Altus Insight January

The Altus Insight

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

Date: January 31, 2019
FR: Forrest Jinks
RE: Answers without Questions

 

I really struggled in coming up with a topic for this month’s Insight. Not because there isn’t plenty to discuss, but because it did not feel worth spending time on any of the myriad of possible discussion points. In brainstorming possibilities, I thought about all the pundits that write their yearly forecasts each January. I am certainly not qualified to be a pundit, and also feel like trying to predict what will happen in twelve months is like trying to catch the breeze in your hands. And yet there is considerable value in looking forward, if nothing else to try and understand possibilities. And so, looking forward, I present to you the first (and possibly last) issue of “Answers without Questions”.

1. YES. There will be a recession. But no, I don’t know when. Despite the apparent reticence of the Federal Reserve, recessions are beneficial to the long-term health of the economy. In a cycle that is ever repeating, capital first flows to good investments, then to ‘less good’ investments, and then to speculation (over production).  Recessions clean up the mis-allocation of capital, wash out weak businesses, and help good businesses rise to the top. Because of the Federal Reserve’s actions over the past couple of years, recessions have been delayed and delayed, most recently through the flood of money into the economy. That cheap money is masking the bad investments and propping up companies that should have long ago been put to rest. But recessions can’t be delayed forever, even with ultra-cheap money and low lending standards.

We can say unequivocally that we are closer to the next recession now than we were twelve months ago, but not as close as we will be three months from now. However, early indicators are that a recession may be closer than we think. An inverted yield curve is followed by a recession an average of 18 months after the curve inverts. However, when most people refer to an inverted curve they are referring to the 2-year and 10-year treasuries. So far that hasn’t occurred, but the 1-year T-bill and the 7-year treasuries inverted in December and stayed inverted into January. As of this writing the 1-year and the 7-year are basically flat with the six-month rate, which is still higher than the 5-year rate.

Other indicators and circumstantial evidence abound. The delta between the consumer confidence reading and the consumer future expectations reading is the fourth highest since 1967 (when the measurements first started to be taken), and all three such prior readings were in the months leading up to the 2001 recession. Since this information has been tracked any gap between the two measurements over 50 has indicated a recession in the near future. The difference between the two readings currently stands at 82.

2. NO. I don’t agree with the US’s actions on Venezuela and I certainly don’t believe Maduro is a democratically elected leader.  I think he is closer to despot than benevolent dictator, but how can we dismiss one person’s right to the presidency by backing another, supposedly democratic leader, who likewise just appointed himself leader? This isn’t democracy, it is crony democracy at best. This doesn’t mean it doesn’t all work out for the better in the end, but the approach is highly hypocritical.

This obviously isn’t the first recent case of this. The outrage about Russian, Chinese and others trying to influence our election is another such example. According to research done by macro-economic consulting firm Geopolitical Futures, the US has tried to influence at least 60 foreign elections since WW2, across presidencies and congresses controlled by both political parties. If it is so important for us to try and influence the elections of others, why would we not expect them to do the same?

What does this have to do with economics? While the above examples are specific to foreign relations, we have a very similar situation with our own domestic economy. We like to boast about our freedoms (and we should, we are fortunate indeed) and our free market economy. But we don’t have a free market economy. We have a crony capitalistic economy. To some degree this is unavoidable in any economy. Who you know always end up being more important than what you know once you get to a level where everyone knows an incredible amount. But we have gone far past the unavoidable. Can we blame it on lobbyist? Maybe. Politicians? Certainly. With a little bit of ironic twist, the structure of our democratic government, for which we are thankful, is the very thing that leads to the cronyism. Politicians will do nearly anything to be re-elected. If that means selling out to Pharma, Ag, the Auto Industry, the Solar Industry, Wall Street, etc., to get/stay elected, so be it. As extremes in politics continue to be exacerbated and the middle is hollowed out, we will see stronger and stronger cronyism as the elected play to their base. It may not be the same cronies all the time, there are someone’s cronies getting the benefit.

3. NO. I don’t think populism is going away. I think it is going to get far worse before it gets better. Both parties will try and bottle it for their own gains, but I think it is inevitable that society will move dramatically back towards Labor and away from Capital. We are already seeing Unions collecting huge wins (for the Unions, certainly not for society) by getting PLAs (Project Labor Agreements) inserted into public work requirements and experiencing some wins in local elections (and to a smaller degree even with some of their backing of the current president). This is after years of waning influence. Obviously, this process is at different stages in different parts of the country but from my travels and experiences in the business world, the momentum does seem to be strengthening.

Automation is only going to provide additional tailwind for this shift. As I have discussed in previous Insights (Click here) some very smart people project that 25% of the work force will be unemployed by 2030. Those same people said we would go through a period of extremely low unemployment before we get there as it takes people to build and train the first generation of machines before machines take over processes.

In many ways a greater focus on Labor over Capital may not be bad, but will the shift in laws and society to get there can and will have a dramatic impact on each of our individual situations? State income taxes at 20%? The idea is already being discussed in circles of elected officials. Repeal of property taxes laws to greatly increase property taxes? Only a matter of time. A redistribution wealth tax? Don’t count it out. 

And all this speaks nothing to the societal impact and disruption these changes will create.

This experience will be new to all of us, but not new for the country or the world. Our first true populace president was Andrew Jackson, and he is thought of highly enough to grace the $20 bill, one of only eight presidents to have the honor of their image on our currency. 

4. NO. I am not impressed with Jerome Powell’s U-Turn. I had been quite impressed up until December, and then even less so now in January. After being somewhat of a hawk and putting the impact on the financial markets behind the best interest of the country (market performance isn’t one of the Fed’s mandates), Powell and his crew kowtowed to the President’s ongoing criticism and complaints and quickly backed off more interest rate increases. Here is a secret. The interest rate increases aren’t the big deal here anyway. Quantitative Tightening, known as the unwinding of quantitative easing in more genteel circles, is having a far greater impact on the cost of money than is the increase of the Fed rate.

5. NO. The coming recession (and again, I am not predicting when it will be) is not my largest economic concern. While there are so many macro-economic factors currently playing into world economics so as to completely convolute any semblance of understanding, assuming none of those macro factors turns into a black (or even grey) swan type event, this coming recession could well be the garden variety type. However, with a slight push at just the wrong time, the next recession could be as damaging as 2008. Corporate debt is incredibly high after years and years of stock buybacks. Equity doesn’t have to be paid a dividend, but debt payments have to be made. If profits fall in conjunction with rising interest rates there will be scores of large companies in dire straits. That in turn impacts jobs, which impacts consumer sentiment, impacting spending, etc.

But even that recession isn’t really my largest economic concern. Unfortunately, I think things are going to get considerably worse before they get better. Everything goes in cycles and for many decades the economy has been untethered to grow and innovate. Those days are over (see above comments about crony capitalism and the populist shift) and are likely to get worse as the power of special interest groups continues to grow and politics continue to bifurcate. Maybe the corporate default recession leads us to societal unrest and restructuring, but I don’t think so. I think it will be the next recession after that, either causing or being caused by the societal change/unrest mentioned above that will be the big one. That will be the government and pension plan recession. When corporations go bankrupt, investors lose money, and people lose jobs, it is still largely impersonal and the fault of the greedy corporation. When things like pensions, Medicare, and/or Social Security are reduced or eliminated it becomes very, very personal indeed.

The amount of debt in the world is incomprehensible and has seemingly moved past the point of having the possibility of being paid back. Even if by “paid back” we mean debt loads growing at or below the growth rate of the encompassing revenue streams. Very serious people that are far smarter than I believe we will experience a debt jubilee as the fall out of the wild and crazy 2020s. If/when that happens there will be winners and losers of astounding scale.

6. YES. I would prefer to be on the winning side of the coming disruption. No, I don’t know with any level of certainty how to do that. All I have is ideas. Unfortunately, I have a feeling that as time passes some of those ideas will be loved by some and hated by others, with other of the ideas being hated by some and loved by others. Whether I have the courage or willingness to speak my truths and risk offending many remains to be seen.  

 

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 and retail), debt, and small business start-up (online marketing and site retail). He can be reached at fjinks@altusequity.com.