Archive for the ‘Finance’ Category
AON’s Global Risk Management Survey
The good folks at AON just shared with me their very detailed Global Risk Management survey for year-end 2017. It’s a terrific document, very thoroughly researched, and I commend them for the effort they put into this. (Full disclosure – neither I nor Greenfield, nor any of its affiliates, have any interest in AON.). This is the sort of study that should be on the desk of every CEO who has globally-affected interests, and certainly real estate and private equity fall into that category.
The document is chock-full of good stuff, and I’ll revisit this in future posts. Two interesting comments, however, hit me right up front. First, and I’ll simply quote from the survey, “…developed nations, which were traditionally associated with political stability, are becoming new sources of volatility and uncertainty that worry businesses…”. Of course, they’re taking about the U.S. and its misguided trade war, BREXIT, the elections in Northern Europe, and the impeachment of the South Korean president.
Second, what are the top concerns for global businesses and wealthy families? The list may come as a surprise to those who don’t follow these important sectors, but these certainly make sense in today’s climate:
- Damage to reputation/brand
- Economic slowdown / slow recovery
- Increasing competition
- Regulatory / legislative changes
- Cyber crime / hacking / viruses / malicious codes
- Failure to innovate / meet customer needs
- Failure to attract or retain top talent
- Business interruption
- Political risk / uncertainties
- Third party liability
I can tell you Greenfield is deadly serious about these issues. You should be, too.
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NYC Family Office Club
I had the very real pleasure of attending the Family Office summit in New York City last Friday. The meeting drew together about 400 individuals, give or take, who are involved in various aspects of management or advice to family offices. Greenfield was, of course, the one of the leading real estate advisory providers there.
For the uninitiated, a Family Office is more-or-less what it sounds like. A family views its financial and other holdings as something to be managed for the benefit of the entire multi-generation family. A very, very rough division might categorized those families with a billion dollars of net worth or more, families with $100 million to a billion, and families with aggregate net worth below $100 million. For the first category, the family office is usually a separate business enterprise managing just that family. It may directly employ one or more attorneys, accountants, and investment advisors, or at the lower end of the scale perhaps just one or two professional managers with other professionals on retainer. The family office manager ensures that the assets are well invested and well managed, that the taxes and other bills get paid on time, and that the family estate is managed.
In the middle category, a professional manager may oversee several families, or in some cases a management team may oversee a dozen or more families. The suite of services is somewhat less (estate management and day-to-day bill paying may not be on the table). At the lower end, for families with $50 to $100 million in investable net worth, there are trust companies that manage the money and make sure the tax accountant gets everything needed.
It goes without saying that above a certain level, every wealthy family has some sort of family office. To quantify this, the wealthiest 0.1% (that is, one tenth of one percent) of American families have an average net worth of $200 million. Ahem… That’s 125,000 families. It perhaps goes without saying that these families are shown the best investments, receive the best legal, accounting, and advisory services, and expect mind-boggling results.
Now, you’d think that the lessons learned from these uber-wealthy families and their advisors would have little to do with the average American family, but indeed that’s far from the truth. Amazingly enough, the lessons learned here are applicable to every family in America, indeed the world. I’ll summarize just a few.
- The family matters more than the money. Indeed, the wealthy families I’ve spoken with manage their money carefully and purposefully to knit together the family across generations. Even so, only 30% of earned wealth hangs around past the third generation. Why? The biggest single issue was family disputes.
- There is an extraordinary global industry of lawyers and others devoted to family reputational management. Managing a family’s reputation is paramount.
- Most wealth families expect their investment advisors to preserve wealth. They already know how to make money, they just don’t want their advisors to lose it. That said, they don’t like blind pools, they want to be in control of private equity investments (but are open to partnering with other families or “sidecar” arrangements) and prefer private equity to public.
- Wealthy families and their investment managers are rarely open to an investment “pitch”. They want to get to know an investment manager first, and may not be open to an investment until the third or fourth idea.
There were a lot of other details, and I’ll leave those for another time.
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Quarterly Phily FED survey
Hey, gang! It’s been a while! I’ve been having a darned good winter, how about you? It’s been busy, I’ll say that, hence the gap since my last post.
Anyway, as you may know by now, I’m a regular follower of the Phily Fed’s quarterly survey of economic forecasters. It’s a delightfully simple model — just ask a not-so-random group of economist where they think the economy is headed, then look at both the central tendency (you know, mean, median, mode, that stuff) as well as the dispersion of forecasts (standard deviation, median absolute deviation, stuff like that). The results are not only interesting in and of themselves, but also it’s fascinating to track what the forecasters were saying a quarter ago compared to what they’re saying now (which the FED does).
For example, the forecasters, PREVIOUSLY (end of the year last year) projected that GDP growth for 2018 would be 2.5% (real, annualized), the unemployment rate would be 4.1% on average (and 4.0% at year-end) and that we would add 163,400 folks to the nation’s payrolls on average each month during the year. Today, however, these same forecasters have up’d the ante a bit, forecasting real GDP growth at 2.8% for the year, average unemployment at 4.0% (and ending the year at 3.8%) and adding 175,100 workers to payrolls per month.
Now, don’t get too excited, folks, because as with everything the “devil’s in the details.” A big chunk of the change comes from shifting the shape of the new employment curve. Previously, the forecasters projected a fairly flat payrolls change over the year — not bad, just flat. However, new forecasts project this to be skewed to the early part of the year, and then declining after the summer. Indeed, 2019 is currently projected to be anemic. Early employment numbers has the effect of driving up GDP (people earn and spend money for more months in the year). Note that when we look at the dispersion of GDP growth, there is some great news (very little sentiment for a recession this year) but also some not-so-great news (very little sentiment for growth above 4%).
The Phily FED also surveys for inflation projections, but that’s been flat-lined for years now. Current CPI projections for the year are 2.1%, which is the same as previous projections. Of more specific interest to us at Greenfield, the Phily FED is now reporting forecasts of house price growth for the coming two years, although rather than use their regular panel they are synopsizing several publicly available indices (Case-Shiller, FHFA, CoreLogic, and NAR). In general these indices point to price growth from 4% to 5.2% this year, and slightly lower growth (3.3% to 5.1%) next year.
There’s a bit more to the survey, and if you’d like you’re own copy, just click here.
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The WalMart Effect
It’s a sleepy Saturday morning in the Pacific Northwest. December 23. Like so many Americans, I have some last minute shopping to do. Like so many Americans, I’m dreading that, and looking around feverishly for an excuse to not do it. Fortunately, I have a blog and a functioning computer.
Reading Reddit recently (and always looking for an excuse at alliteration) I happened upon an interesting map of the US showing the largest employer in each state. I couldn’t help but notice that in a large number of states, WalMart was the largest single employer. As someone who regularly travels the length and breadth of our great nation, I also couldn’t help but observe that many of the states where WalMart dominates employment are also at the lower end of the economic totem pole. Aha! I exclaimed, for I had suddenly stumbled on a distraction worthy of my Saturday morning.
Before I go any further, please let me stress that I have nothing against WalMart. I’ve actually done a bit of work for them, in the long distant past (OK, maybe 15 years or so ago) on property disposal issues. They have very tough standards for consultants, but they pay their bills (although, you earn the money!). Indeed, I have very few bones to pick at all in this study, other than the obvious which is that political and civic leaders owe it to their states and communities to seek out exportive “basic employment” businesses. Communities do not benefit by sending their money elsewhere (which is what they do when people shop at any retail establishment, as I will do later today). They benefit when they send goods and services elsewhere in trade for money. Note that “exportive” is a general term. In Nevada, for example, the largest employer is MGM Resorts. The customers are kind enough to haul large sums of money to Nevada from out-of-state and dump it in the middle of the street for the locals to scoop up by the bucketful.
My little study also does not account for states which have lots of exportive businesses, but no single entity which is dominant. For example, Florida is a bit of an outlier, in that tourism is a big exportive business, yet WalMart is still the biggest single employer. Go figure. I would have guessed Disney. In many states, the University system is the biggest employer, but recognize that Universities are huge exportive enterprises. Money flows in from research grants, technology transfer, patent licenses, tuition from out-of-state and foreign students (the U.S. is still the preferred place in the world for an education), and alumni gifts, and all we send out are journal articles and educated individuals. From a local perspective, higher education is the gift that keeps on giving.
Anyway, I downloaded the data. There are 22 states in which WalMart (“WM”) is dominant, and 28 in which it is not. I also went to the Census Bureau and grabbed the state-by-state median household income (“HHI”) stats. I then ran three quick studies (and yes, it’s still morning). First, a simple correlation shows that having WM as the state’s largest employer has a negative 51% correlation with HHI. In other words, if your state has WM as its largest employer, your state is 51% likely to have lower-than-average HHI (yes, this is a simplistic way of looking at it, but bear with me).
I then ran a simple log-linear regression. (Since HHI is bounded at zero, the conditions for OLS don’t stand, so a log transform of HHI is needed. It actually makes it a bit easier to interpret the data. Plus, there are a few other reason, but I won’t bore you.) The WalMart Effect, as I call it, is about 15.75%, with a very high (>99%) level of confidence. In other words, if your state has WalMart as its largest employer, your state’s median household income is likely to be 15.75% below average.
Finally, I measured the actual numbers. Of the 28 states which do NOT have Walmart as the largest employer, the average median household income was $62,116 in 2016. If WalMart is the largest employer, that number was $52,290, for a difference of $9,818. Thus, the Walmart effect….
Now, I’m going to go shopping. I’ll eventually write this up in a little paper. E-mail me and I’ll send it to you when and if I get around to it.
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Livingston Survey strengthens
One of my economic “touchstones” is the semi-annual Livingston Survey, begun in 1946 by the famed economist and journalist Joseph A. Livingston. The survey continues today under the auspices of the Philadelphia FED. Twice a year they survey a panel of economic forecasters on the key metrics of unemployment, GDP growth, inflation, T-Bill and Bond rates, and the S&P 500. Not only are their opinions of interest, but also the change in the central tendency of those opinions over time.
For example, six months ago, the panel forecasted that year-end unemployment would be 4.3%, with a slight decline to 4.2% by mid-year, 2018. Now, this forecast has shifted slightly downward, with an expected year-end unemployment rate of 4.1%, mid-year 2018 projected at 4.0%, and year-end 2018 at 3.9%. These are decidedly low numbers, and suggest an econonomy at nearly full steam. (“Frictional” unemployment, which is the lowest level we would normally see, is generally thought to be close to 3%.)
Previously, year-end GDP growth was projected to come in at about 2.5%. That’s now up to 2.9%, settling back to about 2.5% by mid-year 2018. Projections of inflation are also solid, with CPI ending the year at about 2.1% and PPI (producer price index) at about 3.0%. Both of these estimates are slightly lower than previously forecasted. Intriguingly, CPI is forecasted to stay about the same in the coming year, while PPI should decline to about 2.0% by the end of the year next year.
The cost of debt is projected to increase in 2018, albeit at modest rates (and lower than previously projected). Previously, the 10-year bond rate was forecasted to end the year at about 2.75%, but now should end the year at about 2.45%, according to the panel. Rates should rise in 2018, but more slowly than previously projected, ending 2018 around 3.0%
Finally, the June survey projected that the S&P 500 would end the year at 2470, but now the panelists think the market will end the year at 2644. (I note that the S&P sits at 2691 as I write this.) The S&P is projected to end 2018 at 2805, or about 6% higher for the year.
The full survey also contains data on a variety of other topics (auto sales, corporate profits, average weekly earnings, etc.). You can subscribe by visiting the Phily Fed at www.philadelphiafed.org/notifications.
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So, folks, where are we going to live?
Much has been said recently about housing starts being back up to where they were before the recession. If this is the case, then why does Seattle, for example, have a 0.9 month supply of homes for sale? As usual, the details are much more complicated than the headlines.
Prior to the “meltdown” (let’s say, 2004 – 2007), housing starts in the U.S. averaged about 1.865 million units per year. Now, few analysts disagree that this was too many, but figuring out the right number is harder than one might think. In 2008, the number dipped down to about 905,000, and hit a low of 583,000 in 2009. Since then, the annual starts have trended up. However, in 2016, we still were only at 1.207 million. Of that, only 751,000 were single family units, compared to an average of 1.4 million single family homes per year in the 2004-2007 period. Hence, nationally, we’re building about half as many homes as we were 10 years ago.
From 2004-2007, we started 7.462 million dwelling units in America, but in the past four years we’ve only started a total of about 4.432 million (all varieties). That’s a shrinkage of about 3 million new homes, and most of that shrinkage is in the single family category.
One might posit that the decline in home ownership rates should have freed up some demand, and some of that’s true. The home ownership rate in America peaked at 69% during the run-up to the recession, and dropped steadily after the melt-down, to a low of 62.9% in the 2nd quarter 2016. As of the end of the 3rd quarter this year, it sits at 63.9%, or about 5 points below the peak of a decade ago.
There are about 76.146 million owner-occupied housing units in the U.S. today. A five-percent swing in this number is a little over 3.5 million houses. In short, we’ve now “absorbed” the decline in starts, and structurally we’re more-or-less “over” the recession, and we’re simply not building enough new homes to meet the demand.
Several consequences came out of the melt-down. First, developing land takes quite a few years — five or more in the “hot” areas like Seattle, where land has to go thru a permitting and entitlement phase long before a house can be built. All of this requires land planners, both in the private sector and downtown at the county or city hall. Many of these folks lost their jobs during the 2008-09 period, and indeed some county and city planning offices were eviscerated. New home development frequently requires a significant outlay in public infrastructure, including schools, roads, and utilities. Worse than that, many construction trades were gutted, with no replacements available. Financing for acquisition, development, and construction is now problematic (although, arguably, it was too liberal pre-recession).
As such, it’s a sellers market for homes, and in hot markets, buyers compete by bidding up prices beyond reasonable levels. Some pundits are nervous, and with good reason.
(Thanks to the U.S. Census Bureau for the October 31 data.)
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Tax Reform and Senior Housing
We follow some REITs at Greenfield, and in general REITs are having a lackluster year. REITs in general have outpaced the S&P 500 this year (though some have done very well), the goal is for a REIT to outperform its underlying net asset value, or NAV for short. NAV is the theoretical amount of cash the REIT would have if it liquidated its holdings at current market value. If the REIT management is doing well, or if the sector is expected to grow, then the REIT price should be higher, and should grow faster than NAV in anticipation of those future earnings.
Unfortunately, this has not been the case, particularly in some sectors. For that reason, health care REITs have backed off acquisitions a bit, since new acquisitions would be dilute current values. In their stead, non-REIT players (private equity, for example) are snatching up senior housing under the SWAG analysis that “hey, people are getting older, so senior housing is good.” Yeah…. Andrew Carle, a senior housing analyst quoted in a November 13 National Real Estate Online article by John Egan, notes that these new players may not be giving “proper consideration to market-specific dynamics.” That’s a nice way of saying they’re not doing their homework. This is not to say that senior REITs aren’t a good idea, but like every good idea, picking thru the produce rack for the best fruit is a must, particularly when you’re investing other people’s money. By the way, private equity accounted for 47% of senior housing deals in the first half of 2017, compared with about 10% done by public entities.
One of the “known unknowns” (to borrow from Donald Rumsfeld) is what will happen in Congress to taxes. One might think that lowering taxes is generally good for real estate, but that’s not always the case. Consider the Reagan tax cuts in the mid-1980’s. Market anticipated one thing, and the final bill had something else. In the end, much of the mistaken anticipation (for example, failure to grandfather certain deductible items) was one of the straws on the camel’s back that led to the S&L melt-down, FIRREA, the need for Fannie/Freddie oversight, etc. That said, just like the early 1980s, there’s a lot of private money chasing real estate deals. Let’s hope it all gets invested properly. Nothing beats good due diligence, analysis, and careful selection.
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The FED — “Everything Old is New Again”
Even though we’re both South Carolinians, I didn’t meet former FED Chair Ben Bernanke until 2004, when we were introduced at the American Economic Association’s annual FED luncheon in San Diego. He was, at the time, a member of the FED Board of Governors, a seat he would soon resign to become the Chair of President W’s Council of Economic Advisors, and shortly thereafter the FED Chair, succeeding the long-serving Alan Greenspan.
So now, somewhat in contrast, we have Jerome Powell nominated to be the new FED Chair. Like Bernanke, Powell will come to the job having served as a FED Governor. He also served in government, as Treasury Undersecretary, but spent most of his career in the private sector, most recently, intriguingly, at the Global Environment Fund, focused on specialty finance and opportunistic investments. After several years of Yellen and Bernanke, we tend to forget that many prior FED chairs came with significant private sector experience. Greenspan spent nearly his entire career on Wall Street, interrupted by a stint as President Ford’s Council of Economic Advisors Chair. Paul Volker before him had two long stints at Chase Bank, interrupted by a brief period in the Kennedy Administration as an Undersecretary of the Treasury. William Martin worked as a stockbroker at A.G. Edwards, Thomas McCabe was the CEO of Scott Paper, and William Miller was CEO of Textron.
Powell will be the 9th FED Chair since WW II, and most intriguingly, one without a degree in economics or finance. Yellen, Bernanke, Greenspan, and Burns all had doctorates, so we tend to think that’s de rigueur. Actually, it would appear that holding a Ph.D. in economics isn’t a prerequisite at all, and in fact of all of the FED Chairs in history, only those 4 held doctorates. McCabe, the first FED Chair after WW II, held an BA in economics. Martin, who succeeded him, studied Latin, originally considering a career as a Presbyterian minister. (Originally appointed by Truman in 1951, Martin served as FED Chair under 5 presidents, leaving office in 1970.) Miller, who served under Carter, was also a lawyer (and before that a Coast Guard officer) before joining Textron. The great Marriner Eccles, who served as Chair for 14 years under Roosevelt and Truman, had an undergrad degree and came out of his family’s business in Utah. (Intriguingly, this FED Chair who helped define Roosevelt’s New Deal was a registered republican. Go figure…)
So, why the history lesson? In part, to reflect on the fact that Powell may be one of the most mainstream appointments this White House has made. While FED chairs tend to have an agenda, the job tends to be somewhat more reactive than proactive. Consider the storm that Bernanke waded into, or the aftermath which Yellen has had to manage. Powell’s job will be to stay the course, which has been quite good the past few years. One tends to feel a bit sorry for him, recognizing that his will probably be an unenviably tough term of office.
(Footnote — Many will disagree with my comment about doctorates, and argue that Paul Volker had one. He did not. Volker held an MA in political economy from Harvard, and went on to do advanced graduate work in the subject at the London School but without the award of a degree, not that it appears to have held him back…)
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Housing…. overheated again?
“Home price increases appear to be unstoppable,” — a quote from David M. Blitzer, Chairman of the Index Committee at S&P Down Jones Indices, as quoted in a Tuesday article by Christopher Rugaber of the Associated Press, and featured on usatoday.com. Am I the only one who felt cold chills reading that?
C’mon, David, exactly how did that turn out last time? Prices, by the way, are headed up because money is still relatively cheap, demand is incessant, and supply is constrained. S&P, which is in business, among other things, of promoting their Case Shiller index, notes that buyers are in bidding wars. That index, released Tuesday, showed that house prices are up 6.1% from a year ago — well above inflation — and in 45% of the cities tracked, the house price increase has surged from a month earlier. In short, not only is the car speeding, it’s accelerating.
However, sales volume has fallen 1.5% from a year ago. That may not sound like much, but in a market that was already not at equilibrium, that’s economically significant. Plus, the number of homes for sale was down 6.4% from a year ago, to the lowest level since the NAR started tracking these statistics. Ever. In history.
Sigh….
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Retail?
The massive, annual orgy of shopping is just around the corner, and I’ll admit I’m worried. Let me share a bit of a story. I live in a pretty tony suburb of Seattle. I dare say I’m surrounded by conspicuous consumption. The Range Rover density in my corner of the world is embarassing. That said, the glass bowl on the Kilpatrick family’s upright mixer broke (first world problems, right?), so we ordered another one. Turns out, the quickest quickest way to get a replacement was to have it delivered directly to a nearby big-box (which shall remain nameless) so I wandered in to pick it up yesterday.
It wasn’t just the dearth of customers that disturbed me, but the dearth of sales staff. the shelves were reasonably well stocked (albeit, nothing holiday-esque yet) but the cashier stands were empty — all checkouts were directed to the customer service desk (I’m not kidding). I’ve frequented this store regularly, and while I don’t have a grasp of the seasonality of their business, my guess is that the shopping count was about half of what I had seen in there before.
Let me repeat that. About half.
Most economists have been looking for a pull-back (that’s a kind word for “recession”) sometime next year or the year after. The current leadership in Washington fails to note that increasing stock prices do not bely the onset of a recession. Indeed, Mike Patton had a great study of recessions and the stock market (measured by the DJIA) published in Forbes back in 2012 (click here for a copy). He studied 14 economic pull-backs dating from 1928 thru the most recent one. Intriguingly, in most cases, the market hit record highs immediately prior to the onset of each recession. In fact, in a couple of the recessions (particularly the one in 1945), the market continued to rise even during the economic trough. During the most recent kerfluffle, the market was behaving quite nicely, albeit with a bear trend, until the full onset of the recession.
I think there’s more to be learned about recessions down on Main Street than there is up on Wall Street. Right now, Main Street in my admittedly prosperous corner of the world is not as healthy as it was a year ago.
From a small northwestern observatory... 