From a small northwestern observatory…

I love boating, I really do.  To quote from Grahame’s famous The Wind in the Willow, “…there is NOTHING–absolute nothing–half so much worth doing as simply messing about in boats.”  However, any experienced sailor has had one of those days when the water was perfect, the wind was with you, but off on the horizon a storm cloud lurked.  “Will it head our way, or pass us by?” is the key to whether the fun cruise continues or not.

Today, and for the next few weeks, the economy is like that.  The wind is definitely at our backs, and things are generally looking up.  That having been said, the fiscal cliff continues to loom on the not-too-distant horizon.

First, the good news, and there’s plenty of it.  I’m on the Board of an investment fund (and in fact just got named chairman of the board this month, for a two-year stint).  We had a great briefing yesterday from our lead fund manager, and macroeconomic news was as good as I’ve seen it in a while.  Corporate profits are at near-record levels as a percentage of GDP, and non-financial interest expense as a percentage of profits is at a near-record low.  Lending is back up, although corporate lending isn’t quite as robust as consumer lending,  and current stock market price-earnings ratios (measured on a 12-month trailing basis) are at levels usually associated with strong intermediate-term (5-year) market returns.  Equity risk premia tell the same story.

On the real estate side, everyone’s seen the news that the S&P Case Shiller index is trending back up, and this morning’s news report puts current housing starts above an 800,000 annualized level (note that we’re hoping for a million, and at the trough of the recession we were at a record low 300,000-ish).  Manufacturing has added about a half-million jobs since the trough of the recession (early 2010), and is about 300,000 above where it stood in July, 2009.

The implications for real estate investment are clear, and as I reported earlier this week, the total return on U.S. REITs has exceeded 30% in the past year, besting the S&P 500.

With that in mind, though, the fiscal cliff continues to trouble us all.  If you’re not familiar, on January 1, the Bush Tax Cuts will expire and mandated federal spending cuts are scheduled.  Together, these two will hit the economy to the tune of about 4% of GDP (yes, driving us into a second recession).  Sadly, the solution is political, and this is all coming at a time when Congress and the White House are totally focused on the impending election.

We’ll keep you posted, and we’re preparing some private white papers on this subject for our clients as the season moves forward.