It is the last Insight of 2019. Where did the year go? At Altus we went through considerable growth this past year, with some of the accompanying growing pains. It was both a difficult year and an incredibly rewarding year. I am looking forward to an exciting 2020.
A few articles and events from the last couple weeks derailed the plan I previously had for this month’s Insight. The benefit being a shorter than usual article so we can focus more on the holiday festivities.
In the “wow” category: Consumer spending makes up somewhere between 65% and 70% of the US GDP. It is a big, big deal. This is why economists and analysts watch consumer sentiment/confidence so closely. Survey results, per the widely followed University of Michigan Consumer Sentiment Index, have been all over the map this year. Crashing in January (after December’s stock market swoon), recovering consistently and considerably through May, then falling off the map to the lowest point since 2017 in July as recession worries became mainstream, but then starting to recover again to a new seven month high in November (December numbers have not yet been released). The timing was excellent for retailers, creating the hope and expectations of a strong holiday season.
Consumer confidence, in and of itself, doesn’t provide any insight into the structural health of an economy, but because consumer spending is such a large part of GDP, it does have an outsized, and somewhat self-fulfilling, shorter term impact. While my overall concerns about the structure of the economy and debt loads remain (which will be discussed more in future Insights), I am inclined to think that this kind of consumer confidence could push out the inevitable recession farther than anticipated.
And as a tailwind: Not only has consumer confidence been on a winning streak, the November results of the National Federation of Small Business (NFIB) Confidence Index show a spike in confidence among small business owners. The November index is sitting at the second highest level ever, and only one point below the previous peak. As a percentage of the economy, small businesses would seem to be insignificant, but because nearly all net new job creation comes from small businesses, growth investment by those businesses has an outsized impact on marginal employment and income rates. Availability of job opportunities and higher incomes then in turn provide support for consumer confidence.
But all is not quite right: Many of you have probably heard about the issues within the repo markets over the past couple months that in one case caused rates to spike to almost 10%, a huge anomaly when short term rates are otherwise around 1.5%. “Repo” is basically short-term lending/borrowing secured by highly liquid assets with a repurchase agreement. Most commonly, financial institutions lend money to each other overnight so that the other financial institutions can meet their cash liquidity requirements without selling assets from their portfolio. It is a huge part of what makes the water flow through the pipes of the financial markets. The Federal Reserve quickly intervened to add liquidity to the markets, but most observers agree that such action should not be needed in a time of economic growth and strong banks.
Readers might also be familiar with quantitative easing. The Federal Reserve purchased trillions of dollars (literally) of government debt and mortgage backed securities between 2009 and October 2014 when quantitative easing officially ended. The purchases were brought to an end because the economy was on strong enough footing that the Fed decided it no longer needed the extra liquidity infusion or downward pressure created on interest rates caused by the debt purchases. But then, over the past several weeks, the Fed has been buying mortgage backed securities again. With $2.4 Billion purchased over the past two weeks the amounts are minimal compared to the monthly $40 Billion originally part of QE3 (that was increased to $85 Billion a few months later), but it is still a meaningful change in direction. And the big question is why? If the economy is doing as well as everyone says, including the Fed, why would the extra stimulus/downward pressure on rates/liquidity be needed?
Seriously?: This leads to a discussion of the most recently agreed upon Federal budget. The final budget projects a deficit of over $1 Trillion (TRILLION). All in a time of a robust US economy and historically low interest rates (which impact the federal debt payments). While Democrats did increase the discretionary spending portion of the budget above what the President had requested, it was minimal in comparison to the overall size of the budget. Republican law makers should be embarrassed by it all. For years these same Republicans harped on spending and the need to reduce our deficits. Now that a Republican holds the presidency, they are suddenly silent. It is the ugliness of politics (more on that below), and it will have a major impact on us as investors. Two axioms in investing are 1.) what can’t happen, won’t (or what must happen will) and 2.) things will always go farther and last longer than makes any sense. With that in mind, there will be a day of reckoning on the debt. There always has been throughout history (there is an interesting study on the history of debt published in the book “This Time is Different”). But, it is likely that day of reckoning is farther away than we may think. What that means in terms of actuality, I have no idea.
Then there is the impeachment: Like the Republican flips on spending, the impeachment has been a giant game of politics. I didn’t, and don’t, have enough time to watch all the proceedings, and the various news outlets are so obviously biased in their coverage that I have no idea what to think. Assuming the House sends the articles of impeachment to the Senate, Trump will be the third US president to be impeached (Nixon is not one of them). The most recent was of course a Democrat, Bill Clinton. It is almost a certainty the same outcome from the Clinton impeachment will occur, with Trump being acquitted in the Senate trial. The Democrats are predictably accusing the Republicans of not planning on having a true trial, and the Republicans, predictably, are saying we will do the same thing as you (the Democrats) did with Clinton. At the end of the day it will likely be a big tempest in a teapot. And if history, limited though it may be, tells us anything there will be little impact to the stock market or economy.
There is a smaller chance that this process blows the lid off the underbelly of the political elite. While it should have nothing to do with determining Trump’s guilt or innocence, there is a video of Joe Biden bragging that as Vice President he got the Ukrainian attorney general fired by threatening to withhold resources. If what is good for the goose is good for the gander, and with Biden having already admitting to the same “crime”, a Senate trial could get ugly and end up dragging most of Washington through the same mud. I am wondering if this is why Pelosi hasn’t sent the articles of impeachment to the Senate, but also doubt the Senate would risk acting in such a way that could uncover most of these types of actions across the political landscape.
Countries around the world have exploded in protests over the past couple months, including several wealthy European countries, and places like Chile which have been stable democracies for the past several decades. Despite all the political fighting in Washington, the US has been conspicuously calm. No Occupy Wall Street. No Tea Party. No Million Man March. If the impeachment process gets ugly and things are exposed that further show there are different standards for different Americans, the lid could get blown off. Like in Hong Kong, this well could result in stock market and economic damage.
Happy Investing, and a happy 2020.
About the Author: Forrest Jinks is CEO of Altus Equity Group Inc and a licensed real estate broker. Forrest has decades of experience as principal in a variety of alternative investment segments including real estate (residential rehab, in-fill development, multi-family, office and retail), debt, and small business start-up (online marketing and site retail). He can be reached at firstname.lastname@example.org.