As most of you know, a good magician shows you a trick but never tells how he does it. I recently read a few good books by Brad Meltzer (The Nazi Conspiracy and The JFK Conspiracy and Make Magic). In Make Magic (a short read), he says there are only four types of magic tricks and I think they all apply to Commercial Real Estate.
The four types of magic tricks:
- You make something appear (development)
- You make something disappear (demolition)
- You make two things switch places (re-tenant)
- You change one thing into something else (conversion: office to housing, etc.)
Let’s talk about a little magic that is going on in the economic markets. First, interest rates on Treasury bills are currently about 1.7% above their historic norm.
In an effort to bring them down, a couple of weeks ago the Fed cut rates by a quarter-point (25 basis points). Yet, as if by magic, the 10-year Treasury note rose by 2 basis points to 4.127% and the 30-year Treasury added 2.5 basis points to 4.745%. Hmmm…what happens if the Fed keeps cutting short-term rates, but long-term rates keep rising? The “tell” is that the bond market (long-term rates) thinks short-term rates lead to higher inflation, so they demand a higher return to offset the depreciation of their currency over time.
I think the Fed will be slow to cut rates until it senses inflation is under long-term control. This leads to the second magic trick, show-and-tell. As I have been questioning for over a year, it seems that (surprise!) the U.S. Government has been overstating job growth and then (when no one was looking) revised the numbers down to much lower. This has led to over a million fewer jobs than initially reported. This led to President Trump firing the head of the Bureau of Labor Statistics (BLS). The BLS jobs and inflation data are arguably the most important numbers the government compiles because the Federal Reserve relies on them to conduct monetary policy. But the problem is a much bigger problem than firing a single person at the top. The problem is that they compile their reports from voluntary surveys. Response rates to surveys are down 35% – let’s be real, who answers surveys from the mail, online or by phone? Maybe we should rely on Las Vegas oddsmakers which were the most reliable during the Presidential election. Otherwise, the BLS could just pick up the phone and call the IRS who already has a count of employer withholding data from paychecks twice a month. Or they could use the National Employment Report created by private payroll processor ADP. They handle payroll for about 20% of the nation’s workforce, but it tracks closely to BLS numbers.
Locally, unemployment headlines reported San Diego’s rate dropped from 5.2% to 5% last month. However, most of that was due to teachers going back to school. At 5%, we’re still above the national rate of 4.5%, but lower than California’s 5.8%. Still, San Diego’s unemployment remains near one of its highest levels in four years.
Nick’s Numbers
In the chart below:
- The blue line tracks the yield spread from January 1954 through today.
- The yield spread dips below zero when the short-term rate rises above the long-term rate. This is the inversion point.
- +1.21 is the point at which the probability of recession begins, as calculated by Fed economists. Yield spreads smaller than 1.21% predict successively greater probabilities of recessions one year forward.
We haven’t seen the recession that the yield curve indicated for this year. We now find ourselves in a trade war which is global and very disruptive to businesses at the moment, with jobs numbers yet to be impacted.
If you would like an analysis of your property’s value or discuss what you should be doing with regard to interest rates or inflation and their impacts on your business, tenants, or property, I’d be happy to talk. (Nick Zech, 858-232-2100, nzech@cdccommerical.com).
So, for the last of my magic show-and-tell, I am going to tell you about three things you may have already seen or used. But if you haven’t, I’m going to show you the trick and hopefully you’ll enjoy the magic. First, if you are a Costco member, make sure you download the app. You don’t have to carry your card anymore, your phone will let you in the store, and you can store your Costco Visa in the wallet section. More importantly, you can see store inventory availability of any product, as well as, if it is in another nearby store. Game changer! Second, download the Home Depot app. It automatically knows which store you’re in and when you search for an item, it tells you the aisle and bin number. No more running down an orange apron!
Lastly, check out https://weeksoflife.com. Given recent national news, it really does put life into perspective in a simple graphic way. Hope you enjoy this month’s story…
Show-and-Tell
I’ve been teaching now for about 15 years. I have two kids myself, but the best birth story I know is the one I saw in my own second grade classroom a few years back.
When I was a kid, I loved show-and-tell. So, I always have a few sessions with my students. It helps them get over shyness and experience a little public speaking. And it gives me a break and some guaranteed entertainment.
Usually, show-and-tell is pretty tame. Kids bring in pet turtles, model airplanes, pictures of fish they catch, stuff like that. And I never place any boundaries or limitations on them. If they want to lug it to school and talk about it, they’re welcome.
Well, one day this little girl, Erica, a very bright, very outgoing kid, takes her turn and waddles up to the front of the class with a pillow stuffed under her sweater. She holds up a snapshot of an infant.
“This is Luke, my baby brother, and I’m going to tell you about his birthday. First, Mommy and Daddy made him as a symbol of their love. Then Daddy put a seed in my mother’s stomach, and Luke grew in there. He ate for nine months through an umbrella cord.”
She’s standing there with her hands on the pillow, and I’m trying not to laugh and wishing I had a video camera rolling. The kids are watching her in amazement.
“Then, about two Saturdays ago, my mother starts going, ‘Oh, oh, oh!’” Erica puts a hand behind her back and groans.
“She walked around the house for, like an hour, “Oh, oh, oh!” Now the kids’ doing this hysterical duck-walk, holding her back and groaning.
“My father called the middle wife. She delivers babies, but she doesn’t have a sign on the car like the Domino’s man. They got my mother to lie down in bed like this.” Erica lies down with her back against the wall.
“And then, pop! My mother had this bag of water she kept in there in case he got thirsty, and it just blew up and spilled all over the bed, like psshhheew!” The kid with her little hands is miming water flowing away. It was too much!
“Then the middle wife starts going push, push, and breathe, breathe. They started counting, but they never even got past ten. Then, all of a sudden, out comes my brother. He was covered in yucky stuff they said was from the play center, so there must be a lot of stuff inside there.”
Then Erica stood up, took a big theatrical bow and returned to her seat. I’m sure I applauded the loudest. Ever since then, if it’s show-and-tell day, I bring my camcorder – just in case another Erica comes along.
- Annonymous