The Chicago Purchasing Managers' Index has risen rather dramatically this past year, joining the rapidly growing list of signs and symptoms of a V-shaped recovery. I've been arguing for a long time that this recovery would be V-shaped, that once the financial markets got back on their feet and confidence started returning, the recovery would feed on itself--a virtuous cycle, if you will.
It's very hard to derail a process such as this. I know that the recovery skeptics point to all sorts of dreadful things that await us as the housing market experiences another wave of defaults and commercial real estate struggles with high vacancy rates and its own wave of defaults, and as the nation struggles with high unemployment and trillion-dollar deficits. But all of those become less dreadful if the underlying economy is picking up. And in any event, defaults don't kill growth, they merely transfer wealth. Housing price declines don't kill growth either; rather, they allow new owners to buy a home they otherwise couldn't afford. High unemployment doesn't kill growth, it is a manifestation of slow or weak growth: an effect, not a cause. Deficits don't kill growth either, but they do slow down the recovery since they are caused mainly by massive government transfer payments which don't produce much in the way of productive activity, if any.
I am concerned about the debt coming due on non-residential real estate in the next few years. I have seen large property owners scrambling to get loans equivalent to what they had. Due to an increase of "cap-rates" on the order of 25% to 50%, many properties have lost much of their equity value. A lender cannot make the same loan if the properties have a lower perceived value. Between 500 million and one trillion of loans are due to be reset over the next four years. Who is going to renew those loans at their previous amount? As you and others have mentioned, everyone is trying to reliquify and increase savings-the real cause of the end of the Depression. With government transferring from productive workers to new government workers the trillions that have been earned, where will the savings come from? Won't we be locked into creating government as the primary employer for years? When everyone has a government job, who will earn money to pay the bills?
ReplyDeleteTake a look at C1 page, today's Wall Street Journal, bottom left hand corner.
ReplyDeleteOperating earnings of S&P 500 companies have doubled from bottom of recession, on per share basis.
The chart actualy makes a nice V.
If trends hold, earnigns will get back to old peaks in five more quarters.
Die, recession, die, die, die.
Commercial property defaults? Yes, there will be many--but vulture funds are buying already.
With a little luck, we could be entering a long-run boom.
Old Guy: I understand your frustration with big and bigger government, but we are a very very long way from a situation in which "everyone has a government job." Fortunately. Also, I think you should never underestimate the ingenuity of the financial sector to overcome the problems you cite in the CRE sector.
ReplyDeleteBenjamin: Good point about the vulture funds. Lower prices on CRE will attract new buyers and new businesses.
ReplyDeleteAs you may know, I prefer the NIPA profits series to the GAAP profits used for standard PE ratios. NIPA profits have almost doubled since 1999, yet the S&P 500 is still lower now than it was then.
Scott,
ReplyDeleteTo compensate for lower tax receipts, cities/counties/states are raising taxes at the fastest rate in history.
Perry County commissioners raise taxes 16 percent
Do you think dratmcially higher taxes could have an impact on the current recovery?
Higher taxes will obviously retard the recovery, and they are widely anticipated. The question is really whether the market has already factored this in or not.
ReplyDeleteAny ideas how? More government buildings? $100mm buildings with $50mm loans now have equity of 0-25% even though they are 92% occupied. The debt is in stacks rated by agencies that don't know what to do. The debt is current. Can the same loan be made again if it is owed to several distinct owners whose equity has disappeared? TARP 2?
ReplyDelete