Altus Insight October, 2018

The Altus Insight
Market news, commentary and relevant topics for today’s alternative asset investor

Date: October, 2018
FR: Forrest Jinks
RE: Midterm Review

 

Two years ago we were in the middle of the refinance of one of our apartment properties. We had lined up a twelve-year fixed rate loan at a really great interest rate. As the election drew nearer we could have pushed the process in order to lock that rate into place before the election. I may not have drug my feet, but I certainly didn’t push the process. I had no idea who would win the election but based on the considerable amount of travel I was doing around that country at the time, I had a feeling Trump was going to perform better than many thought he would. The thinking on not locking the interest rate was, if Clinton won it would be business like normal, so interest rates would stay stable. If Trump won…I thought markets would freak out and yields would collapse as investors fled to safety. Collapsing yields would have been great for our apartment loan. On the night of the election I didn’t pay attention to the news, having already cast my ballot for neither of the main candidates a week or so prior. I did keep watch on the ten-year treasury though. I went to bed around 10:30 that night and checked the ten-year one last time. Yields had fallen out of bed. From this I knew Trump was having a far stronger performance than anticipated, and as related to not locking the interest rate, I felt like the smartest guy in the world. By the time I woke up the next morning, interest rates had not only recovered from the drop the night before but had spiked higher. And continued to run up without pause over the following weeks. By the time we locked the interest rate on the loan our interest cost had ended up increasing hundreds of thousands of dollars over the life of the loan. So much for me being the smartest guy around. And welcome to the Trump Presidency.

A couple weeks ago I was having a casual conversation with several I am in a business group with, representing at least three different political affiliations. As the conversation turned to politics, one of those in the conversation, something of the informal ring leader, asked the question, “Removing all the rhetoric and craziness, what has the Trump administration changed or implemented that you disagree with?” Though an interesting question, it is a hard question to answer with any amount of level headedness due to the president being such a polarizing character. Now that we are two years into the current administration it is a good time to ask this hard question. I will endeavor to attempt such an answer in this month’s article. I think the only way to make such an attempt is to do so in full disclosure of my personal opinions of the President.

My parents taught me from the time I was young to not pass judgement on those I didn’t personally know, and even if I did know someone, to be extremely careful passing judgement since there is probably much about them or their situation I don’t know. I have never met the President, so I should probably stay away from any personal judgements. However, Mr. Trump is not the typical person, having chosen to put himself and his opinions out to the public in every way possible. This person, or at least his persona, is someone/something I strongly dislike. This is not a recent opinion. Long before he was a politician, and well before he was a reality TV personality, Trump was already the most famous real estate developer in the country. He had written books, had games created after him, and even pre-Twitter he was oft-quoted. His conceit, narcissism and lack of scruples was well known within the real estate industry.  This was early in my real estate career and each time I would tell people what I did for work and they responded, “Oh, like Donald Trump”, I would just cringe. No, no…nothing like Donald Trump. At least I certainly hope not. It is with this long existent prejudice towards the man that I will attempt to do a two-year review.

Please keep in mind that the purpose of this exercise is not to review what the President has said, tweeted, how he has conducted his personal life, etc. It is solely, simply, and only, to review the actual things that he would call his accomplishments since in office. Not events that have occurred while he was in office (like the stock market run up), but policy changes, etc. that were a direct result of his presidency.           

 

Regulation

Contrary to popular belief and corroborated by this article in Bloomberg, regulations have not fallen during the first two years of the Trump administration. What has occurred is the rate of new regulation has slowed dramatically. In the first two years of the Bush and Obama administrations there were 470 and 500 final regulations, respectively. In Trump’s first two years there have been only 160 new final regulations. I think most people would agree that we need some level of regulation to protect us from others (and ourselves). I think most people would also agree that too much regulation is stifling and counter-productive. I think most business owners would agree that it is the constant changes to regulations that creates problems. Having some stability, though with still 160 new regulations it’s relative, is a huge win.

 

Taxation

Previous Altus Insights (here and here) have discussed some of the good ideas in the new tax law that was passed. Overall though, my opinion of the Tax Cuts and Jobs Act of 2017 is that it was, or at least will be, a huge fail. I dislike paying taxes (especially when our company deals with the massive inefficiencies of how those tax dollars are used on a daily basis), but even more than disliking paying taxes I hate the idea of my kids having to pay dramatically higher taxes to pay for poor spending habits of the generations in front of them. After years of wracking up massive deficits under the previous administration, the size of the deficits has been waning the last few years. With the passing of this tax plan the US deficit exploded. Not quite back to the early years of the Obama administration, but certainly an increase over the past few years. The ridiculousness of this is magnified by where we are in the current economic cycle. We are in the middle of the longest (though admittedly certainly not the most robust) recovery in history. This is when our deficits should be shrinking. This is where, in 1998 (Clinton) and 2001 (W. Bush) the federal government actually ran a surplus. I am fully on board with the tax code needing changes. To make changes in such a manner that increases government debt (substantially) is almost beyond fathomable and stinks of a president focused more on a popular win that wise governance. If I was giving a grade, this would be a big red F.

 

Administration

It is hard to run any organization if the people in key positions keep changing. This administration has been plagued by intrigue. Who is going to quit? Who is going to get fired?…I cynically view this almost as a benefit if it keeps the administration from making changes (see above comments about regulation). Non-cynically, this sort of turnover at the top does not show well for the President.

 

 International Affairs

  1. Syria: The current administration’s positioning and strategy on Syria is mostly unchanged from the previous administrations. If you liked one, you probably like the other. If you didn’t like the first, then you probably don’t like the second.
  2. Iran: I am of the belief that the rescission of the Iran nuclear agreement has little to nothing to do with Iran’s nuclear activity and far more to do with the concern that since Iran has rejoined the world oil markets that they have spread their influence and military power far to the west and throughout the Middle East. Using Iranian funded and armed proxy groups, they have largely taken control of Iraq, are deeply influential in Syria, and are firing rockets into Israel. By using the supposed violations of nuclear accord to reinstitute sanctions the US is severely impacting the source of income needed by the Iranian government to continue to fund these efforts so far beyond its borders. My guess is that if Iran was to withdraw its influence back to within its own borders that suddenly there would be a new nuclear agreement. I don’t like the idea of breaking agreements but maybe it is still to early to tell on this one.
  3. Taiwan: Early in the Obama presidency China felt it necessary to warn the US and US allies about violating its One China policy. At the time, the US pulled back from its visible Taiwan outreach but continued to work with Taiwan more subtly, including the sale of weaponry. This is the same as what the Bush administration before them did (and the Clinton/Bush/etc.). The Trump administration threw back the covers on what was already happening and called a spade a spade. I respect calling something what it is and think there is a larger game at play here regarding China’s rapidly coalescing desire to control south east Asia. I think I like this move overall. And a side fun fact, I was in Taiwan last year when China flew bombers around the island as a show of force due to the US recognizing Taiwan as its own country.
  4. Israel/Jerusalem: In 1995, Congress passed a law requiring the US embassy in Israel to be moved to Jerusalem by 1999; but it included a clause that the timing of the move could be delayed by 6 months, if the delay was considered in the national interest. Both Bill Clinton and George W. Bush campaigned on the promise of moving the embassy to Jerusalem. Both back-tracked on that promise once in office (and used the 6-month extension option continually through their presidency). Obama used the 6-month extensions throughout his presidency to avoid the move happening under his watch. Trump simply didn’t sign the extension. Hence, we now have a US embassy in Jerusalem. Obama quite obviously backed away from the US-Israeli relationship throughout his presidency. Trump has done the opposite. Israel has been a long-time ally of the US and I respect supporting allies. I am not sure of the wisdom in undertaking an action that very obviously was inflammatory for the region.
  5. Russia: In the first few months of the Obama presidency, there was considerable talk of “The Great Reset” with Russia. Years into his presidency, the relationship had grown cold, sanctions were in place and Russia was flaunting the US’s power (or lack thereof) with its annexation of Crimea. All this sounds pretty familiar so far with the Trump administration. Trump expressed great admiration for Putin and their first meeting was chummy (plus that whole email thing). Since then, additional sanctions have been put into place and the US and Russia are butting heads in several areas, from North Korea to Syria.
  6. North Korea: For decades North Korea would pop its head up every few years and do some saber rattling, get concessions out of other countries to put down its weapons, go underground for a while before popping back up and doing it again. This time the concession was the highly valuable acknowledgement of legitimacy through the meetings North Korea has had with the US (and Kim Jong-un has had with Trump). Many see this as a great win for the current administration. I am not so sure. Jong-un has leveraged his meeting with Trump into ongoing meetings, considerable progress with South Korea, and a reduced veracity of enforcement on the current sanctions meant to punish the nuclear efforts that had been made. While a unified Korea may be better for the world than a rogue North Korea, Trump appears to have lost all leverage around getting North Korea to disarm. At this point, it seems more likely that US troops will be asked to leave the Korean peninsula than North Korea will give up its nuclear capacities. There are still many pages to be written in this story, but so far I don’t think this is working out the way Trump was hoping it would.

 

International Trade: Full disclosure. I am a free trade guy. I understand that free trade benefits some more than others, but long term the total benefits realized by a country far outweigh any short-term losses… It is hard to swallow if you are the person dealing with the short-term loss, but I wish politicians would make decisions based on the long term good of the country and not the next election cycle.        

  1. Europe: Why Trump dragged Europe into trade conversations, I have no idea. It doesn’t seem like there is much of a win to be had here regardless how it turns out. In the meantime, the result is ticked off allies and a bunch of WTO cases.
  2. NAFTA: I begrudgingly acknowledge that this could well turn out to be a win for the US, and therefore for the President, at least in the short term. But as mentioned above, free trade is a long-term benefit. Forcing Mexico to pay higher wages to their automobile workers may keep more jobs from going to Mexico now, but it will increase the cost of the cars we buy and completely negates the purpose of free trade in the first place. Everyone wins when the production is done in the country (or state/county/etc.) where it can be done the more efficiently/effectively. Raising the cost of inputs distorts the relationships and hinders the free trade benefits.
  3. China: China is especially interesting to me. It is pretty obvious that the US buys much more of China’s stuff that China buys of ours. However, having equal trade is not the same as having free trade, so if someone in China can buy a Huawei phone equivalent to an iPhone but at a lower cost, why would they buy an iPhone? Even if they do buy an iPhone, most of the components in the iPhone are built in China anyway, so even that isn’t really importing a US product. But here I am much more okay with the tariffs and pending trade war. Even if trade itself isn’t technically restricted by China, there are other considerations and requirements for that trade that are decidedly “unfair”. For instance, China commonly requires companies that want to come into China to turn over their technology to Chinese competitors or the Chinese government. Companies often do it to gain access to the Chinese market (granted, those companies technically have the option of saying ‘No’). Chinese companies, backed by the Chinese courts, often dismiss trademark and patent ownership as well. This technology issue is a big deal, maybe bigger than the free trade, as it affects innovation and patented technology/processes that allow US companies to compete on a global scale. Take that advantage away, throwing out the millions (or billions) of dollars in the investment required to develop those technologies, and we suddenly have a major impact to free trade.            

 

Immigration: This is such an emotional issue for most people that I hesitated to include it, however it has been a large part of the goings-on surrounding the Trump presidency, so hard to ignore. I will only say this, without immigration our economy would suffer badly (and we are all immigrants at some point in our lineage), but I also recognize there are rules and laws in place and it is the government’s job to enforce those rules. If the rules should be changed, it is legislature’s job to change the rules. So long as neither side in this argument will acknowledge the legitimacy of the other sides’ argument this issue will grow more and more divisive.

 

Other indicators:

  1. Every year since 2004, the World Economic Forum (based in Sweden) has released its World Economic Competitiveness report and rankings, including 110 different variables about each country’s economy. For the first time since 2008, the US ranked as the most competitive economy in the world, this after falling as far as 7th by 2012. This is a big win. The afore-mentioned slowdown in regulation would have assisted in this ranking. Ever increasing trade barriers will hurt the US rankings in future years.
  2. Melissa and I (and the kids) recently returned from a few weeks of travelling in south Asia. We met literally hundreds of people on the trip with jobs ranging from hospitality to taxi drivers to factory owners. We were often asked about Trump. My wife feels the same way about him as I do, and our grimaces often gave away our opinion. Without fail, (seriously, 100% of the time), the person asking would acknowledge our grimace and then comment that they thought he was doing a great job. This was highly confusing to us based on what we’ve commonly heard/read about the US losing its standing in the sight of other countries. I can’t help but wonder if those rankings are mostly based on western countries’ opinions, while those in Asia are concerned about China’s growing hegemony and are encouraged by the way the Trump administration has stood up to China’s imperialism.

I am a staunch believer in reduced federal government, with much of what is currently done at a federal level being shifted to the responsibility of the states, and much of the states’ responsibility in turn being shifted to the responsibility of the cities and counties. Taxation should follow. This allows citizens to be more actively engages in government and creates a higher level of competitiveness between states and between local jurisdictions. Competitiveness leads to efficiencies and effectiveness. Somewhat tongue in cheek, I love that due to the Trump administration there is a huge wave of state’s rights momentum among those that historically have wanted to consolidate power at the federal level. Local government is where we as citizens can truly effect change and I love that suddenly there are a lot more people seeing things this way, even if that was never a conscious intent of the President.

Summary: Any summary of an Altus Insight needs to bring the conversation back to the economy and/or investing. So, my summary is this: Trump may well be doing a better job internationally than we are giving him credit for (time will tell) but I believe he is doing a far worse job with the economy than he is getting credit for. Outside of the slowdown in regulation (which I completely support), his impact on the economy and investing is very short sighted. Throwing gasoline on a fire doesn’t lengthen the amount of time a fire will burn, it just creates a flash of heat that can end up sucking life out of the fire itself. My concern is the tailwinds to the economy provided by the Trump impact (tax and trade) will falter and leave us stranded far out to sea.

 

Happy Investing,

Forrest Jinks

Altus Equity Group, LP

off: 707/932-5887

fax: 707/544-2972

www.altusequity.com

 

About the Author: Forrest Jinks is a managing director of Altus Equity Group, LP and 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, industrial, and retail), debt, and small business start-up (online marketing and site retail). Altus Equity Group currently manages about $125 Million in alternative investment assets. He can be reached at fjinks@altusequity.com.