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Finance and economics generally focused on real estate

Archive for the ‘Inflation’ Category

Trump’s Tax “Reform”

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Mark Twain is usually — and incorrectly — quoted with the phrase “No man and his money are safe while Congress is in session.  (The actually quote goes to 19th century NY politico Gideon Tucker, but I digress.)  There’s little to be said, in general, about TheDonald’s proposals yesterday, simply because there’s little substance to analyze.  However, I’m old enough to remember the last tax overhaul, in the early stages of the Reagan administration, and perhaps I can offer a few observations.  I’ll limit my mental meanderings to real estate for now.

First, the Reagan tax re-hab (the 1986 Tax Act) was a disaster for real estate investing, particularly at the individual, atomistic investor level.  One of the “loopholes” to be cured was the elimination of deductibility of passive losses on real estate investments.  The real estate community reluctantly supported the tax act, in trade for increases in the deductibility of home mortgage interest and a guarantee that passive losses on then-existing real estate deals would be grandfathered.  Indeed, in the run-up to passage, there was a flurry of investing (by Main Street USA folks — the kind of folks who still, amazingly, support Trump) in just such “grandfathered” investments.  At the last minute, the grandfathering was removed, costing Main Street USA investors tons of alternative minimum tax payments on now-sour investments.  Some pundits suggest that this grandfathering-revocation, alone, led to the downfall of the Savings and Loan industry, but that excuse is a bit to simplistic.  It did, however, shut down the time share industry for a while.

Today, according to news reports, single family residences are enjoying record demand (which may or may not be good news).  The hottest market is among first-time buyers, and the demand is greatest among starter homes.  The Trump proposals would double the standard deduction for a married couple filing jointly.  While, on the surface this seems like a good idea, it will drastically shrink the number of tax payers who itemize mortgage interest and property taxes.  In short, for the biggest tranche of homebuyers, the biggest differentiation between ownership and renting would be effectively removed.  As a guy who invests in rental property, that’s nice, but the home building industry won’t react well.

Otherwise, I don’t see lowering the marginal tax rate on corporations as having much of an effect on real estate investing.  For one, most of those projects are either done thru tax-advantaged REITs or thru other pass-thru entities, like partnerships and LLCs.  Even if it did, the demand / supply of investment grade real estate depends on other factors, and slight changes in the tax rate may have an impact on the debt/equity mix, but not on the aggregate output of new commercial construction.  The ONE area most affected will be low income housing, which is funding in no small part by tax credits.  The value of those credits will be slashed, requiring a complete re-thinking in the finance side of low income housing.  The last time such a tax cut went into effect, it was a real mess for low income housing.

If I was the government, and I wanted to create good paying construction jobs, I’d embark on a long-term infrastructure redevelopment plan.  That would probably require actually raising tax rates a bit, but would have marvelous returns on investment for middle America.  But that’s just me….

…and the next thing…

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I’ve been critical of the current occupants of the White House, and particularly their apparent naivity about the economy.  One might falsely surmise from my criticism that I’m a raging lefty.  I would rejoinder that competence knows no political stripes.  That said, I would note this morning that an economist from two leading conservative think tanks also expresses skepticism over The Donald’s trade policies.

The conservative bona fides of the Club for Growth and the Heritage Foundation are beyond question.  The former bills itself as, “…the leading free-enterprise advocacy group in the nation,” while the latter is lead by former GOP Congressman and Tea Party stalwart Jim DeMint, from my former home state of South Carolina.   Stephen Moore, a Heritage economist and co-founder of the Club for Growth, appeared on CNN’s Party People podcast, and said, “On trade, I think he’s playing with fire here.”  He went on to say, “And I think the idea of a tariff against Mexico is a terrible idea.  I think it would hurt Mexico a lot, and I think it would hurt American consumers as well.  We don’t need a trade war with Mexico.”  He did, however, give a tentative pass to The Donald’s attitude toward China, noting  “I kind of approve of some of the things he’s doing on China.”

Full disclosure here — I don’t necessarily agree with Moore on every point he makes.  Moore invokes the legacy of Harry Truman, and says that Truman got off to a rocky start but learned the Presidency quickly.  I would beg to differ on the validity of Moore’s analogy.  Truman had held significant local office in Missouri, was an Army Reserve Colonel, and was late in his second term as a Senator when the nod for the VP job came along.  The Truman Committee in the Senate, during the war years, provided extraordinary oversight to the conduct of the war and investigated every aspect of government management during the several years he was chair. As such, Truman was probably the most prepared person to assume the presidency available at the time.  (Many would have preferred South Carolina’s Jimmy Byrnes, but Byrne’s record on segregation would have made him a tough sell.)

Any “rough start” to the Truman presidency had to be taken in the context of inheriting a 2-front war, an atomic bomb, the beginnings of the cold war, massive demobilization, turning the American economy from war production to consumption, open rebellion from two wings of his own party (the Dixiecrats under Thurmond and the Progressives under Wallace) and devastation around the world.  The Donald, on the other hand, has inherited a stable, growing economy, no inflation, low unemployment, and a loyal majority in both houses of congress.

Ahem….  If The Donald screws this one up, it’s all on him.

Written by johnkilpatrick

February 14, 2017 at 7:19 am

Strong vs weak dollar

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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.

Written by johnkilpatrick

February 10, 2017 at 11:12 am

Unilateral tariffs

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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…

  1. Any tariffs on imports from Mexico will be born, 100%, by American consumers, and generally those at the bottom tier of the consumption curve.
  2. It pisses off our one of our two nearest trading partners, and will undermine our relations with the other one.
  3. It opens the door for China to create and expand a hedgemony in the Pacific Rim….
  4. …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).
  5. 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???
  6. 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.
  7. Google “Smoot Hawley Tariff Act of 1939” and see what you get.
  8. Unilateral shifts in complex demand curves are theoretically unsupported (OK, that one requires a bit of graduate level econ, but bear with me here.)
  9. 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).
  10. Oh Christ it’s such a stupid idea….

Written by johnkilpatrick

January 26, 2017 at 3:42 pm

Posted in Economy, Finance, Inflation, Uncategorized

Tagged with , , ,

Merry Christmas to all!

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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!

Written by johnkilpatrick

December 27, 2016 at 11:12 am

Livingston Survey

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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!

December’s Livingston Survey

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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.