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Playing Ball in the Later Innings Dr. Mark G. Dotzour College Station, Texas [email protected] Blog at www.markdotzour.com Since 1945, there have been 11 economic cycles • The average recession has been 11.1 months • The average expansion has been 58.4 months Source: National Bureau of Economic Research Since 1945 there have been 11 economic cycles • The average recession has been 11.1 months • The average expansion has been 58.4 months. • As of May, the current expansion is 83 months. Source: National Bureau of Economic Research Since 1945 Longest U.S. Economic Expansions • • • • • Mar 1991 to Mar 2001 Feb 1961 to Dec 1969 Nov 1982 to Jul 1990 Jun 1938 to Feb 1945 Nov 2001 to Dec 2007 120 months 106 months 92 months 80 months 73 months Nationally the Bullish Outlook Continues U.S. Leading Index of Economic Indicators Consumers Spending Money Again Real Retail and Food Services Sales 200,000 190,000 Millions of Dollars 180,000 170,000 160,000 150,000 140,000 130,000 120,000 110,000 Jan-92 May-95 Sep-98 Jan-02 May-05 Sep-08 Source: Federal Reserve Bank of St. Louis/FRED Jan-12 May-15 Light Weight Vehicle Sales: Autos & Light Trucks Light Weight Vehicle Sales: Autos & Light Trucks 25 15 10 5 Sep-15 Source: U.S. Dept. of Commerce: Bureau of Economic Analysis/FRED Jan-10 May-04 Sep-98 Jan-93 May-87 Sep-81 0 Jan-76 Millions of Units 20 Manufacturers’ New Orders: Nondefense Capital Goods Excluding Aircraft Manufacturers' New Orders: Nondefense Capital Goods Excluding Aircraft 77,000 72,000 62,000 57,000 52,000 47,000 42,000 37,000 Source: Dept. of Commerce: Census Bureau Jun-15 Feb-12 Oct-08 Jun-05 Feb-02 Oct-98 Jun-95 32,000 Feb-92 Millions of Dollars 67,000 Corporate Profits (With Inventory Valuation Adjustment & Capital Consumption Adjustment) Corporate Profits After Tax with Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment 1,800 1,600 1,200 1,000 800 600 400 Jul-09 Oct-99 200 Jan-90 Billions of Dollars 1,400 Source: U.S.Dept. of Commerce: Bureau of Economic Analysis Corporate Hiring Plans: Next 6 Months Q4-15 Q3-15 Q2-15 Q1-15 More Jobs 35% 33% 34% 40% Less Jobs 34% 32% 26% 23% Source: Business Roundtable Small Business Outlook “Planning To Hire People In The Next Three Months” Planning to Hire People in the Next Three Months 25 20 10 5 0 -5 Source: National Federation of Independent Business Jan-16 Apr-15 Jul-14 Oct-13 Jan-13 Apr-12 Jul-11 Oct-10 Jan-10 Apr-09 Jul-08 Oct-07 Jan-07 Apr-06 Jul-05 Oct-04 Jan-04 Apr-03 Jul-02 Oct-01 Jan-01 Apr-00 Jul-99 -10 Oct-98 Net % of Respondents 15 Job Growth in the 21rst Century 2000 TX CA FL AZ VA NC GA WA CO 2015 9,929,387 12,494,350 16,033,179 17,798,614 7,565,981 9,153,264 2,410,581 2,959,518 3,522,865 4,051,908 3,986,151 4,495,473 4,071,557 4,549,951 2,901,492 3,343,992 2,294,408 2,718,698 Change 2,564,963 1,765,435 1,587,283 549,937 529,043 509,322 478,394 442,500 424,290 Total Texas Non-Farm Employment 12,500 10,500 9,500 8,500 7,500 Source: Federal Reserve Bank of Dallas Jan-16 Jan-14 Jan-12 Jan-10 Jan-08 Jan-06 Jan-04 Jan-02 Jan-00 Jan-98 Jan-96 Jan-94 Jan-92 6,500 Jan-90 Thousands of Workers 11,500 Mythical Chimera • Something that exists only in the imagination and is not possible in reality. Mark Dotzour’s Chimera: Winning the Masters with an 15 Handicap Japan’s Chimera: Quantitative Easing in a “New Dimension” On Apr 4, 2013 BOJ will buy 50 trillion in JGB and 10 trillion in Nikkei ETFs Plan to double the monetary base from 135 trillion yen to 270 in two years. Government Pension Investment Fund will cut holdings of government bonds from 60% to 35% to increase demand for stocks. “This is taking monetary easing into an entirely new dimension.” H. Kuroda, Governor BOJ Japan is Imploding • Major banks are offering home loans at .5% interest • Popular trade is to short yen and buy Nikkei. If traders sell stock and buy back yen, the yen increases in value. • Government debt burden is now 200% of GDP. • The economy shrank in 4Q15 and could lead to the third technical recession in four years. • Yield on 10-year JGB was .15% in 1999! Japan is Imploding (Then) • Shinzo Abe was elected Prime Minister (12/2012) after promising unlimited quantitative easing • Since BOJ governor Kuroda took office in March 2013, the central bank has sharply increased its purchases of stock ETFs. • During the past two years, the BOJ has been buying stocks roughly once every three days. • The Topix Index has gained more than 50% since the start of the new policy. – WSJ 3/12/15 Japan is Imploding (Now) • The BOJ is now a top-ten stock holder in about 90% of the stocks on the Nikkei 225. • The Nikkei is down 9% so far in 2016. • Buying 3 trillion yen of stock every month. • Goldman estimates by 2017, the BOJ will be the largest stockholder in 40 of the Nikkei companies. • BOJ currently owns about 55% of the ETF market. • Won’t sell ETF holdings until 2026. Chinese Chimera: The Shanghai Stock Exchange Plunged 30% in three weeks in June 2015. • You can buy, but you can’t sell. • Please borrow money to buy stocks. • Half of all shares are suspended from trading. • Declared war on “foreign puppet masters” and vicious short sellers. European Chimera: I can help countries that are heavily in debt by loaning them even more money. “The Governing Council is willing and able to act by using all the instruments available within its mandate if warranted in order to maintain an appropriate degree of monetary accommodation. “ Draghi, November 3, 2015 Eurozone Lethargy Continues • EU now predicts GDP of the 19-nation area to expand just 1.6% this year, less than the 1.7% growth of 2015, while consumer prices are seen up 0.2%, significantly below the 0.5% increase projected in February. May 3, 2016 • Tensions between the ECB and Germany are continuing to escalate, after Mario Draghi suggested that Germans are responsible for a "global savings excess" that has led to ultra low interest rates. "There is a temptation to conclude that since very low rates generate these challenges, they are the problem. But they are not the problem. They are the symptom of an underlying problem, which is insufficient investment demand, across the world, to absorb all the savings available in the economy.“ May 3, 2016 Bad News Lifts US Stocks The Dow jumped 322 points or 3% to 11,176 as a new round of bleak economy data buoy investor hopes that Mr. Bernanke will step in with some sort of monetary stimulus. WSJ August 24, 2011 Dow surges 217 points after signs of lackluster economic data have reduced the odds of an interestrate increase by the Fed this year. WSJ October 16, 2015 Dow soars more than 300 points because ECB Draghi says it will do more QE if needed. WSJ October 23, 2015 U.S. Stock Market “Investors” High-frequency trading now accounts for more than half of all stock trading volume in the US as banks, hedge funds and institutional investors seek to gain an edge…” WSJ July 30, 2009 Stock Buybacks Proliferating Source: FACTSET Buyback Quarterly December, 2015 Margin Debt Debit Balances at Broker/Dealers Debit Balances in Margin Accounts at Broker/Dealers 600,000 500,000 300,000 200,000 100,000 Source: New York Stock Exchange Jan-15 Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03 Jan-02 Jan-01 Jan-00 Jan-99 0 Jan-98 Millions 400,000 Mar 2000 Dow 11,234 Mar 2001 Dow 9,106 Mar 2002 Dow 7,415 Jul 2007 Dow 14,021 Jul 2008 Dow 10,827 Jul 2009 Dow 8,087 Inflation Rate Remains Low Consumer Price Index for All Urban Consumers: All Items 30 25 Percent Chg. From Year Ago 20 15 10 5 0 -5 -10 -15 -20 Jan-20 Jul-34 Jan-49 Jul-63 Jan-78 Source: U.S. Dept. of Labor: Bureau of Labor Statistics Jul-92 Jan-07 University of Michigan Inflation Expectation University of Michigan Inflation Expectation© 12 10 Percent 8 6 4 2 0 Jan-78 May-83 Sep-88 Jan-94 May-99 Source: Thomson Reuters/University of Michigan Sep-04 Jan-10 May-15 Low Interest Rates Around the World German 2-year German 5-year -.46 -.25 German 10-year Swedish 10-year Dutch 10-year Swiss 10-year .30% .61% .40% -.34% Japanese 10-year -.09% The End of the Credit Super Cycle? Maybe Not 20.0 18.0 30 year mortgage rate 10 year treasury rate 16.0 14.0 10.0 8.0 6.0 4.0 2.0 Source: Board of Governors of the Federal Reserve System/FRED Apr-09 Dec-02 Aug-96 Apr-90 Dec-83 Aug-77 0.0 Apr-71 Percent 12.0 The Energy War Escalates Saudi Arabia Saudi Arabia has announced it will raise domestic petrol prices by more than 50 per cent for some products. Prices will increase for electricity, water, diesel and kerosene, after the country posted a deficit of $135 billion in 2015. The 2015 deficit is the highest in the history of Saudi Arabia, which relies on oil for 90 per cent of public revenues. Contemplating selling a portion of ARAMCO to raise money. The IMF has warned Riyadh that failure to cut spending and implement reforms will eat up the country's fiscal reserves in just five years February 3, 2016 Middle East Budget Strains The Saudi Binladin Group is the largest construction company in the Persian Gulf region. They have an estimated $30 billion in debt They haven’t paid subcontractors and suppliers for months. The Saudi government is delaying payment for completed projects. WSJ 3/26/16 Investment Themes for 2016 • Mortgage rates unlikely to increase above 4 percent • Home price appreciation to continue in most markets • Currency declines will reduce foreign purchases of US real estate from Russian, Canada and Mexico. • Anti-corruption policy in China could reduce Chinese purchases of US real estate • New federal transparency rules on cash purchases will reduce foreign buying demand in the US • Foreign pension funds have strong appetite for US CRE • Japanese REITS have strong appetite for US CRE Investment Themes for 2016 • Europe, China and Japan printing money with little result • Emerging market countries experience inflation & recession • No American inflation until year after oil price bottoms • A couple of meaningless rate hikes by the Federal Reserve • GDP ambles along at a tepid 2% growth rate CRE Pricing Outlook • China selling US Treasury bonds and still our yields continue to fall. • Forget the BRIC countries. • Increased JREIT purchases as part of BOJ QE campaign. • “We are in an environment where very few of the classic, liquid, safe assets have provided much protection whatsoever. “ WSJ 1/8/16 Pension Interest in CRE Nov 2011: CALSTERS back off $2.5 billion allocation to commodities. Since 2007, they have lost 13% in the sector. Oct 2014: CAPERS raises its real estate allocation to 11%, requiring another $7 billion in property Dec 2014: San Francisco pension plans to increase its real estate allocation from 8% to 17%. May 2016: Norway’s Government Pension Fund earned 2.7% in 2015. Plans to increase it’s allocation to real estate from 5% to 7%.