Archive for the ‘Finance’ Category
Strong vs weak dollar
Ahem…. this may or may not be the truth, but in the words of my fellow Low-Country South Carolina expat, Stephen Colbert, it’s certainly “truthy”. Reportedly, according to Huffington Post, The Donald called his national security advisor, Flynn, at 3am, to ask whether a strong dollar or a weak dollar was good for the economy. Reportedly, Flynn told The Donald to ask an economist. Since then, economists of all stripes have offered advice, because, well, this is important stuff for a President to know, along with “war is bad” and “full employment is good” and stuff like that.
So, here we go. I’ll take a stab at it. Whenever the world roils, investors of all stripes look for stable currencies in which to invest, and the dollar is the “mother of all stable currencies”. Until Brexit, the same could be said of the Euro and the Pound. Now, not so much. Anyway, paradoxically, the election of The Donald roiled the world’s zeitgeist, causing investors to seek the dollar, and thus strengthening our currency. Now, what’s the impact? Well, a strong dollar makes it tough to export stuff, but it makes it easy to import stuff. That wrecks the trade imbalance, and costs jobs in exportive industries. Conversely, a weak dollar suggests lack of faith in the American economy, but helps with American jobs, albeit makes American consumption more expensive.
ALSO, a strong dollar makes it easy to borrow. As America runs deficits (both fiscal and trade), we have to borrow and much of this borrowing occurs in foreign markets. Conversely, a weak dollar drives up the cost of borrowing.
In short, if The Donald wants to bring American jobs home, he’ll opt for a weak dollar, but that will inevitably drive up the cost of consumption as well as the cost of borrowing. Ironically, the way to achieve a weak (or lets say, “less strong”) dollar is to achieve some sort of stability in the world, and that doesn’t seem to be in the offing.
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Economic Baseline
I just returned from a hectic several days in NYC. I have to tell you, the vibrancy of the Big Apple never ceases to amaze me. Then again, I was in Lexington, KY, week-before-last, and the core of downtown is alive with new construction. (My darling wife speaks fondly of the Kilpatrick Index of Economic Activity, which is the number of high-rise cranes I can see from my office window.) I was in Atlanta a week ago, and saw much the same, particularly in the tony suburbs of Cobb County. My own main base of Seattle is awash with new construction.
Bottom line — America is actually working pretty well right now. Unemployment is well under 5%, which is an amazing level for a developed economy. Goldman Sachs tells me that global GDP growth should be in the 3% to 3.5% range in the coming year (where it’s been for the last 5 years) driven in no small part by a healthy U.S. economy. According to tradingeconomics.com, U.S. GDP growth was 3.5% in the 3rd quarter of 2016, and is expected to come in at 1.9% in the 4th quarter. Again, for a developed economy, these are not bad numbers.
One great measure of the health of the job market is the Gallup Job Creation Index, which is a weekly survey of 4,000 working adults. It takes into account both job growth (at the respondents workplace) as well as anticipated job shrinkage. The index bottomed below zero in 2008-09, but has steadily increased since then, and now stands as high as it has since the index was started in early 2008. Inflation has been nearly non-existent for the entire century.
I point all this out, because this is the economic baseline that the Trump Administration takes over. This is what they argue they will improve upon. I don’t doubt that there are corners of the U.S. that aren’t on the same economic plane, and I would concur that we, as a nation, should direct attention in those directions. That said, for the nation as a whole, things are going quite well. Most of us in business have seen the flow chart that starts with the question, “Was it broken?” and asks, “yes” or “no”. If no, then it asks, “did you mess with it?” So, here we are, with an economy that, by and large, works pretty well for most people. Let’s see how this works out…… I’ll keep you posted.
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Unilateral tariffs
It occurs to me that a few people might not understand why unilateral tariffs against Mexico might be a suicidially bad idea, the global equivalent of “Hey, hold my beer while I try this!”
Here are a few random reasons, just off the top of my head, why this is an amazingly stupid idea… in no particular order…
- Any tariffs on imports from Mexico will be born, 100%, by American consumers, and generally those at the bottom tier of the consumption curve.
- It pisses off our one of our two nearest trading partners, and will undermine our relations with the other one.
- It opens the door for China to create and expand a hedgemony in the Pacific Rim….
- …which, in effect, nullifies the Monroe Doctrine (3 & 4 being the most devastating problem — no one in the Pacific Rim will trust us ever again).
- Since the left coast of our country is vitally dependent on Pacific Rim trade, it’s…. well… I’ve already used the word suicide. Given that Washington, Oregon, Hawaii, and California didn’t vote for Trump, why does he care???
- We export zillions of things (trucks, airplanes, software, indie movies, timber, building products, video games, wine — just to name the things that come from MY ZIP CODE) to the Pacific Rim. Kiss those asses goodbye.
- Google “Smoot Hawley Tariff Act of 1939” and see what you get.
- Unilateral shifts in complex demand curves are theoretically unsupported (OK, that one requires a bit of graduate level econ, but bear with me here.)
- On a practical level, I can now import anything I want from El Salvador at a price 1% higher than I previously received from Mexico. Thus, I’ve simply baked in a 1% consumer inflation to be borne entirely by folks who shop at Wal Mart (see #1 above).
- Oh Christ it’s such a stupid idea….
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Mueller’s Market Cycle Monitor
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.
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Merry Christmas to all!
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!
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FED raises rates — now what?
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.
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Livingston Survey
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!
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How many homes do we need?
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.
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A great little September
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….
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December’s Livingston Survey
The late columnist Joseph A Livingston started surveying economists about their forecasts back in 1946. It’s the oldest continuing survey of its kind, and is continued twice a year under the auspices of the Philadelphia Federal Reserve Bank. One of the neat things about this semi-annual report is that it compares the current central tendency of projections to the projections which were being made six months ago. In short, we can directly compare how economic forecasts are changing over time.
One of the biggest shifts is in the GDP growth rate for the 2nd half of 2015. Six months ago, economists were projecting that we’d end the year with a modestly healthy 3.1% annual rate of growth. Now, economists are forecasting we’ll end the year at about 2.1% — a fairly significant shift in sentiment. Similar declines in GDP growth are projected for 2016. Check my prior blog post about the 12th District report on the western economy, and particularly the impact a stronger dollar is having on the export market.
The good news — and it’s slight — is an improvement in the projections about unemployment. Six months ago, economists were forecasting we’d end the year with an unemployment rate of 5.1%. This has now been revised downward, ever so slightly, to 4.9%. Also, inflation continues to be dead-on-arrival. From the end of 2014 to the end of 2015, the consumer price index is projected to rise only 0.1%, in line with prior forecasts, and the producer price index is actually projected to fall by 3.2%. Both indices are expected to swell in the coming year, but only slightly. The current CPI forecast for the coming year is 1.8%, and PPI is 0.7%. I’ll leave it up to the reader to pick a reason for this, but can you say “energy costs”?
Six months ago, interest rates were forecasted to rise. Actual increases are somewhat lower than previously forecasted. Six months ago, forecasters predicted we’d end the year with 3-month T-bill rates at 0.59%. In reality, the November 23 auction was at 0.14%, although rates are trending up in December (0.28% as of Monday) in anticipation of Fed rate increases. The current forecast is for 3-month rates to end the year around 0.23%, and for 1-year rates to end around 2.3% (down from the previously forecasted 2.5%). Forecasters currently predict 3-month T-bills will hit 1.12% by the end of 2016, and 10-year notes will end next year around 2.75%.
Finally, forecasters are asked to predict the S&P 500 index for the end of the year as well as the end of next year. Six months ago, the consensus forecast was an S&P level of 2158 for the end of the year, and this has now softened to 2090. (It’s helpful to note that the S&P opened just under 2048 this morning.) Forecasters currently project the S&P will hit about 2185 by the end of next year, which is an anemic growth of 4.5% over the coming 12 months.
If you’d like your own copy, which includes much more detail on these forecasts, you can download it for free here.
From a small northwestern observatory... 