Archive for the ‘Economy’ Category
4/19/09 — Anyone Reading Krugman?
Some Nobel Prize winners do great things, then it gets misused. Options theory comes to mind — Fisher Black (who died before the Nobel was awarded) and Myron Scholes gave us some wonderful tools for understanding how complex instruments should be priced, but I doubt they ever predicted the wild-and-crazy derivatives market that would result from their elegant math.
Others do great things, then misuse their fame themselves. Case in point — Paul Krugman. Now, I personally agree with most of the rest of the economic world that Krugman’s work in international trade was brilliant. On the other hand, I disagree with a lot of his politics. Don’t get me wrong — I read him all the time, and encourage others to do so as well. Note the link to his New York Times blog over on the right hand side of this page.
None-the-less, his April 17, 2009 column, titled Green Shoots and Glimmers, is Krugman wearing his “glass is half empty” hat, which he loves so very much. His column stands on its own, and I encourage you to read it. I don’t disagree with his facts. What I disagree with are his interpretations.
I would concur that unemployment probably hasn’t hit bottom. My own touchstone, based on the Philadelphia FED’s latest survey, is that we’ll see unemployment bottom out sometime in early 2010 and somewhere shy of 10%. I think we’ve seen the stock market bottom, and I think we’re close to seeing the bottom on housing prices.
Krugman would say this is all bad news — signs that the economy isn’t recovering and the Obama administration isn’t spending enough money. I would counter that the best ANY administration can do is to arrest the downward spiral (which the administration has apparently done), clean up the mess (which they are doing), and get out of the economy’s way so the free markets can go back to work (which is precisely the opposite of what Krugman would have them to do).
Do I agree with everything Obama is doing? No, but he’s doing SOMETHING, and it appears, at least in the long telescope, to be working. I don’t think we should all be cheerleaders, and a good, loyal opposition is a healthy thing for a democracy. However, the biggest danger for Obama’s administration doesn’t come from the right, but from the left, as evidenced by Krugman’s column.
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4/17/09 — GGP Files for Bankruptcy
Argus, on their blog, have a well-written report on the General Growth Properties Chapter 11 filing. I have more than a passing bit of interest in GGP — my Ph.D. dissertation was on REITs, and GGP was one of the companies I analyzed. More importantly, what implications does GGP’s filing have for retail real estate in general?
Is this a passing phenomenon, emblematic of the trough of a recession, or are we facing a structural shift in the American economy away from retail consumption? The former has some implications for GGP’s management (why did you leverage-up so much when you know that consumer recessions are cyclical realities?) as well as for their lenders and bondholders (why did you loan them so much?). The latter potentiality has much deeper, longer-term implications for both GGP as well as their competitors.
Only time will tell, but there is a lot of sentiment among both economists and other public policy types that a return to pre-2008 consumption patterns isn’t necessarily the best thing for America. Naturally, our global trading partners are apoplectic over such an idea — for example, if we quit “consuming” all of China’s stuff, many of their workers are either going to have to go back to farming or their economy is going to have to be more internally self sufficient. In either of those scenarios, China starts looking a lot like the next Japan, only much bigger.
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4/16/09 –This USED to be weekly
A surprisingly large number of entrepreneurs are sitting on the sidelines waiting to see what the Fed’s toxic asset solution will look like. In the spirit of “deja vu all over again”, this look a heck of a lot like 1989/91, when the RTC was coming into existence and a significant number of private firms helped with the workout of bad assets from the Savings and Loan crisis. It was terrifically clear back then — and it’s clear to me now — that this was/is not the sort of thing that can be done internally at a Federal agency (then, the FDIC, now the Treasury). An agency simply doesn’t have the people-power or the entrepreneural expertise to put these assets back to work.
Fortunately, it appears that Geitner “gets it” and the early indications are that they will want to bring some serious players (the Blackstones, Blackrocks, and Goldman Sachs of the world) to the table. From there, it’s anyone’s guess, but my bet is a thousand small private equity firms will get involved to buy, repackage, and redeploy the bad assets.
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4/14/09 — We’re all Hicksians Now
What we call “Keynesianism” or “Keynesian Economics” really owes more of a tip-of-the-hat to a fellow named John Hicks, who in 1937 wrote “Mr. Keynes and the Classics” which, in effect, put Keynes’ somewhat theoretical constructs, his General Theory, into more practical terms. Hicks followed up with his own classic textbook, Value and Capital, which should be must-reading for all advanced economics students.
I say should, but, sadly, it really isn’t. Even when it was prescribed by elderly professors, a whole generation of younger students tended to gloss over both Hicks and Keynes in favor of more “practical” economic topics. After all, who was going to write a dissertation on the IS-LM curve?
Now that we’re all “Keynesians” again (or more properly “Hicksians”), it’s helpful to go back to basics, and I’m specifically referring to that frequently discounted IS-LM curve. A few days ago, I was struck by how little I remembered about these things. With some chagrin, I started doing some research, and found out I’m not the only one — even the best economists in the world are starting to dust off old advanced macro texts and re-remember just how an economy is supposed to work. For a great and relatively brief exposition on this oft-abused topic, I’d refer you to some class notes written by Paul Krugman a few years ago when he was “stuck” by his department at MIT to teach a quarter of Macro Econ Theory to grad students and also had to dust off these concepts. Thanks to the internet, nothing you ever write (particularly if you’re a future Nobel Prize winner) is totally forgotten, and you can read it on-line here. For a little extra commentary, I’d refer you to a 2006 entry from Greg Mankiw’s blog here.
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4/6/09 — Back in the Office
Was in New Orleans and Baton Rouge last week. The Louisiana economy, which has never been wonderful, none-the-less seems to be handling the current recession better than most. Of course, the whole of the Gulf Coast is still recovering from the disasterous 2005 hurricane season that saw Katrina and Rita — both Category 3 storms at the time of landfall — hit the Louisiana coast within a month of each other. For a synopsis of the real estate research implications of these storms, see my 2007 Journal of Real Estate Literature article with Dr. Sofia Dermisi. You can also get a great synopsis of the economic impacts of these two storms from Louisiana State University’s Geographic Information Center.
According to LSU, about $25 Billion in Federal redevelopment funds have come into that state in the past 3 years, with the bulk of that flowing into the New Orleans area as a result of Katrina. Of course that doesn’t include substantial private settlements, such as the $330 milllion Murphy Oil settlement which Greenfield assisted in negotiating. The accounting for all of these pivate dollar flows will probably never be totalled.
Does that mean Louisiana has recovered from these disasters? Far from it. The state is still in economic turmoil, and current state budget cuts have the potential to eviscerate higher education, further increasing the “brain drain” that Governor Jindal pledged to stop in his campaign.
But, given where Louisiana was, economically, as of about a year ago, one would have expected that the recession would have simply shut down the economy there. Instead, there’s still a wonderful vibrancy in the state. Crops got planted this year, refineries are still in operation, and tourists still flock to the state. Anecdotal reports indicate that building construction has slowed, but not as badly as in some other parts of the country. Louisiana still has economic problems, and like the rest of the country, many of these problems are beyond their direct control. However, they seem to be slowly pulling themselves together.
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3/30/09 — It’s coming fast and furious now!
My normal weekly posting is quickly becomming daily, as a result of the rather rapid changes in the landscape. I’d recomment reading:
http://www.becker-posner-blog.com/archives/2009/03/the_governments.html
From the Becker-Posner blog. It’s — along with the commentary — is a great explanation of the issues surrounding the toxic assets plan. Good reading!
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3/29/09 — and two more things….
Two more very quick things….
First, the best description of the various Federal bail-out choices comes to us… no surprise, from the TV show Southpark:
http://www.southparkstudios.com/clips/222638
Second, this comes to me from Greg Mankiw’s excellent blog. Prof. Mankiw teaches introductory econ at Harvard and is the former chair of the President’s Council of Economic Advisors.
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3/29/09 — Rolling Bottoms
I got some strange looks last week when I was speaking at a real estate investment group. The “theme” of my talk was on the structural shifts in the economy, which I’ve talked about here as well as in our monthly newsletter. However, when asked about the “bottom” of the recession, I told everyone I thought we were looking at a rolling bottom. The equities market would bottom out first (and we’re probably there right now). The real estate market would bottom second, sometime later this year. The employment/GDP picture would bottom third.
Now, I think I’m on pretty safe ground with the first and the third. The dire predictions of a 5000 DJIA seem to be behind us, and some recent analyses of options market pricing suggests that the market puts less than a 10% probability on a “depression era” type crash. As for the third prediction, I’m relying primarily on the Livingston Forecast, produced by the Philadelphia FED. This semi-annual survey of leading economists gives us both the central tendency of their opinions as well as the degree of consensus around those opinions (more or less a measure of dispersion). Generally, they’re looking at GDP growth and employment bottoming this year, with GDP growth turning positive again by the last quarter and employment turning positive in the first quarter of 2010. (Note: I’m a huge fan of this survey — while they don’t always get it “right” , they get it “less wrong” than other forecasts.)
The audience of real estate professionals and investors was a bit skeptical of the middle component of my forecast. Some skeptics even suggested that real estate should lag the rest of the economy, and won’t rebound until after employment and the GDP bottom out.
Economy.Com, in their recent report Housing in Crisis projection that the Case-Shiller index will continue to decline into the 4th quarter of 2009, bottoming out some 36% lower than the recent peak. While even that would suggest that real estate prices (at least housing) will bottom out before the employment sector, it still seems somewhat on the pessimistic side.
Current evidence suggests the bottom may be nearer than these projections imply. For one, a report this week from CNBC provides three important clues to the near-term. First, the National Association of Realtors reports that 45% of all residential transactions in 2008 were distress sales. That’s a pretty large number of sales, and wringing the distressed market dry is a necessary precursor to a recovery. Anecdotally, this would suggest that the bottom feeders have pretty much found their bottom. Second, much of the U.S. has not been hit as hard as reports indicate — particularly “middle America” which were never truly overbuilt or badly overpriced, and where price-declines have been moderate. Finally, some of the hardest-hit areas — Florida and the Phoenix/Scottsdale area — are receiving significant interest, even in the hard-hit second home market.
This all portends good things for the residential market, but what about commercial? Construction lending is nearly dead today, and permanent financing for all but “sure bets” (or low income housing) is a tough sell. Nonetheless, pricing seems to be accomodating both the increased cap/discount rates as well as forward-looking fundamentals. Some markets will continue to suffer (residential development, big-box retail) while others are already getting some upward pricing pressure (apartments). However, the market seems to have a pretty good consensus pricing on this, we’re not seeing nearly the “distress sale” pricing in commercial assets that seem to have plagued residential, and in general the damage may pretty much have already been realized.
Does this imply buying opportunities? Probably, but only for the most patient investors. If we are seeing a bottom, that doesn’t imply a return to a steep upward slope on prices just yet. Both investment demand and occupancy demand are going to stay low for a while, the former as funds and investors lick their wounds and the latter as corporate America comes to terms with what the post-recession economy will look like.
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3/22/09 — Newsletter this week
The past two weeks have been busier than usual due to a pair of expert-witness trial testimonies in Kansas City. (Congrats to our clients, by the way, who prevailed with flying colors!). This coming week is slightly relaxed, then I’m off to the races again for a couple of weeks, including a trip to Louisiana and some other projects here in Seattle.
In the meantime, our monthly newsletter, The Greenfield Advisor, is slated to come out this month. We had planned to unveil our new trophy property index this month, but now I believe we’ll defer that for a couple of months. This month, our newsletter will summarize our economic forecast for the 1st quarter, with emphasis (of course) on the implications for real estate. I’ll unveil this forecast at a luncheon presentation to Seattle’s “Belden Club” at the Seattle Yacht Club on Tuesday.
The crux of the forecast depends on which of two economic theories you buy into — is this recession “normal” (albeit far deeper and longer than usual) or are we looking at a real structural shift in the economy?
It’s hard to point to specific phenomenon and say, “Aha! We have a structural shift on our hands!” because these events are so rare and ideosyncratic. Recessions are easy to spot, at least in the rear-view mirror. String together a couple of quarters of negative GDP growth, and you have, definitionally, a recession. However, once a recession is over, people go back to their jobs, asset markets make-up for lost time, and generally all of the trend lines are back where they were before the recession began.
There’s a lot to suggest that this time will be different. The obvious one is the housing price bubble — Moody’s Economy.com in a report released last month predicts that the Case-Shiller Index will retreat a total of 36% before it bottoms-out in the 4th quarter of 2009. That’s not only unprecidented, it also implies a massive loss in household wealth which will take many years to re-coup. Unfortunately for many families, time is not on their side, since the crest of the baby-boom — currently in their 50’s — were looking at this accumulated equity as a major source of retirement cushion. Coupled this with the declines in the stock market — household wealth buried in the equity market (either directly or indirectly) was another significant source of retirement cushion.
Some economists think the real clincher is the pay-down in household debt, which began last year and will probably accelerate this year. There’s a double-whammy there — much (most?) of the pay-down is being done by the most credit-worth households, leaving credit card companies seeing a real shift in the aggregate credit-worthiness of their borrowers. This is happeneing at the very time when the credit card companies themselves are seeing significant retrenchment in their lines of credit. Credit card companies are left with no choice but to curtail credit limits, thus forcing less credit-worth households to either pay-down or default. Since many households were already running permanent balances, and using the monthly pay-down as their revolving purchase line, the impact on household consumption is obviously severely negative.
If we ARE in a structural shift, then the impacts will be felt differently in the U.S. and abroad. Domestically, we’ll look a lot more like the 1970’s but without the inflation. The stock market will trade in a narrow band, and without inflation, bonds will look better than equities. Younger workers coming into the job market will see stagnating expectations, with older workers deferring retirement and an economy that won’t sustain significant job growth.
Abroad — Asia and Europe will be basket cases. The more conservative oil countries (Saudi Arabia comes to mind) will fare well enough, but the economies that bet the whole farm on $100 oil (Venezuela comes to mind) will quickly go into downward spirals. Don’t even start talking about sub-Sahara Africa. Japan — already suffering — from an aging population and a stagnant economy, will face political turmoil. China may be the worst hit — they’re more than happy today to loan us whatever money it takes to get the U.S. economy rolling again, since we are the engine that pulls their 8+% GDP growth. The U.S. could face two choices — either fund our domestic recovery with severe devaluation of the dollar (a distinct possibility) or hunker-down with protectionist legislation (anyone read what a good idea this was in the 1930’s?). Either case leaves China headed back to subsistence rice farming. A significant structural shift in the U.S. away from a consumption-driven economy basically puts us and China in the same position anyway, albeit indirectly rather than directly.
I’m personally leaning 60-40 in favor of a believing in a structural shift. The Obama Administration, at its core, believes in stronger domestic-spending by the U.S. government on things like education, health care, and domestic infrastructure. All of this shifts money away from consumption and toward government expenditures. GDP grows, but the mix of components that gets us there is lower consumption (or at least lower growth in consumption), higher growth in government spending, and a dampening of the import/export red ink.
What are the implications for real estate? More on that in my next post.
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3/13/09 — “All the lights are on….”
I’ve been traveling this week, and actually surprised to be in the office today — I was supposed to be in court today testifying in a case. Fortunately, the case went quicker than we’d planned, and I get an “extra” day in my schedule. It’s sunny outside, with mild temperatures. Naturally, that means I’m sitting at my desk. Oh well….
But anyway, I have to share this semi-boring story with you from my travels this week. It’s 100% true, only with the name of the city and the “offending” corporation blotted out. I found it fairly humorous. You may find it terribly boring, but I thought it was emblematic of the current investment malaise.
I was in a major central-time-zone city, far away from Wall Street. I flew in late Sunday night, and checked into a hotel which I’ve frequented in the past. I’d never paid attention to it in the past, but next door to the hotel is an art museum, and next door to IT is a fairly blank, open field of perhaps 4 – 6 acres or so. As I drove past the field late at night, I couldn’t help but notice that there were some odd looking light fixtures out in the field all turned on. The fixtures themselves were fairly decorative, but they were positioned as if they were supposed to illuminate something else — but there was nothing else in the field besides the lights.
The next day, I had a few minutes to kill and went for a walk. Across the street is the very massive, multi-building headquarters for a very major mutual fund company. Full disclosure here — until mid-2008, this mutual fund company had a tidy sum of Ms. K’s money invested. They still have her money, it’s just about 1/3 less than it was a year ago. Anyway, the field, as it turns out, is the “Mutual Fund Company Sculpture Garden”, a part of the art museum paid for by the folks across the street as a gesture of good citizenship.
But… ahem…. where’s the sculpture? The lights are all there, but the supposed sculpture pieces which are to be illuminated by said lights are all gone. What’s even more galling (where’s Al Gore when you need him…), the lights were on at night even though there was nothing there to illuminate.
Seriously. A mutual fund sculpture garden, fully illuminated, with no sculptures. If that’s not emblematic of the current investment world, I don’t know what is.
From a small northwestern observatory... 