Lead Story… To say that the past few days have been a shit storm in the fixed income market would be an understatement. As I wrote last week, we’ve spent the past 6 or-so years becoming conditioned to believe that every major financial or geopolitical disruption would result in a flight to quality trade into US Treasuries, lowering borrowing costs for real estate. Last week’s surprise election result obviously broke that trend and, even the few people out there that got the election result correct mostly got the bond market response incorrect. As such, are now in a position where things could dramatically change in the lending market which would obviously have profound implications on real estate in general and housing in particular. Interest rates are already up substantially as talk about potential tax cuts, a mountain of infrastructure spending and de-regulation of mortgage markets abounds. What seemed to be a grindingly slow and somewhat boring market just a couple of weeks ago is now changing rapidly, leaving some worried and others excited.
But here’s the thing: no one really knows what this new administration is going to look like in terms of economic or housing policy or how it will interact with a congress that, although of the same party was often hostile towards the President-elect during the election. Political campaigns have become little more than 2 years of mudslinging and bullshit and the one that mercifully just finished was far worse than most. Markets appear to be jumping to the conclusion that it’s going to be easy for everyone on the right side of the isle to simply come together after all of their inter-squad fighting and slam through broad changes. This line of thinking largely discounts that there is a very narrow majority in the Senate while disregarding the fact that there are major, major disagreements on key issues between the incoming administration and legislative branch. Maybe they suddenly come together and do everything that market participants seem to believe they will, leading to higher inflation. Maybe they don’t. The fact is that we simply don’t know at this point.
Oaktree’s Howard Marks is one of the most brilliant and successful investors in the world. His response to the election and policies that may or may not be enacted in the next 4 years is something that everyone should read. From Financial Review (emphasis mine):
“I am in the ‘I don’t know camp’. We should not rush to conclusions,” the founder of $US100 billion ($131 billion) fund manager Oaktree told the audience at the Sohn Hearts & Minds Investment Leaders conference in Sydney on Friday.
“On paper he should be a pro-business president and objectively speaking he should be more pro-business than Hillary Clinton would have been,” Marks said, but added he will be watching to see which policies Trump will pursue and will be able to pursue and who he appoints.
“He said lots of things people didn’t like but he said some supportive things for the business environment such as cutting taxes. The negative is his view on trade.”
Another positive is Trump’s pledge to invest in America’s infrastructure.
“It will be a nice thing and put people to work but I don’t think it will redirect the trajectory of the economy, but it’s a plus and something people can agree on.”
The rise of populism would become a feature of the US political and economic environment.
“The Trump candidacy didn’t make people angry – it touched on an anger and a division.”
“Globalization and automation has cut into jobs and is going to cut in further.”
He feared that sustained lower growth will be a challenge for the nation.
That’s one of the world’s most successful investors freely admitting that he doesn’t know what’s going to happen with the economy from a policy standpoint. If only all of the talking heads on the TV and internet could show such restraint….
The crux of the matter is this: infrastructure spending, tax cuts and financial de-regulation are all inflationary. Protectionist trade policy and tarrifs are deflationary. At this point, there is no way to tell whether the pro-growth or populist side will win out. There is a fine balance to be struck here. During the Bush administration, the regulatory pendulum swung too far towards de-regulation. The result was banks gone wild and, eventually the Great Recession / housing crash. Somewhat predictably it swung hard in the other direction during the Obama administration, leading to retulatory stagnation, a lack of bank credit and incredibly low interest rates. My hope is that the new administration and Congress ease up on regulation enough to get banks lending again but not so much that we go back to the bad old days of 2005 which was basically the lending equivalent of the wild west. IMO, we need policies that are more pro-growth but not at the expense of stability. To be sure, it’s a difficult tightrope to walk. We don’t know if it will happen or not but I’m remaining open minded until I know more.
Glass Half Full: Higher interest rates mean long term gain at the expense of short term pain.
Positive Trend: The prime working age population (ages 25 – 54) is finally growing again which should help to provide a positive economic tailwind. See Also: 40-somethings are the prime drivers of US productivity but no one really understands why.
Breaking Away? As you can imagine, a large portion of Silicon Valley was not happy with the results of last week’s election. Several tech titans got together and are now working on an initiative to put a referendum for California secession on the 2018 ballot. Here’s why that would be an incredibly dumb idea from an economic standpoint.
A New Direction? As I previously wrote, last week’s Election results have traders betting on more inflation in the near future.
Giving Away the Farm: Manhattan landlords are offering more concessions than ever due to an oversupply of available apartment units.
Virtual Reality: Some online retailers are turning to physical locations in an effort to connect with consumers better.
Paying Up: A post-election Treasury sell-off that resulted in higher mortgage rates has home affordability in the United States waning.
Bullish: While the nation as a whole may be divided, construction firms are quite bullish on the result of the presidential election.
New Direction? Silicon Valley is the poster child for the housing affordability crisis in the US. However, the election of several pro-development candidates in local city council races should be a positive for a region that has become so expensive that it’s not uncommon to see Tesla’s in trailer park driveways.
Chart of the Day
More sensitive than an America college student.
Here’s what happens to values when rates rise 1%
And here’s what happens to values when they fall 1%
Good Boy: A town in Minnesota re-elected a dog as mayor for a third term. In related news, if anyone asks me what leaders I admire I’m going to direct them to Duke the Great Pyrenees.
Cat Lady: A woman in Texas was arrested last week after police discovered three tigers, a cougar, a skunk and a fox in her house along with her and her 14 year old daughter.
Bottoms Up: A new study found that drinking a beer a day helps prevent stroke and heart disease. You’re welcome.
Landmark Links – A candid look at the economy, real estate, and other things sometimes related.
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