What is the Outlook for Commercial Real Estate?

Darius recently sat down with Nick Halaris to explore the current state of US commercial real estate.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. A Commercial Real Estate Disaster May Be On The Horizon

Over the past couple of years, there has been a confluence of factors that have negatively impacted the real estate sector:

• The rise of interest rates
• The blow-up in Crypto
• The increase in layoffs at tech companies
• Office space occupancies leveling off at 50%
• The regional banking crisis

As a result, US commercial property prices are back down to pre-covid levels. Although they have declined substantially since the COVID-19 blow-off top, they will likely decline even further.


 

2. Commercial Real Estate Distress Levels Are On The Rise… Albeit Slowly

Distress levels in US commercial real estate have been accelerating since mid-2020 but are not yet at levels seen in the Great Financial Crisis because:

• Banks learned from the Great Financial Crisis that the rapid withdrawal of liquidity from real estate would hurt them, so they are more patient with borrowers and more lenient with covenants.
• The “Goldilocks” economy continues to be resilient, supporting the real estate sector.

3. Commercial Real Estate Investment Volume Is Drying Up

Investment volume is down significantly YoY across commercial real estate:

• Multifamily: -70%
• Industrial: -48%
• Office: -63%
• Retail: -65%

Sellers are hesitant to sell because they expect inflation will increase again, increasing the value of their properties back to 2022 levels.

Buyers are hesitant to buy because their existing exposure is declining in value and interest rates are pricing them out of further investment.

Transactions are sparse as a result. The waiting game continues….

That’s a wrap! 

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1. Go to www.42macro.com to unlock actionable, hedge-fund-caliber investment insights.
2. RT this thread and follow @DariusDale42 and @42Macro.
3. Have a great day!

Will Inflation Come Back HOT?

Darius recently sat down with Anthony Pompliano to discuss inflation, its direction, and its effect on asset markets.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. Headline CPI Is Accelerating Again, Primarily Due to Energy

Last month, the 3-month annualized growth rate of headline inflation spiked from just under 2% to 3.9%.

A material increase in energy inflation drove the move. 

Until last month, the three-month annualized rate of energy inflation had been negative for approximately one year; the August CPI report indicated an energy inflation increase of 25.4% on a 3-month annualized basis.

We expect the increase in energy inflation to persist as Brent crude oil continues its upward momentum.
 

2. Core CPI Continues to Decelerate, Primarily Due to Shelter

While Headline CPI is increasing, Core CPI, a measure that excludes some of the most volatile components like food and energy prices and therefore provides a clearer view of the underlying trend in inflation, is decreasing.

Last Wednesday’s report showed that:

• Core CPI decelerated to 2.4% on a 3-month annualized basis – the lowest reading since 2021.
• Core Goods CPI inflected negative to -1.9% on a 3-month annualized basis.
• Shelter Inflation materially impacted Core CPI as it declined from just over 5% to 4.4% on a 3-month annualized basis.

3. Producer Price Inflation Is Back on The Rise Again And May Also Represent The Vanguard of Sticky Inflation

PPI, which measures price changes from the producer’s perspective, accelerated to 4.2% on a 3-month annualized basis – the highest value since the first half of last year.

Leading underlying measures of inflation like Super Core PPI are beginning to show upside momentum and we are starting to see the first signs that inflation is potentially bottoming out.

The return of inflation is negative for asset markets – with it comes a stronger dollar and greater bond market volatility, both of which are headwinds for any increase in global liquidity.

 
That’s a wrap!


If you found this blog post helpful:

1. Go to www.42macro.com to unlock actionable, hedge-fund-caliber investment insights.
2. RT this thread and follow @42Macro and @42MacroWeather.
3. Have a great day!

“No Landing” = No Liquidity, Says The US Dollar

The US Dollar Index is poised for its ninth consecutive weekly advance — the longest winning streak since 2005 as the global currency market rerates economic resiliency in the US and derates the economic outlooks in Europe and China. The reason why FX and interest rate volatility are drags on global liquidity is because when net international investment surplus economies like Japan and the Eurozone see their currencies weaken, it makes it harder for their financial intermediaries to create the dollars required to capitalize investments around the world. FX and interest rate volatility complicate that process and slow down the creation of new dollar supply at the margins.

Growth of the world’s demand for dollars is more stable due to the refinancing requirements of the existing stock of cross-border financing that is denominated in USD — roughly 50% of the total, with ~65% of cross-border loans and ~80% of international debt securities issued by entities that have no organic access to dollars. Thus, fluctuations in the supply of new dollars have an outsized influence in driving FX trends because of the relatively inelastic demand for dollars versus a more elastic dollar supply curve. More FX and interest rate volatility = marginal dollar supply falls faster than marginal dollar demand = stronger dollar. Less FX and interest rate volatility = marginal dollar supply rises faster than marginal dollar demand = weaker USD. This process is reflexive and feeds on itself until exogenous factors like central bank pivots inflect the trend. This is why price momentum in the currency market tends to trend.

Will Bitcoin Crash Before The Halving?

Darius recently sat down with Anthony Pompliano to discuss global liquidity, bitcoin, the Fed, and more.


If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. The Years Leading Up to Bitcoin Halvings Are Extremely Volatile. 

When we analyzed the past Bitcoin halvings from November 2012, July 2016, and May 2020, we found that in the years leading up to the halving, Bitcoin tends to have three drawdowns of more than -20% on a median basis.

All drawdowns in the year leading up to halvings have a median decline of -27%. 

We believe Bitcoin will be much higher in a few years, but it will likely require a rough path to reach its destination. 

2. Over The Next Year, Liquidity Will Determine Bitcoin’s Path.

On a median basis, Bitcoin increases 144% in the year leading up to halvings.

These increases have closely followed global liquidity cycles; the liquidity cycle bottomed in 2012 and 2015, years leading into the halvings where Bitcoin increased 384% and 144%, respectively.

However, in 2019, when liquidity conditions were less favorable than in 2011 and 2015, Bitcoin failed to see a similar price increase. 

The increase that year was only 20%, and the drawdowns were more significant than in the previous pre-halving years.

The amount of liquidity in asset markets will decide Bitcoin’s path over the next year.

3. We Believe The Fed Will Be Forced to Increase Their Inflation Target From 2% to 3%

The change will likely come in two phases:

• First, the market will become comfortable with inflation settling above 2%. This is likely a 2024-25 phenomenon. 
• Then, when the unemployment rate is high enough, and with enough political pressure, the Fed will officially increase its target to 3%, ultimately paving the way for it to resume QE and lower interest rates. This is likely a 2025-26 phenomenon. 

That’s a wrap! 

If you found this blog post helpful:

1. Go to www.42macro.com to unlock actionable, hedge-fund-caliber investment insights.
2. RT this thread and follow @42Macro and @42MacroWeather.
3. Have a great day!

All Things Macro

Darius recently sat down with Nick Halaris to discuss proper risk management, the labor market, inflation, asset markets, and much more.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. Investors Are Doing A Great Disservice To Themselves By Not Being Bayesian

At 42 Macro, we use three core tenants to form our systematic macro risk management process:

• Regime Segmentation: We identify which investable regime the economy is in, the probability of that regime persisting, and how long it is likely to persist.
• Bayesian Inference: We systematically update the probability of relevant economic scenarios as new information becomes available to the market.
• Risk Management Tools: We use sophisticated quantitative tools like our Volatility Adjusted Momentum Signal (VAMS) and Global Macro Risk Matrix to predict when the price momentum of a particular security or overall market regime (risk on vs. risk off) is likely to change. 

We urge our readers to infuse proper risk management in their investment strategies. We welcome you to use our tools if you want to gain a systematic edge in the market: https://42macro.com/sampleresearch.

2. Labor Hoarding Has Contributed To The Resilience Of The US Economy

The most recent US Total Labor Force SA reading was 167 million people – a value below its trendline since 2009. 

Conversely, Gross Domestic Income recovered its trendline approximately 18 months ago and remains above it. 

The discrepancy in strength between the two indicators suggests there is a large amount of cash in the economy that can be used to demand goods and services but insufficient labor to supply those goods and services.

3. History Tells Us The Fed Must Break The Economy to Achieve Its Price Stability Mandate

We analyzed every recession since 1969 and found that, on a median basis, core PCE inflation is almost always flat-to-up in the year leading up to a recession.

Historically, inflation does not break down without a recession.

Both this study and our HOPE+I framework confirm that inflation is a lagging indicator, and we believe it will again fail to fall below the Fed’s 2% target without a recession.

That’s a wrap! 

If you found this blog post helpful:

1. Go to www.42macro.com to unlock actionable, hedge-fund-caliber investment insights.
2. RT this thread and follow @42Macro and @42MacroWeather.
3. Have a great day!

Evidence Of A Potential Wage-Price Spiral

The ~150,000 member United Auto Workers (UAW) union has declared “war” on Detroit’s big three auto makers GM $GM, Ford $F, and Stellantis $STLAM IM, threatening a strike by September 15 if the companies fail to acquiesce to demands that include a +46% wage increase and a decline in the work week to 32 hours. If a new collective bargaining agreement cannot be achieved by the deadline, the strike will be joined by Unifor — Canada’s largest labor union with ~315,000 total workers and ~18,000 auto workers.

Stories like this are supportive of our view that the narrative around inflation is likely to shift from “immaculate disinflation” to “sticky inflation” within 3-6 months. We have been keen to call out the elevated probability of a soft landing in the US economy. While a soft landing is not our modal outcome, we believe it is a scenario worth educating you on because a soft landing in the economy is highly likely to result in a soft landing in inflation relative to the Fed’s 2% target — which Powell went out of his way to quadruple down on last Friday at Jackson Hole.

No firm on global Wall Street has had a more accurate view on the resiliency of the US economy than @42Macro has for the past year and, as a result, a better call on bonds. We still see more fixed income volatility in the months ahead because we believe the consensus narrative surrounding inflation is likely to deteriorate before the recession hits.

What is Making the U.S. Economy so Resilient?

This week, Darius sat down with Maggie Lake from Real Vision to discuss the resiliency of the US economy, the housing market, and much more.

If you missed the interview, we have you covered. Here are three takeaways from the conversation that have significant implications for your portfolio: 

1. The Resiliency of the US Economy Will Likely Continue 

Our research shows the US economy has nowcast itself into “GOLDILOCKS” for the past five months. GOLDILOCKS is a regime marked by growth trending higher and inflation trending lower.

The strength of the economy will likely continue because:

• Goods demand is increasing — real goods PCE increased 5.4% on a three-month annualized basis in the most recent month.
• Corporations have been reducing inventories for the past five quarters, reducing 72 basis points off of GDP per quarter, on average. This, paired with increasing demand, could lead to inventory restocking the next few quarters.

2. New Home Sales Are Surging Because The Existing Home Sales Market Has Been Starved of Supply

Today, homeowners are unwilling to sell their homes and trade their ~3.5% mortgage (the effective mortgage rate nationally) for the current market rate of ~7%.

This supply shortage is causing a spike in new home builds:

• Building Permits are growing at 7% on a three-month annualized basis.
• Housing Starts are growing 31% on a three-month annualized rate of change basis.
• New Home Sales are growing at 21% on a three-month annualized basis.

3. “Bidenomics” Is Also Contributing to Our “Resilient US Economy” Theme

The US economy is experiencing a record non-war, non-recession budget deficit under the current administration.

Last year, the deficit was -3.7% of GDP. 

Today, it is -8.4%.

That 470 basis point difference equates to approximately $1.3 trillion of incremental fiscal stimulus supplied to the US economy, further contributing to its resiliency. 

That’s a wrap! 

If you found this blog post helpful:

1. Go to www.42macro.com to unlock actionable, hedge-fund caliber investment insights.
2. RT this thread and follow @42Macro and @42MacroWeather.
3. Have a great day!

Fresh Evidence of Transitory GOLDILOCKS in the US Economy

The August University of Michigan Consumer Sentiment was marginally confirming of our “resilient US economy” theme.

Specifically, the Employment Survey – one of our “Fab 5” recession signaling indicators – ticked up to its highest level since Sep-22.

Additionally, the 1yr Forward Expected Change in Financial Situation Index ticked up to its highest level since Jul-21.

The August University of Michigan Consumer Sentiment was marginally confirming of the “immaculate disinflation” narrative as well. Specifically, the NTM and 5-10yr CPI forecast declined to their lowest respective levels since Mar-21 and Sep-22.

Correction or Crash?

One recent data point that gives us confidence we are not at the start of a market crash is the July NFIB Small Business Optimism Survey, which was released yesterday. The report had an undeniable GOLDILOCKS (growth UP; inflation DOWN) vibe to it.

On the growth front:

• the Headline Index rose to the highest since Sep-22
• Capex Plans rose to the highest since Jan-22
• Inventory Accumulation rose to the highest since Oct-22
• Sales Expectations rose to a 5mo high
• Hiring Plans rose to a 2mo high
• Few or No Qualified Applicant for Job Openings rose to the highest since Sep-22

On the inflation front:

• the Higher Prices Index fell to the lowest since Jan-21
• Price Plans Next 3mos fell to a 3mo low
• Compensation Plans fell to the lowest since Apr-21

Still No Recession in Sight

From a recession-signaling perspective, we have been watching three statistics that are updated with each month’s Jobs Report: Continuing Claims/Total Labor Force Ratio, Cyclical Unemployment, and Temporary Employment.

• With respect to the Continuing Claims/Total Labor Force Ratio, the 3mo annualized growth rate for July decelerated to -24.6%, well shy of the median rate observed at the start of recessions throughout the history of the time series.
• With respect to Cyclical Unemployment, the 3mo annualized growth rate for July accelerated to -3.3%, well shy of the median rate observed at the start of recessions throughout the history of the time series.
• With respect to the Temporary Employment, the 3mo annualized growth rate for July decelerated to -6.5%, narrowly shy of the median rate observed at the start of recessions throughout the history of the time series and is the only one of our “Fab 5” Recession Signaling Indicators suggesting the US economy is currently in a recession.

With the Fed nearing the end of its rate-hiking scheme, asset markets likely require a recession for the current correction to develop into a crash.