January 2018 Monthly Letter
“The reason that guru is such a popular word is because “Charlatan” is so hard to spell.”
~ William Bernstein
The word “Charlatan” is derived from the Italian word ciarlare which means “to babble”. One of the benefits of keeping ones eye on history is that you discover, more often than not, that the handwringers and doomsayers are usually wrong.
On January 1, 2018, it has become officially illegal to sell the original “bright idea” in California. The incandescent bulb, innovated by Thomas Edison more than a century ago, is banned in the Golden State and will be in the rest of the U.S. in 2020. While the light goes out you will now be able to “light up” that is, recreational pot will be legal in California as of January 1. In the meantime, the birthrate is so low in Japan and the boom of seniors so high, that adult diapers have out sold baby diapers for the last 6 years running. What is coming of this world . . .
With that random assortment of facts, here is my “charlatan” list of predictions, musings and other babble that you should keep an eye on for 2018;
- Voicification of the internet (hello Siri, Cortana, Alexa, Google home, etc.)
- North Korea – no easy happy ending.
- Continued meltdown in Hollywood.
- Interest rates – up.
- Fraternities/Sororities – crash (where else is the raunchy behavior of Hollywood, DC, media taught).
- Bitcoin – see tulip mania.
- Labor cost – biggest pressure on business & inflation.
- Inverted yield curve – watch out recession, here we come
- Pension meltdown – read the children’s book “The King has no clothes”.
- NFL players accept a tax which is used to pay for cameras on every law enforcement officer – instant replay in the hood.
- Disney buys CNN – ATT merger goes through with Time Warner.
- New network big three – Disney, Netflix, Google.
- Healthcare turmoil continues – only solution is Siri & Alexa providing .99¢ diagnosis when you lick your phone screen.
- Syria – the real U.S. – Russian showdown.
- Movie theaters offer scent, shake, wind – something you can’t get from Netflix.
- Artificial Intelligence – it is real, it is coming and will be part of your life like the internet and cell phone.
Did you know that the Federal government owns or leases 5,066 bathrooms occupying nearly 1.7 million square feet of the governments 1.9 billion feet of office space? Forty-five of them are listed as historic landmarks (really what makes a bathroom historic?). Uncle Sam owns 16,570 parking lots, 17,000 warehouses, 766 hospitals, 2427 schools. Billions are wasted on unused or unneeded Federal property. Once the government owns something it becomes costless because it is off the books. This is a huge lost opportunity cost. Many of these properties can be turned into apartments & offices. Redevelopment instead of paying for upkeep of old empty buildings. This is like the government’s ownership of the wireless spectrum which they started to auction off in 1994 – a move that added nearly $60 billion to the Treasury and gave us Wi-Fi and cell phones.
Early reports of Christmas sales were very positive with Mastercard reporting shoppers spent over $800 billion during the season, more than ever in history!
While retail sales have boomed, the material impact of the internet on the shopping center has continued to evolve what is or is not a successful tenant roster. Electronic stores, department stores and clothing stores have given way to restaurants with live music, escape rooms, urgent care facilities, gyms. The internet hasn’t killed the shopping center, but it is changing its tenant mix.
In San Diego, the unemployment rate has dropped to a low 3.7%. The USD Burnham-Moores Index of Leading Economic Indicators for San Diego rose in September and October. The outlook continues to be positive but slower growth through most of 2018. Two things of interesting note; (1) 16 to 17% of San Diego tenant businesses work from home (Inside Prospects), 2) In 2017 in California 105,000 more people moved out of CA then moved in – this is never a good sign.
Many have asked about my take on the new tax reform and its effect on commercial real estate. Well here you go…Depends;
- Depends on what the corporations do with their repatriated money.
- Depends on what the millennials do with the $1000 – $5000 less taxes they will be paying.
- Depends if the new pass through tax deduction really works in real estate LLC’s.
- Depends on how much impact the $750,000 max loan interest deduction has on housing (because the housing industry feeds commercial space needs – office – industrial – retail).
- Depends if real estate investors/developers start using carried, interest structures more since it wasn’t eliminated.
I recently read that there are three common factors in those that live to be over 100 years.
#3 – genes – but not as big a factor as you would think.
#2 – lifestyle – not smoke, not fat, exercise, preventative testing & screening.
#1 – the number of people you love in your life! – by far the single biggest factor.
We wish you a Happy New Year and a long and prosperous life and may you also find that the technology in your life makes it easier and happier… I hope you enjoy the story.
A toothpaste factory had a problem. They sometimes shipped empty boxes without the tube inside. This challenged their perceived quality with the buyers and distributors.
Understanding how important the relationship with them was, the CEO of the company assembled his top people. They decided to hire an external engineering company to solve their empty boxes problem.
The project followed the usual process: budget and project sponsor allocated, RFP, and third-parties selected. Six months (and $8 million) later they had a fantastic solution – on time, on budget, and high quality. Everyone in the project was pleased. They solved the problem by using a high-tech precision scale that would sound a bell and flash lights whenever a toothpaste box weighed less than it should. The line would stop, someone would walk over, remove the defective box, and then press another button to re-start the line. As a result of the new package monitoring process, no empty boxes were being shipped out of the factory. With no more customer complaints, the CEO felt the $8 million was well spent.
He then reviewed the line statistics report and discovered the number of empty boxes picked up by the scale in the first week was consistent with projections, however, the next three weeks were zero! The estimated rate should have been at least a dozen boxes a day. He had the engineers check the equipment, they verified the report as accurate.
Puzzled, the CEO traveled down to the factory, viewed the part of the line where the precision scale was installed, and observed just ahead of the new $8 million-dollar solution sat a $20 desk fan blowing the empty boxes off the belt and into a bin.
He asked the line supervisor what that was about.
“Oh, that,” the supervisor replied, “Bert, the kid from maintenance, put it there because he was tired of walking over every time the bell rang.”