it. I note that the Obama administration, for reasons I don’t fully grasp, suddenly suspended the rule this past week. I had the opportunity to go to Cuba last January, and was amazed and overwhelmed buy the entrepreneurship of the people. It’s tough to eek out a living in a totalitarian, centrally-planned dictatorship, but many people seem to do it in a style we can only hope to emulate. As a west-coaster, I’ve seen how the influx of Asian immigrants have fueled the entrepreneurship of the internet age. As a native of the south, steeped in east-coast-ness, I know how our country has been fueled by wave after wave of immigrants from every corner of our planet. In every one of our major cities there is a jewish tailor, there’s a mid-easterner with a falafel stand, an Indian with a hotel, a Chinese merchant, an Italian eatery, a Nisei left with nothing at the end of WW II who started a business and built a fortune. These may seem like stereotypes, but these stereotypes built the nation I call home, and swore to defend w-a-a-a-ay back when. I spend a bunch of my time in Key West, where eastern Europeans have built some nice homes by setting up janitorial businesses and t-shirt shops, doing work I wouldn’t do.
I agree — the laws should be followed, and illegal immigration should be dealt with. But how? Arguably, the deck has been stacked terrifically against brown skinned folks and in favor of people who look and sound like me. The folks who we endeavor to keep out are often the most inventive, figuring out how to make markets out of janitorial services, falafel stands, and yes, selling vinyl records to music afficianados. I’d like to keep America great, and I would argue that only with a constant influx of new, inventive, aggressive, creative blood, that may be a problem.
I was giving a brief presentation on real estate two weeks ago, and mentioned Glenn Mueller’s great Market Cycle Monitor, which is actually owned and produced by Dividend Capital Research in Denver. Dr. Mueller is a professor at Denver U, and the Market Cycle Monitor stems from a paper he wrote back in the 1990’s. The Monitor basically examines commercial real estate across four phases — recovery, expansion, hypersupply, and recession. It then examines real estate subsectors across these phases (suburban offices, downtown offices, factory outlet retail, etc.) and then examines the top markets in the top 55 geographic markets. If all of this seems massively complicated, Dr. Mueller makes it relatively easy to understand, with great explanations of his graphical presentations.
By the way, the four phases are determined in the context of rising and falling occupancy, rents, and new construction. Thus, a property type or market in recovery evidences declining vacancy rates and no new construction, which leads to rising rents and values. The expansion phase is marked when the market or property type occupancy rises above the long term occupancy average, and that phase evidences continued declining vacancy and some new construction. After occupancy peaks, and begins to decline, the market or property type enters the hypersupply phase, marked by increasing vacancy yet continued new construction. A property type or market enters the recession phase when occupancy falls below long term averages, and yet increasing vacancy rates are met with increased completions of new properties. The report goes on to explain the impacts on rents, rent changes, and how rental rates interact with construction feasibility at different levels of the cycle. Simply reading the Market Cycle Monitor is a great primer on how commercial real estate markets work.
Simply collecting the data is a bear, so there is usually a 2 month delay producing the report. The most recent report covers the 3rd quarter, 2016, and was produced in late November. While the report covers 55 markets and 12 different property type sub-markets, the data generally spans five major property types — office, industrial, apartments, retail, and hotels. Three of the five sectors (office, industrial, and retail) had improving occupancy in 3Q16 and improving rents. Hotel occupancy was flat, but room rates actually increased, albeit at only 2.2% annually. Apartment occupancy actually declined 0.1% in 3Q16, but room rates increased at an annual rate of 3.2%.
The remainder of the report is packed with great information, and extremely readable. Check with Dividend Capital for a copy, or send me an e-mail.
Hope everyone’s having a great holiday season (Christmas here, but with homage to Hanukkah, Kwanza, Winter Solstice, Festivus, and such and so forth….)! Needless to say, 2016 has continued is reign of terror — our condolences go out to the families of Carrie Fisher, George Michael, and a long list of folks who left us w-a-a-a-a-a-y too soon. (We lost three of my favorite space travelers this year — John Glenn, Carrie Fisher, and David Bowie!) This past year suggests the United States may have been founded on an old Native American burial ground….
Ahhh… but enough on that. NAREIT tells me this morning that 2016 was a tough one for REITs in general, but 2017 looks better. (My wife’s Pomeranian could have written THAT press release.) On a somewhat more realistic tone, private equity fund raising is projected to be down among real estate funds in the coming year, which does not portent good things. The Limited appears to be poised for bankruptcy filing, and many (most?) stores that are still open are refusing to accept returns this week. I just wandered into a shopping mall this morning (as I do about twice a year) and noted that The Limited was boarded up. The timing is interesting, since retailers do about 14% of their holiday sales during the week AFTER Christmas.
On another note, S&P CoreLogic’s Case Shiller Index (whew… a mouthful for something started as a student’s MBA project a few years ago…) just announced that house prices from October 2015 to October 2016 rose 5.8%, which isn’t a bad number, and in fact may be a bit high given the present rate of inflation. However, this doesn’t take into account the impact of November’s election, and the likelihood that newly empowered Republicans in Congress will likely tighten capital constraints on major banks. (Ha-Ha-Ha to everyone who thought the GOP was in the pockets of the bankers.) This portends tightening of capital throughout the lending system. Add to this that the dollar is strengthening (the dollar always strengthens in the wake of global uncertainty, irrespective of the source of the uncertainty!) and you get declines both on the supply side and demand side for capital. Couple with this both recent and impending rate hikes at the FED, and one has to wonder what will be a good investment in 2017. (Hint — cash continues to be King.)
Once again, this blog is NOT investment advice, and Greenfield and its senior folks may, from time to time, have investments in things discussed here. It’s just a blog… nothing more….
Well, by for now! May the Force be with you!
There is plenty of news about the FED bumping rates today — a whopping 0.25% (“yawn”) and only the 2nd time in a decade. The argument is that the FED no longer sees low rates as a needed crutch for the economy. Perhaps they’re right. My interest is real estate — how will higher rates impact property returns? More to the point, if the Trump administration goes ahead with infrastructure spending, as was promised, and the FED follows with further rate bumps, as has been projected, will real estate continue its upward climb?
Rather than answer that directly, there’s a great piece on that topic from TIAA — you can access it by clicking here. Looking at data from back to 1980, TIAA finds that real estate appears to perform just as well during periods of rising rates as it does in other times. Indeed, they find a 70% correlation between acquisition cap rates and long-term Treasury rates, suggesting that real estate buyers are agnostic on rates, within reason. Indeed, as the graphic above indicates, the most upsetting quarterly property returns came during periods of relatively stable, downward trending long-bond rates. For the last half-decade, quarterly property returns have tracked the long-bond quite nicely.
So there ya have it, folks.
I’ve noted in the past that one of my favorite economic forecasts comes from the Philadelphia FED. The semi-annual Livingston Survey captures the sentiments of 28 leading economic forecasters on key metrics, such as unemployment, GDP growth, and inflation. Year after year, the forecast remains fairly accurate and steady — much to the disappointment of politicians who fail to realize that the worlds largest non-centrally-planned economy changes course fairly slowly.
Of course, 2017 may be a bit of an exception. Indeed, so was 2009. The forecast can’t take into account shocks to the system (such as the recent economic melt-down) nor can it handle significant policy shifts from D.C. I have some “gut” feelings that differ a bit from the Livingston folks, and I’ll note those at the end.
Now, on to the details. GDP growth for the second half of 2016 was a bit better than had been previously forecast, coming in at about 2.7% rather than the previously forecast 2.4%. Looking forward, the forecasters project a 2.2% annualized growth in the economy during the first half of the coming year, rising slightly to 2.4% in the second half of 2017.
Ironically, unemployment appears to be coming in slightly higher than forecasted, about 4.9% rather than the previously projected 4.7%. Of course, neither of these numbers is anything to complain about. Forecasters look to continued improvement in the unemployment numbers through the coming year, ending up around 4.6% next December.
Inflation measured by the consumer price index (CPI) is right on target at 1.3%. Next year, forecasters are projecting 2.4% (slightly up from previous 2017 forecasts) and the crystal balls (which is all they are this far out) suggest 2.5% in 2018. The yield curve is ending the year a bit steeper than previously projected. Earlier forecasts put the short end (3-month T-Bill) at 0.75% and the long end (10-year) at 2.25%. Currently, they see the year ending at 0.55% and 2.3% respectively. For 2017, the soothsayers forecast a year-end 1.12% at the short end and 2.75% at the high. This is somewhat higher at the high end and lower at the near end than had been projected previously, suggesting an expectation of higher overall interest rates in the future. Finally, forecasters see the stock market rising over the next two years, but at a fairly lackluster rate.
I promised my own bit of forecasting. During the tumultuous months surrounding the recent melt-down, I played a bit of follow-the-leader with this survey, and went on record that the melt-down would be short-lived. Boy was I wrong! As noted, this survey is pretty good when the economic ship is on a steady course, but doesn’t handle rough water very well. For the past several years, we’ve had an unprecedented period of economic growth, by all metrics (GDP, stock prices, unemployment, and inflation). Just from a pure market-cycle perspective, we may be overdue for some unpleasantries. Looking at the political horizon, I’ve already noted that politicians are generally disappointed that the economy doesn’t move as quickly as they wish or even in the desired directly. That said, we have a Congress that is frothing to trim the Federal budget, and will probably opt to do so in the transfer payments arena (welfare, health care subsidies, etc.). They’ll hope to balance this with tax cuts. However, tax cuts fall slowly, and on one sector of the economy, while entitlement cuts (and any budget cuts, for that matter) happen quickly and are usually borne by a different segment of the economy. I think I’ll be watching GDP reports fairly closely for the next couple of years. I would note what happened in the years leading up to the 1982 recession — not withstanding inflation (driving nominal interest rates), the economy looked OK in 1981, and the metrics were generally pointed in the right direction. (For a good visual representation, I’d refer you to the August, 1981, report to Congress of the Council of Economic Advisors, a copy of which you can view on the St. Louis FED’s website by clicking here.)
All in all, we’ve been focused on politics for the past several months, and now we’re going to find if those political decisions have actual economic repercussions. Stay tuned!
It is HARD to keep up with a blog when the news seems to move out from under you every day. Now that the election is over, we can get back to normal stuff, like how’s the economy doing and where do we go from here.
Back on the campaign trail, ONE of the presidential candidates (HE will remain nameless) complained about the level of home ownership, which hit the “lowest level” in 50 years or so. Admittedly, that’s true, but also a bit misleading. Since the peak — which led, by the way, to the recent mortgage melt-down, home ownership in America declined from 69.2% (June, 2004) to 62.9%% (June, 2016). That’s not a huge decline, but indicative of just how sensitive our economy is to the level of home ownership. I’ll be the first one to admit (and in my early days, I did more than a bit of research on this) that lots of good things eminate from new home construction and from the home brokerage business. For one, there are a lot of good jobs at stake — from skilled carpentry to mortgage lending and everything in-between. I’ll also note that there have been many studies thru the years focused on the social benefits of home ownership, which add to neighborhood quality, school quality, and even reduced crime levels.
That said, most good things come in “optimum” levels. For example, eating a well balanced diet is superior to either starving or binge eating. Human bodies are optimized for a temperature of 98.6F, and will die if internal temps are sustained even a few degrees on either side. Not enough water and you die, and yet people drown each year from too much. See the connection?
Home ownership would not have hit record levels without lending practices that were neither healthy nor sustainable. We don’t know exactly what the optimum level of home ownership in the U.S. economy might be, since the economy is anything but static. However, right now, the economy seems to be chugging along quite nicely with current home ownership levels. Are we at a sustainable optimum? Perhaps, but only time, and stable economic policies, will give us some empirical data.
Following up on Renaissance Weekend at Aspen, Lynnda and I took off with some friends for Europe for a couple of weeks. It was wonderfully relaxing (albeit my office found out I had wifi most days) and a great way to dip into the culture and economies of some countries I’d either never visited (Hungary, Slovenia, Austria) or hadn’t visited in a few years (Germany, The Netherlands).
First, it’s interesting that the river valleys we visited (Rhine, Main, and Danube) appear to enjoy a tremendous economy off of tourism. The proliferation of river cruise ships (we were on Viking) means that a lot of cities and towns can make money selling low-capital, high-profit items (beer, wine, food, and tourist paraphernalia) without investing in high-capital, low-profit infrastructure (parking lots, hotels). They seem to have focused their attention on fixing up cathedrals and castles, all of which are quite lovely.
I was also terrifically impressed with how much commercial vessel traffic uses the Rhine River. I didn’t try a head count, but I’m guessing commercial vessels outnumbered tourists by 10-1. The Main and Danube weren’t quite so busy, but the traffic was still there. Unlike the U.S., where our very few locks are frequently public infrastructure, the vessels we were on paid an average of 1,000 Euros per lock (times 68 locks between Amsterdam and Budapest!). I presume the commercial cargo haulers paid something similar. That said, the cargo haulers generally transported low-value, time-insensitive cargo (grain, aggregate, scrap metal) and each cargo hauler was able to replace quite a few trucks. Thus, the benefit of these 10-knot, fairly efficient cargo vessels, was not only in cost but also in using a natural infrastructure (the river) to replace one that would have to be built (highways and bridges). Add to this the environmental concerns (I’m told that the cargo vessels are significantly more environmentally friendly on a “per ton of cargo” basis) and it all seems to add up quite nicely.
One of the biggest economic problems facing Europe is the aging population. Indigenous populations (e.g. — native Germans) are living long and not breeding very much. To put it in simple terms, if Germany makes money selling Mercedes to other people, then how are they going to build them when all the Germans retire? Many industries — not only in Europe but elsewhere — deal with this problem thru advanced automation. Indeed, the advances in productivity in Europe, North America, Japan, etc., can be tied directly to automation. However, there is a limit to replacing people, particularly in the service industry. Up to this point, “First and Second World” countries (that is, us and them) have partially staved off the problem by importing labor. That, of course, has its own problem, not just the crowding out effect (immigrants allegedly taking jobs from natives) but also results in a shortage of labor in some skill areas in the countries which source the immigrants. For example, nurses are flooding into Europe and the U.S. from India, leaving a shortage of nurses in India. The opposition argument to the crowding out effect is that natives are often unwilling or untrained to take certain jobs. One German engineer pointed out to me that it’s impossible to get a German to collect garbage. Here in the U.S., there is a huge demand for nurses, computer programmers, etc. Sadly, we seem to churn out an excess of poets.
Sigh…. you’d think I could tour the Danube and the Rhine without thinking about such things, but here we are….