The Economy: The U.S. economy appears to be powering ahead with unemployment at a 48-year low. There are more jobs available than there are job seekers to fill them. Average hours worked are up; construction spending is up; manufacturing is up; factory orders are up … the list goes on. Economic strength continues to give the Fed leeway to raise rates. Another 25 basis point (1/4%) hike in June is a given. The longer Powell is at the helm of the Fed, the more observers believe that he’s cut from different cloth than we saw with Greenspan, Bernanke or Yellen. Some observers liken Powell to former Fed Chair Paul Volcker. It was Volcker who trounced inflation in the early 1980’s with interest rates in excess of 20%. The economic pain of Volcker’s reign was enormous. But it ended an inflationary cycle that threatened to spiral out of control. It also laid the groundwork for the robust expansion of the 1980s and 90s. The stock market took off with Volcker and has never looked back. The rocket ride accelerated with Greenspan. … almost 40-years of stocks and real estate going up with only the occasional pause. No wonder my doctor friend blithely talks DOW 100,000 as if it’s already here. The trick for Powell will be to keep the good times rolling while simultaneously taking away the moonshine punchbowl of free money.
Food for Thought: The “China Card” is huge; whether you’re talking politics, military or socio-economic. Check out today’s “Video of The Week” below for a compelling take on why culture may limit China’s rise. Then look at how San Diego,riding the crest of a building boom, has about $3.5 billion in downtown projects underway. Papa Doug Manchester’s Pacific Gateway project represents $1.5 billion or 43% of this amount. The Gateway project is the redevelopment of the 12 acres near the Broadway Pier. That aside, housing units are driving much of the building boom as the urban lifestyle is attracting both working folks and retirees. Prices reflect the demand with higher prices the norm. Downtown is happening. While the Gaslamp draws tourists, San Diegans are flocking to Little Italy for its charm, restaurants and the weekly Saturday farmers market.
The Economy: The CPI and PPI prints were hotter than expected and have helped to juice the stock market indices to a 50% rebound. The feel good mood has been further enhanced by the Olympics. Winners all. Inflation indicators watched by the Fed are are heating up. … and bond vigilantes seem to be on the loose with interest rates accelerating higher. As has always been the case, the Fed will follow the markets. There are few consumers who remember interest rate hikes that crimp economic activity. Fewer still who remember being priced out of a home or auto loan because interest rates moved against them. … remember when an 8% home mortgage was to die for? How many real estate players could handle those metrics today. How about those halcyon days of 16% home mortgages? Fun!
Food for Thought: Annuities and life insurance have evolved in ways that work well with investors seeking income or the possibility of establishing an estate. In specific situations they may be a prudent investment for retirees. Contact us if you have questions about creating or supplementing your retirement income.
Music of The Week: Sade’s “Lovers Rock”
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The Economy: All systems are go on a global economy that shows signs of continuing to expand. Easy money from central banks remains the order of the day. Trump tax cuts and deregulation have bolstered business confidence. The holidays showed Americans on a spending spree. Naysayers see the band on the Titanic bravely playing as she went down. Optimists see hundreds of billions in repatriated US corporate profits, tight labor markets, inflation and Trumponomics as the next leg up in the economy and the 9-year bull market in stocks. Ray Dalio of Bridgewater has called this a new bear market in bonds as Jerome Powell was confirmed by the Senate as the new Fed Chair. Powell is seen as dovish and a continuation of the Bernanke/Yellen school of gradualism in monetary policy. But it pays to remember that markets tend to drive the Fed and not the other way around. Interest rates are rising. Gold has broken through its $1,300 resistance and oil is at multi-year highs. With global expansion, investors are complacent that central banks will keep stock markets and real estate moving up forever.
Food for Thought: Davos, billed as the Global Economic Summit is in full swing. Over time it has morphed into another rich kid’s confab with the glamorous and notorious. It is known as the Bastion of The Globalists. This year Donald Trump will upset the apple cart as he presents America First Shock and Awe with his appearance and speech on Friday. The annual ego rush of whose private jet is bigger will be sadly missing Prince Alwaleed’s private 747 with the gold throne. The Prince is apparently still confined by his King who reportedly wants billions in return for a kiss-and-make-up return to business as usual.
Music of The Week: Chaka Khan “Chaka”
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The Economy: The new year is off to a roaring start with tax cut optimism leading the charge. Corporate profits held overseas, estimated in the hundreds of billions, are expected to be repatriated. Stock markets are salivating at the expected new surge in buybacks. Talk from Bulls is that the new round of buybacks will dwarf anything ever seen in history. Bulls anticipate that buybacks will dramatically reduce the number of shares outstanding. Their call is that this is only one of many events that will drive stock prices to dizzying new heights. Small business optimism is at a 32-year high; highest since 1985.
Food for Thought: San Diego feels like a boom-town. Free money, surging stock prices, the Pentagon’s “Pivot to the Pacific”, the hi-tech/med-tech sweep, construction buoyancy and the torrential real estate market have hundreds of thousands of San Diegans walking on air. We toured a new development of $2+ million tract homes that was sold out in record time. Yards small enough that some would call them garden homes and built so close together that you have to hold your breath in order to squeeze between them, real estate bulls are saying they’ll be worth $5 million in just a few years. Bitcoin up 300+% in a few weeks has taken a breather recently. Bitcoin Bulls tout a value of 50,000 to 100,000 in its next run. Jamie Dimon says he regrets calling Bitcoin a fraud. Investor euphoria appears to have arrived.
Music of The Week: Beegie Adair’s “Martini Lounge”
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The Economy: “Synchronized Global Expansion” remains the bullish buzzword with 45 countries expanding in lock-step. This is a first in 50-years. Central bank liquidity programs and global debt are fueling the growth. The front cover of The Economist says it all, “The Bull Market in Everything.” Stocks, bonds, real estate, alternative investments, art, wine, automobiles, chopsticks. Everything and the kitchen sink has gone vertical and defies gravity. The relentless upward thrust makes the North Korean missile shoots look boring by comparison.
Food for Thought: Back in the day when there were economic cycles and price discovery, investors looked for nuggets in value or special situations. Today, the bull market steamroller has overruled causality and flattened every bear in sight. Thoughts of correction are dim; of a market crash, non-existent. Cowabunga!
Music of The Week: Shania Twain’s “Now”
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The Economy: The news has been all about the Fed. Trump made it clear during the election that he wanted to remake both the Supreme Court and the Federal Reserve. Word is that Randy Quarles will be Trump’s nominee as Vice Chair and the Fed’s Bank Supervisor. He comes from the private equity/private investment world. Quarles is considered to be a conservative counterweight to Yellen. Quarles would bring a fresh perspective to the Fed which has become dominated by academicians with little real world experience. Speculation has also focused on replacing Fed Chair Yellen in 2018. Trump’s Fed Chair nominee is expected to be National Economic Council Director Gary Cohn. Cohn comes from the investment banking world and would be the first Fed chair in 40-years who isn’t an economist. Within the Trump administration this is viewed as a plus since Trump wants practical experience over academic credentials. The downside is that Cohn is another Goldman Sachs alumnus; all of whom are detested by Trump’s core followers. Regardless of the accuracy of these reports, it’s obvious that Trump is determined to put a different Fed in place. A Fed that is more oriented towards pro-growth real world experience.
Food for Thought: Whenever we get out in the economy we’re impressed with how robust it looks. Restaurants are packed with diners day and night. Real estate continues to appreciate. New cars flood the streets. Everyone seems to be taking extended vacations. Yet in her Congressional testimony today, Fed Chair Yellen was surprisingly dovish. She expressed concern that inflation was below expectations and implied that the economy wasn’t performing as well as expected. Financial markets loved this narrative as it indicated that Yellen would keep her highly stimulative policies in place rather than continuing to turn off the spigots. But sooner or later the stimulus must end. It’s the human condition to project the recent past into the future; to assume that the future is going to unfold like the past. So it’s always interesting to hear a well-respected figure like Jamie Dimon, CEO JPMorgan speak candidly about the ongoing change in monetary policy. Commenting on the Feds move to end 8+ years of stimulus, he said, “We act like we know exactly how it’s going to happen and we don’t.”
Music of the Week: Josef Franz Wagner’s “Across the Pond”
The Economy: Consumer confidence surged; Everything home-building looking positive. The US continues to post impressive economic numbers. Though nay-sayers shout “Fake News” with every number that’s posted. All news is good news with individual investors finally beginning to pour money into stocks. Brexit, Trump, the rise of populism, the assault on globalism, immigration and the environment are no reason to slow financial markets still feasting on $200 billion a month in central bank stimulus. Repealing and replacing Obamacare was to provide billions in tax savings. Those savings were to be factored into the overhaul of the tax code. The narrative was that passage was a slam dunk. The subsequent fail produced a new narrative that Tax Overhaul would sail through regardless. Markets were thrilled that billions in lost tax savings no longer mattered. True to form, a massive rally followed the fail.
Food for Thought: The Trump phenomenon continues to unfold in stark black and white. Love him or hate him he is a phenomenon. Polarizing in the extreme, he’s brought out the worst in many. The main stream media (MSM), Hollywood, the UN, NATO and foreign governments seem to be the most shocked. Sacred Cows everywhere are in retreat. All concerned are becoming aware that POTUS is a brawler who enjoys taking the fight to the street. As a businessman The Donald understands that the best way to gut a program or department is to decapitate administration and cut or curtail funding. No money, no staffing, no decisions, no activity, no continuation of programs outside the Trump Agenda. Brilliant or Brutal depending on your persuasion. How this ultimately plays out is anyone’s guess. How the financial markets respond is also anyone’s guess. With the stroke of a pen, Trump is undoing decades of U.S. policy and redirecting national priorities and resources. Markets continue to treat these unprecedented events as a win for all sectors of the economy. The prime example is Climate Change. The administration’s position is, “We’re not going to spend any more money on that.” Yet the response of financial markets is that the trillions invested in this sector are going to continue on the same growth trajectory as when they were darlings. Reminds us of PT Barnum’s “There’s a sucker born every minute.”
Music of the Week: Jack Johnson’s “Jack Johnson”
The Economy: The Holiday Cheer keeps coming. Last week it was Happy Holidays! It’s all good: Home prices up 5% year over year. The U.S. economy expanding at the fastest pace in 3-years. Consumer confidence far above expectations. This week it’s Happy Holidays Again!! It’s all good again: ISM non-manufacturing index rose to 57.2 in November; above consensus. October factory orders rose 2.7% also above expectations. Durable goods posted a 4.6% increase once again above expectations. JOLTS revised higher. The incoming administration has a Santa Bag full of action items to move the US in new directions: Obama Care, immigration, deregulation tax code, infrastructure, trade, education, defense, foreign policy. Financial markets have priced in immediate passage and implementation of every utterance. What comes out of the sausage making we call the legislative process, is anyone’s guess.
Food for Thought: Rock On! Markets have been on a roll since the Trump election. This has the feel of a Triple: Post election relief rally, Year-end performance chasing and the traditional Santa Clause rally. Trump supporters have the stage as they advocate a sea change. Hillary fans continue the fight with promises of disruptions in the Electoral College. I’m all for Dedication to The Cause but that’s why we call tilting at windmills Quixotic. After 2-years of flat returns, stocks have jumped to new highs in the past 4-weeks. The markets took 3-days to shake off-Brexit, 3-hours to shake-off the Trump election and 3-minutes to shake-off the Italian election. We’re on track for the next event to have 30-seconds of impact. Complacency Rules so remember Icarus and don’t fly to close to the sun. Have a Great Holiday!
Music of the Week: Dean Martin’s “A Winter Romance”
The Economy: The U.S. economy is continuing on its path of sluggish growth. Once you dial-out the incessant noise you find that there’s been little change in trajectory. The End-of-The-World spasm that we saw with Brexit has been replaced with the usual complacency that central banks will provide additional trillions in debt to keep the global economy moving forward. Yet the Central Bank Follies are dwarfed by the global political circus. It’s May Day in Great Britain as the first woman PM since The Iron Lady, takes the helm. The Chinese claim to the South China Sea was slapped down by The Hague; a first step to internationally sanctioned military action. Our apolitical Supreme Court has jumped into Presidential Politics with one Justice proclaiming that The Donald is unfit to be President. In short, it’s business as usual.
Food for Thought: We continue to advise you to trust your personal experience as a guide to the direction of the economy. From a top-down perspective, the global economy appears to be slowing. Global stock markets are rallying in anticipation of increased central bank stimulus. To us, this is akin to giving a heroin addict more heroin. Though some indices have rallied to new highs, we find it noteworthy that many individual stocks and mutual funds have not participated in the party. For example: Citigroup is down 28% from its 2015 high; Boeing down 18%; Walmart down 19%. We remain cautious and advise taking profits. Restructuring your portfolio may be a prudent move.
The Economy: Recent economic data has been like the weather in Indianapolis: If you don’t like it, wait a couple of minutes and it’ll change. Conflicting data continues to point to a slowly expanding US economy. 7-years into this same slow motion movie and you have to ask, “What next?” Global Central Banksters have given us more than 600 interest-rate cuts and $12 trillion of asset purchases during the past 7- years. With the latest meetings of the ECB and the Fed, the answer is more of the same. Events
outside of our borders are now dictating the course of Fed policy despite the fact that within our borders the economy has demonstrated that removal of monetary accommodation is overdue. Today it was reported that bonds yields of Sanofi, the French pharmaceutical company, and Royal Dutch Shell have turned negative. This is nonsense.
Food for Thought: We’ve had five years of a bull market in the San Diego commercial real estate rental market. Now it may be over. 2016 has seen office space availability increase dramatically. Year to date, 570,000 square feet of office space has come on the market. This is in addition to the 360,000 square feet of space vacated by Qualcomm in 2015. This supply does not include new construction. Rather, it is due to slowing demand and additional space becoming available in existing buildings. In addition, many start-ups are beginning to struggle and their deaths will add more inventory to the market in 2016. The maturing demand for office space is expected to limit rent increases. While the tenants market of 2009 is still in the future, the landlord’s market we’ve seen for the past 3-years is over. The exception to this scenario is Downtown’s Class A buildings. That market is hot with limited availability. However, the offshoot is that rents in Class B and C buildings, some of which are functionally archaic, are under pressure.
Music of The Week: Susie Arioli’s Album “That’s for Me”