I was fortunate enough to attend the UCLA Anderson Forecast this morning. This was the second Forecast event I have attended. The mood was noticeably more subdued compared to a generally upbeat tone at the previous one.
Professor Leamer kicked things off with a "No Recovery" slide. Most of his charts we comparing not against pre-recession highs but against where trend growth would have put the economy today. We are 11% below trend growth on both GDP and employment and it looks increasing difficult to ever get back to trend. In a normal cycle, all lost jobs are recovered after 2 years. This time, we are two years out and millions of jobs have not returned. Dr. Leamer said that over 5 million jobs are permanent displacements, never to return. Permanently lost jobs by his figures:
Manufacturing - 2.5 million jobs
Construction - 2 million jobs
Retail - 800 thousand jobs
The California economy is doing slightly better than many other states. Most job growth has been in hospitality and health care, while most job losses were in government and construction. The government job loss cycle should peak next year, then stabilize, but will be a drag on the economy for the next couple of years.
The focus of this conference was commercial real estate. In general, AAA properties are hot and within 10% of their 2006 highs. Lesser commercial property is slumping. There is a lot of investment money chasing real estate returns. The economists mentioned that pension funds need 7-9% returns to stay sound and can't get there with Treasury bonds that yield 3%. [comment: that might not end well]. Multi-family is expected to boom the next two years as people move out or are kicked out of single family homes. Office space is expected to be weak for years, until employment recovers.
During the first Q&A, a question was asked about the Greek debt. Professor Leamer and panelists agreed that Greece would default, and probably soon. He went on to say that "Uncle Sam was not much better than Uncle Dmitrious" and that after the market dealt with PIIGS, it might turn attention to the US bond market. [comment: While bad, I don't think the US situation is near as bad as Greece]. Professor Shulman stated that Greece would restructure, and that at some point, the US might need to restructure. [comment: I was surprised to hear these comments from the ivory tower].
Keynote speaker was Sam Zell of Equity Residential. Highlights from Mr. Zell:
Consumer over leveraged. Banks over leveraged. Corporate sector strong but unwilling to spend due to uncertainty.
Called Obamacare destabilizing.
Dodd-Frank worse because it did not create any new rules, only directions to make new rules in the future that are not happening.
Called NRLB action against Boeing in South Caroline "shameful".
Deficits unsustainable and unsolvable without growth.
US dollar on verge of losing reserve currency status.
Lots of zombie owners of office space. Way overbuilt.
Lodging - first to fall, first to recover. Said REVPAR was almost back.
Called Western Europe a demographic time bomb. No growth, bad place for RE investment.
Called Asia a tough place to invest. They don't need money, and locals have advantage.
Best real estate investments in Latin America.
Very bullish on Brazil. Reminds him of America in the 1950s.
This was my first time on the UCLA campus. Very beautiful. A really fun time.
Thanks from all the gang at CR!!!
ReplyDeleteThanks for the info, I have to say that it looks like it all bore out today in the action on the stock market.
ReplyDeleteI'd have to agree with Professor Leamer. Default looks imminent and the fact is the USA doesn't look much better. What's interesting to me is the reaction in the gold and silver markets. My initial interpretation is that money has sought some cover in those metals, where as the industrial metals like platinum and copper have gotten slammed. Probably a reaction to the impact of all the riots in Greece and China.
Dryfly,
ReplyDeleteGlad I can bring some value once in a while :)
Hal,
Gold did act as a safe haven today. In extreme stress, I expect it to drop some, but recover quickly as more people decide that gold is "the" safe haven currency.
tekewin, Yeah that's my feel on gold too. Has been for a couple of years now. Peter Grandich likes to call it the "Mother of all Bull Markets" and I have to agree. My feel is eventually, some major currency will come out and tied to gold in some form or another. Seems the end game anyway. Time will tell.
ReplyDeleteHal,
ReplyDeleteSoros also called it the "Ultimate Asset Bubble", and maybe he is right, but I think he exited early. As you said, time will tell.
tekewin,
ReplyDeleteYes. I've heard Soros refer to it that way. But I keep in mind that at his level of power, he often says such things to influence markets and governments.