Chaos in commercial real estate
As we’ve gone over before in the Digest, the combination of the “work from home” trend in the wake of the pandemic, combined with the Federal Reserve’s most aggressive interest rate-hiking campaign in decades, has created chaos in the commercial real estate sector.
For more than a year, we’ve featured an ongoing “Commercial Real Estate Watch” segment here in the Digest to track what’s happening.
Well, get ready for a doozy.
Here’s the headline from CoStar last Wednesday:
One of St. Louis’ Tallest Office Towers, Empty for Years, Sells for Less Than 2% of Its Peak Price
From the article:
In the latest sign of how lower demand is hitting parts of the U.S. office market, one of the tallest towers in St. Louis that sold for $205 million in 2006 has changed hands again this week — for about $3.6 million…
On a per-square-foot basis, the tower’s value over 18 years dropped from about $140 to $2.50, according to CoStar data.
Nothing to see here. It’s all fine. Move along.
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Chaos in the fast-food sector
It’s no secret that the average American is hurting financially these days.
In last Wednesday’s Digest, we included the latest data on this. A survey by CNBC and SurveyMonkey found that more than 65% of Americans now live paycheck-to-paycheck. That’s up from last year’s figure of 58%.
This is, in part, because just about everything has become more expensive – and fast-food is no exception.
It used to be that if you were cash strapped, you could swing by your local McDonald’s or Taco Bell and fill your belly for just a few bucks.
Not as easy these days.
Last week, the analyst Charlie Bilello posted the following fast-food price increases over the last 10 years.
Enjoy:
- McDonald's: +100%
- Popeyes: +86%
- Taco Bell: +81%
- Chipotle: +75%
- Jimmy John's: +62%
- Arby's: +55%
- Burger King: +55%
- Chick-fil-A: +55%
- Wendy's: +55%
- Panera: +54%
- Subway: +39%
- Starbucks: +39%
You might have caught some viral social media posts in recent months expressing outrage about these prices. One of them highlighted a McDonald’s at a rest-stop in Darien, Connecticut, where a Big Mac meal costs $18.
And that’s if you walk into the McDonald’s. If you were at home, wanting it delivered via Grubhub, you’re going to shell out $21.59.
By the way, for all you older investors like me, here’s some nostalgia. This is a photo of a McDonald’s menu from 1980.
Don’t miss that soft-serve ice cream for a whopping $0.35!
Chaos in the bond market
While we often focus on the week-to-week and month-to-month changes in the bond market here in the Digest, let’s step back for some big-picture perspective.
Brace yourself because that perspective is ugly…
Below is a chart from analyst Holger Zschaepitz. Before we get to it, here’s his commentary:
[The chart below shows that the] 10y annualized return of US Treasuries has dropped to 65y low of 0.6%.
The 2020s era of war, protectionism, fiscal excess, scarce energy/housing/labor killed the 4 decades-long bond bull market.
But let’s not stop here!
While we’re discussing the bond market, let’s throw in another dash of chaos…
Chaos in the yield curve
To make sure we’re all on the same page, a yield curve is a graphical representation of the yields of all currently available bonds, from short-term to long-term.
In normal times, the longer you tie up your money in a bond, the higher the yield you would demand for it. So, you’d expect less yield from a 2-year bond and more yield from a 10-year bond.
Given this, in healthy market conditions, we usually see a “lower left” to “upper right” yield curve.
But when economic conditions become murky and investors aren’t sure what’s on the way, the yield curve tends to flatten.
And if the curve inverts, history has shown that it is a highly accurate predictor of recessions, though the timing of those recessions varies. From Reuters:
Yield curve inversion is a classic signal of a looming recession.
The U.S. curve has inverted [6 to 24 months] before each recession in the past 50 years. It offered a false signal just once in that time.
The most widely watched yield curve inversion involves the 10-year Treasury yield and the 2-year Bill. Well, last month, to little fanfare, this inversion set a record.
Here’s Michael Macchiarola at the investment shop Olden Lane to explain:
[In March], the United States Treasury market made history for the longest continuous inversion of the US 2s10s ever.
The yield curve has now been continuously inverted since July 5, 2022 – passing the 624-day inversion from August 1978, which had held the record…
Yet again, move along, nothing to see here. I’m sure that the best indicator we have for predicting a recession, now at an all-time record, can safely be ignored.
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Chaos in the jobs market
You may have seen the following claim from the White House:
Under President Biden, the economy has created more jobs per month than under any other President – ever.
Is it possible that this claim is just a tad misleading?
Could an alternative take be that some of these jobs weren’t “created” as much as they were “recovered” after the government itself forced businesses to shut down during the pandemic… and then required them to remain closed for months?
I’ll let you decide.
The chart below shows all nonfarm employees dating back to 2016. I’ve added a dotted black trendline to help you contextualize our progress.
Does what happened in the wake of 2020 look like new, healthy job creation or a respectable recovery of many of the jobs lost due to the pandemic and its related shutdowns?
Regardless of your answer, there’s another related (chaotic) story here that you might not know about.
Guess what’s an enormous driver of all this job growth?
The government itself.
Here’s a headline from Benzinga back in February:
Biden Administration Job Growth Numbers Are Subsidized by Record Numbers of Government Jobs — 25% of New Jobs Are in Government
And here’s more color from the Mises Institute:
Since early 2021, however, the job growth we're seeing has been increasingly fueled by growth in government-sector jobs.
In other words, the job growth we do see in the government sector does not represent the result of private investment, saving, or demand. It's not organic economic growth.
Rather, these government positions are positions that only exist as the result of wealth transferred from the private sector to the government sector.
To see how this looks, below is a chart showing all private sector employees (in green) and all government workers (in blue). We’re seeing the rolling one-year percent changes, dating back to summer 2021.
Notice how private sector jobs (in green) are on a steady march south while government jobs (in blue) are on a clear climb north.
Also, don’t miss how government job percentage growth surpassed private sector growth last spring.
And here’s one last bit of color from The Wall Street Journal at the end of last year:
Drill into the nation’s 3.7% unemployment rate, and you’ll find a growing welfare-industrial complex beneath the seemingly strong labor market.
Government, social assistance and healthcare account for 56% of the 2.8 million net new jobs over the past year, and for nearly all gains in blue states such as New York and Illinois.
While there’s plenty more chaos we could highlight (the housing market, anyone?), let’s zero in on the chaos surrounding the Fed
The biggest story of 2024 is the Federal Reserve and its interest rate policy.
As we’ve profiled here in the Digest, so much of the bull case for 2024 rests on the Fed enacting multiple rate cuts this year.
But as economic data have come in unexpectedly strong, and inflation data have come in unexpectedly hot, the case for rate-cuts is weakening. This is behind much of the recent volatility in the stock market.
With this as our background, here’s our next bit of chaos, courtesy of former Treasury Secretary Lawrence Summers last Wednesday:
You have to take seriously the possibility that the next rate move will be upwards rather than downwards.
Let’s pause on that one a moment…
How do you think Wall Street would handle a rate hike at this point?
Even if you brush off that hot take as insanity, consider Summers’ perspective on a June rate cut, which the market considered to be a “lock” just a couple months ago:
On current facts, a rate cut in June, it seems to me, would be a dangerous and egregious error comparable to the errors the Fed was making in the summer of 2021.
We do not need rate cuts right now.
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Last week, legendary investor Louis Navellier went on record disagreeing with this perspective
Louis was calling for the first rate cut to happen in June.
But when Louis held a live event last week, called Election Shock Summit, his guest disagreed with him.
Well, I can now reveal that Louis’ guest was Charles Sizemore, Chief Investment Strategist at The Freeport Society. You might recognize Charles’ name since we’ve featured his articles here in the Digest. He’s one of our most popular guest contributors.
Charles believes we won’t see any rate cuts until after the presidential election. And if you think that might usher in a fresh wave of chaos, well, you and Charles should grab a beer.
He suggests this lack of cuts will upend the financial markets, result in Joe Biden losing the election, and bring a level of volatility back into the stock market that we haven’t seen in years.
During last week’s event, Charles and Louis discussed all this, as well as the likely impact on the stock market (plus, what to do about it in your portfolio). If you’d like to watch the free replay, we’ve made it available here.
Wrapping up, let’s highlight one last bit of chaos
And that’s the growing gaslighting by the media.
Now, we could pick from either left- or right-wing media outlets, so we’re not being partisan, but here’s a recent example from Vox:
American economic pessimism has been bafflingly persistent despite major indicators showing that the economy is actually strong.
Really, Vox? You’re “baffled” by the persistence of economic pessimism?
You can make the claim that our economy deserves more credit than it gets. In fact, despite the stories I’ve highlighted in today’s Digest, I think that’s a fair point we could discuss.
But through the lens of nosebleed prices for everyday retail items… home prices that are 40% higher than a few years ago… 7%+ mortgage rates… stagnating inflation-adjusted wages… U.S. gas prices up 16% so far this year… the recent resurgence in inflation… U.S. insurance rates up 22% year-over-year… the average interest rate on a U.S. credit card now at 21.6%... U.S. office vacancies at a record high of 19.8%... and a growing number of corporate layoffs…
… the idea that persistent economic pessimism is “baffling” is so absurd that it would require the author to be either egregiously uninformed or deliberating misleading.
I’ll let you decide.
In any case, we can expect plenty of gaslighting (from both sides) as we get closer to the November election. So, if you’d like some unabashedly honest and candid perspectives about the election, the market, interest rates, the Fed, you name it, check out the replay of Louis and Charles’ Election Shock Summit.
After all, the best way to protect against chaos is to expect and prepare for it.
Have a non-chaotic evening,
Jeff Remsburg
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