Lead Story… First off, I have to admit that I found today’s post rather difficult to write. Although I try not to discuss politics on this blog I was a Political Science major in a former life (insert useless liberal arts major joke here) and still find our electoral process fascinating especially when the outcome runs counter to conventional wisdom. As such, I’ve been a bit distracted this week to say the least.
Over the past 6 years or so the US bond market has responded in a remarkably consistent manner to domestic and geopolitical financial turmoil. Every time an even has taken place that has the potential to move interest rates – especially at the long end of the yield curve, they have behaved in the same way: tby moving down – even in instances where conventional wisdom was that they would rise. From the S&P downgrade of US debt to the European bailout to the debt ceiling debacle, to the Fed raising short term rates, to Brexit and everything in between there has been an decidedly downward market response when it comes to interest rates and by extension the cost of capital used to finance real estate. However, that could be changing as I write this post.
Going into Tuesday’s election, online betting markets were giving Donald Trump a 15% – 20% chance of winning as were most so-called experts parsing the entrails of opinion polls. We all know how that turned out. Conventional wisdom seemed to be that a (highly unlikely) Trump win would lead to uncertainty and volatility in the markets which would once again beget a flight to safety trade. The prevailing view was that much of that “flight to safety” capital would once again pour into into the US Treasury market, driving yields substantially lower. However, that is not how things have played out. At least not so far.
As I write this, longer term bonds have sold off substantially, leading to higher interest rates and swap spreads have widened. It seems to me that markets are anticipating that Trump will spend a lot on infrastructure and tax cuts and finance both with debt. All of which is being viewed as inflationary. Combine this with the fact that we are already seeing wage growth tick up of late and you have a recipe for rising inflation. Again, I have no clue whether this trend will hold (If I had the ability to accurately forecast interest rates, I’d be on a yacht somewhere rather than writing this blog) and it could reverse at any point due to either economic, policy or geopolitical circumstances. The important thing to me is that the market reacted differently to potential instability and turbulence than it has at any point in the past 6 years and that response, in and of itself is an important signal that change could be afoot.
At the moment, the movement in rates is still relatively small and short term rates have barely budged. However, this is a development that has to be monitored closely as interest rates are such a key factor in the cost of real estate capital and by extension valuation. The so-called “flight to safety” trade into US Treasuries may have hit an inflection point this week. If that is indeed the case, we need to hope that long-awaited robust real economic growth will accompany any further increase in borrowing costs but only time will tell. When it comes to the cost of capital moving forward, things just got interesting.
Downward Trajectory: Weekly unemployment claims headed lower again.
Up in Smoke: Industrial and retail real estate markets stand to gain from marijuana legalization. However, a lack of access to the banking system due to illegality at the federal level remains a serious headwind. See Also: Forget Clinton and Trump. Weed was the real winner of the 2016 election.
Turf War: Santa Clara and San Jose are now suing each other over big commercial developments. Thanks CEQA.
Scapegoat: There’s a provocative new theory out there crediting California’s restrictive zoning in coastal cities for Trump’s electoral college win. Regardless of your political persuasion, the logic here sort of makes sense:
“Switching gears, I have a new explanation for Trump’s win that does not involve Weiner or talking about Deplorables or emails. California’s zoning codes caused the win. If California had Texas style housing regulations, then 80 million people would live in California and the state would have 100 electoral votes. The state would still vote Democrat (because of the composition of these new voters) and Clinton would have won. Why would so many people move here? It is heaven. With Hong Kong style density and water markets, the state could accommodate such growth.” – Matthew Kahn
Electoral Roundup: The NAHB put together an excellent summary of the election’s impact on the home building industry.
Risky Business: Equity crowd funding has become a thing in the UK but the results from unsophisticated individual investors putting money into very early stage startups has been abysmal to say the least.
Cord Cutting: The no-subscription streaming TV service space is about to get very competitive as several large tech companies look to compete with Dish Network’s SlingTV.
Black Box: Several big banks passed on selling shares of Uber to high net worth clients due to the ride-share giant’s unwillingness to discloses financials and other key pieces of data.
Chart of the Day
Renter incomes are rising but have a long way to go.
The Signs Were There: Rapper Montana Millz, whose songs include “Sell Drugz” was arrested last week…….for selling drugs.
Didn’t They Make a Movie About This? A large snake slithered out of the overhead compartment on an Aeromexico flight, briefly causing a panic. Samuel L. Jackson was unavailable for comment.
Protest Vote: A candidate for Treasurer in the California City of Oceanside was so unpopular that she lost to her opponent by 6% despite the fact that he died over a month ago. I love this type of local political story because it frequently results in awesome quotes like this from Oceanside City Councilman Jerry Kern:
“Even though Gary passed away, he is still better qualified than she is.”
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