The next 7 weeks are key to everything. First of course is the run up to the election. Some economists believe the jobs numbers will decline in September as the economy again slows. I believe they will rise. There is real tension between a rise due to people returning to work as the $600 went away and as more things reopen. On the other hand, there will be more small businesses and some large ones, like major retailers, which will shed more jobs as they close for good. I don’t think we can know which trend will be more impactful until we see August and September jobs numbers and GDP for Q3.
My belief is things will get much better, and unemployment will decline, but it is very clear the Dems are intentionally not doing a new fiscal stimulus deal in order to cause more job loss and slower growth going into the election. They know if the economy really does grow at 20% in Q3, they lose. It is that simple. If they can keep people unemployed, and without enough stimulus money to get by decently, they win. While the $600 and PPP was being paid out, savings went up dramatically to around 20%, consumers saved enough to have extra cash, and they made material pay downs of credit cards and other debt, so in general consumers are in OK shape, but likely still reluctant to spend much right now.
We will now hear all about people starving-which is not true, but the press will find a few people to put on TV to say they have no food. Reality is there are food stamps and food banks all across the country for those struggling, as well as unemployment and other welfare programs. I believe there is general optimism with a lot of uncertainty right now. Pelosi can call back the House to vote on a fake Post Office bill, but not unemployment, PPP, or anything to help the unemployed and the economy. The Post Office has over $10 billion cash on hand now and does not need cash. They need reorganization and an end to the postal union.
There is a real problem with hospitality, airlines, restaurants, oil workers, and soon government workers. Hotels will remain very challenged until 2023 or longer, most likely, when travel returns full time as the vaccine takes full hold with enough people getting it. It may be 2024 or 2025 before parts of the industry fully recovers. Even then, some big box hotels will never reopen. Virtual working and visiting will become the norm now for many, and travel for meetings will become much reduced permanently.
As time goes on, many have found that a lot of things can be done virtually that were done in person before. Even court hearings, and grand juries are now remote, and might become the norm in civil cases where there is no jury required. Closings are now done remotely. Even notaries work remotely now. A lot of remote workers find it is much more efficient to work from home and not commute. Plus now they get to work out in the early morning, or do whatever that they could not do before when they had to commute. They can start to work earlier, and have more time to think things through in a quiet place, with less stress of riding a train or bus, or driving in the winter.
Think how much more productive we all will be if there is less time wasted on travel and sitting around airports, or driving to meetings. What is missing is the social interaction with colleagues, and training, and project collaboration where sitting in the same room does matter. Therefore there will be a mix of remote and in office. It will depend on what your role is.
Retail has now changed permanently. It will be a while to see, but it may be that as much as 30% of retail is online. Target has now decided that for some low value items it is cheaper to not have it returned if you do not like it for things that cost little. The US was vastly over stored, with 50 sq ft per person, compared to Canada which is one third that, and the EU which is single digits retail sq ft. The elimination of a big piece of retail sq footage was going to happen regardless, and the virus has simply accelerated it. Possibly one third of retail will be permanently eliminated.
Bad news for malls and power centers. It also means brands need to find new ways to market and deliver their products. Walmart is now going to make a major challenge to Amazon, so that will simply accelerate online shopping even faster. Target and even Home Depot and Loews have done a very good job of integrating online with in-store, which is what will define the winners in retail. This also means the very high rents charged for urban ground floor retail in office buildings is past its peak. A real problem for landlords. The other problem for office landlords and hotels is they need to have upgraded ventilation systems, and a lot more regular deep cleaning. That costs money. At the same time many tenants will want lower rents and less space. No way to know how this tension resolves itself over the next year or two, but there is real risk in urban office until it does. Most large office tenants are still paying rent, but it is unclear how much longer that continues as leases expire.
Now we can even buy a car virtually, and get it delivered to your home. I no longer go to the supermarket. A once a week delivery of all my grocery needs comes to my door. I am pursuing a lawsuit now, and I have never had a face to face in person with my lawyer, and he said there is no longer in person hearings. All filings are done virtually online. Just consider the ramifications of not needing many of the ancillary people whose jobs depended on in person purchasing, or hearings, or other things. There were a lot of service support people in retail, court houses, gas stations, delis, bus drivers, and many other functions who are no longer needed. This is where the unemployment problem will be worst, and for people who can least afford it. Higher paid people have savings, and likely have jobs that work well remotely, so can live normally for a long time even if their profession or business is very slow right now. It is estimated that 40% of all jobs can be done remotely, so those people will be fine. The other 60% need life to get back reopened. That 60% will not be running out to spend on discretionary items. It will be two to three years, at least, to once again attain the levels of GDP of 2019. Getting back to 3.5% unemployment will take years, if ever.
The purchasing mangers’ index for both manufacturing and service, in most advanced nations, has returned to above 50, meaning growth, so that is good news. Manufacturing is coming back pretty well. It is the small business, restaurants, hotels, apparel stores, and tourist related businesses that will die. That employs a lot of people. Just consider, if you work remotely from home you do not need to go to the dry cleaner and tailor so often. You are not going to out grab a sandwich for lunch. You don’t need so many suits or dresses. You are not riding the bus or train. Just a small example. Income inequality will be worse between the asset rich, work remotely people, and the service wage earners. That has real political and tax ramifications. Some positives are inflation will remain very low, gas prices will remain very low, which helps low income people, and interest rates will remain near zero for a few years, and that means good news for housing and for consumer borrowing and auto sales. The dollar has declined around 10%, and now seems to be stabilizing, but it is hard to know where it will settle out until after the election and a vaccine becomes approved. A lower dollar is good for exports, but bad for prices of imported goods. At the moment it does not seem to be impacting the stock market, or inflation, but it could in time.
The EU, and even S Korea, are seeing a new wave of virus infections. By comparison the US may be in better shape now having just been through a surge and having better, more extensive testing, and better treatment protocols. The announcement of the plasma treatment is big, and will make a real impact on the death rate. We will have to see how things go in the September, October period as to new surges, or not. If hospitalizations continue to decline into October with no new surges, and the death rate does decline materially, Trump wins. New surges in the EU and Asia do not help getting trade and the economy back full time. But they do help Trump look like the US is doing better than the rest of the world, and that takes away a big talking point from the Dems if it happens. The things Biden says he would do on the virus are things Trump has already done, other than a full shut down again, which Biden is willing to do, which would devastate the economy for good.
On the good news side, home construction and sales are booming, and that is a huge boost to the economy. This will continue for several years. Auto production has increased 200% or more since May, and is back to 2/3 of where it was in February. Another huge boost. Both are beneficiaries of historic low rates. However, Boeing has had major layoffs, and those people are doubtful to be rehired for years as air travel remains barely alive for now until the vaccines are widespread. All those service people in airports, hotels, cab drivers, people who manufacture and sell suitcases and related travel products are also not getting jobs back for years. All of this will take time to sort out and to see where the jobs situation finally resolves itself. It is too complicated and difficult to really get a handle on yet.
However, this is the election-who can better create a strong economy to rebuild jobs. So far Trump wins that one- It is the economy stupid as the saying goes. It will be mid next year before large numbers of people are vaccinated and things start to get more normalized. Then there is the issue of perceptions of safety of the vaccine. Regardless of all the trials etc, many will worry the vaccine may not be safe, and will wait for months before getting a shot. That will mean a slower economic rebound. There is just no way to forecast how this will go until the vaccine is out and available. Only 40% of people get the flu shot, but I want to tell everyone, Mt Sinai in NY is very strongly recommending everyone get the flu shot in September when it is released Sept 15, to avoid the risk of getting flu and Covid at the same time which would be deadly. If you are older get the flu shot.
What we do not know is what are the social and real estate ramifications of all of this. We are never going fully back to the way it was. Office socialization, training, and collaboration will change, but we do not know how yet. As I have stated before, there will most likely be a mix of remote, in-office and satellite office arrangements going forward in many businesses. Busines travel will never fully recover as everyone has realized they can do much of what is needed by Zoom and other services like Zoom. It is unlikely court hearings will ever go back to full time in person. Even doctor visits will be far more telemed permanently. When will concerts and museum visits return to anywhere close to what was normal. It will take another full year, and the vaccine, before we even have a sense of how this all sorts out.
One of the other big unknowns is how the social unrest and crime wave in cities gets resolved. My assumption is, it has gotten so bad that there will be a wave of Giuliani like mayors and governors elected over the next two years, and the far left politicians will see themselves voted out in many places as normal citizens realize their lives are in danger again, and they can no longer go out at night safely. That potentially has real ramifications for retail and entertainment. Over 75% of voters want more cops, not less. Most blacks want more cops. They want the homeless off the streets. They want to be rid of Lightfoot, DeBozzo, the mayor of Seattle and others. They will not want higher taxes to pay for all of this. There is some chance there could be a shift in some major cities to Republican governments. Many people, including blacks are realizing that BLM is doing nothing but making their lives unsafe and filled with crime and protests. There is just no way to predict right now. Compounding the problem is the major reduction in sales and income taxes, plus less fees from developers and from licensing, etc. There is no way the big cities will have the revenue to pay for all their needs and cover pensions, which are the real drain on the system, and budgets. There will have to be major pension reform and services changes in cities. Current city and state budgets will become unsustainable. It is all about pension reform which will be a giant fight, but there is no choice.
It is clear that virtual school is a total failure. Kids just do not learn unless in classrooms. School is far more than sitting in class for young kids. There is the whole learning socialization, conflict resolution, and relationship building. In addition, for many, there is two meals, health checks, special ed, and support and encouragement they do not get at home. For poor minority kids no in person school is a disaster that can never be made up. The teachers union is destroying the futures of tens of thousands of minority kids. We may lose the futures of an entire generation of minority kids if the teachers unions prevail. That is especially bad now when it is essential to have a good education to be able to get a good job in the digital world we are entering. For many recent college grads, the pandemic is a disaster. Jobs they thought they had are gone. For top level grads, their jobs are still there for the most part. There is no way to know when these other kids will get new opportunities. There will be a lot of college kids back in their parents homes working at jobs beneath their skill level. It will be 2009 all over again for many.
We will have to come to political reality on the massive fiscal and monetary stimulus being created now. The massive added spend demanded by the Dems is simply not sustainable. There is no way with the slowdown in the economy that it could be paid for, ever. The Modern Monetary Theory that there is no problem just printing more money, is absurd. Throughout history it has led to ruin. For the moment we get away with it due to ultra-low rates, but if rates return to 4% on the ten year, it is impossible for the US government to pay debt service without huge tax increases and major cutbacks in services and defense. If the Dems get full control and implement many of the huge spending programs they are pushing, then the US in a few years will find itself in a fiscal and monetary disaster. The dollar will fall, services will decline, and the stock market will decline.
CNBC interviewed several noted economists -all of whom blasted Trump on the economy. If you read this just be aware all are left of center anti-Trump economists who are part of the Dem establishment. One was in line to be in Hilary’s cabinet. All are globalists. Krugman has been wrong on almost every issue in the past five years.
There is a new thing happening in colleges. Many small colleges are going out of business permanently. Some will be redeveloped into residential communities, or other uses, and some have no real estate value at all due to location. What is new is that some of the big universities with big endowments are starting to buy small bankrupt schools and using them to expand enrollment. They eliminate the upper level of management completely, and admit the next tier of applicants that were rejected first round. It becomes a remote campus. This activity is just beginning, but U of P has done one deal, and several more are under consideration by Harvard and others . This will change the whole academic world over the next few years. They will also be buying out some tenured professors who only really work part time and then make their living as consultants. Well over 200 small schools will disappear over the next few years.
China remains the big geopolitical issue, and will grow in importance over time. A lot will depend on the election. If Trump wins, we will see a lot more tough efforts to stop China from trying to influence American politics, and commerce, and a lot more shows of force to stop their attempts to intimidate Taiwan and Japan. There will also be a major effort to end the recruiting of US professors and tech workers to provide intellectual property. It will get ugly, but is necessary. If Biden wins, it will be back to globalization and lower defense spending, and China will prevail. This is an existential threat to US world dominance. It is the greatest threat the world faces in the next few years. There is no desire by China to cooperate on anything unless they think it will work to their advantage. A Biden win will be very dangerous for the world because he will get it all wrong with China and Iran.
It is likely that oil prices will remain low for a long time as the world economy takes time to recreate demand. Jet fuel will not be so in demand, and as electric cars become common in 4-5 years, there will be much further reduction in demand. Moves to more wind and solar will further reduce demand. This has major ramifications for the oil patch and energy companies.
Due to the flood of manufacturing out of China to Vietnam, Thailand and the Philippines, the cost of production has risen in those countries considerably. Margins have shrunk materially. The next place factories move will be Nigeria and Kenya. Kenya has a developed infrastructure as does Nigeria, and they are keeping the Islamic guerillas mostly at bay. Nigeria has at least confined them to a portion of the country with US special forces help. Africa is the next frontier over the next decade. There is already a considerable amount of very smart US investor money there. There is just no way right now for the average investor to play there, so don’t try. It is very corrupt and you likely would lose.
Black students at NYU are now demanding to have their own segregated residence floor and student union area. We once called this unconstitutional segregation which all Dems are supposedly against. How ironic that we all worked hard to get the civil rights laws to prohibit exactly this, and now the blacks are demanding to have what we strove to outlaw. NYU of course said they are discussing how to accommodate them. And they claim Republicans are racist!
In a war game setting, a virtual AI piloted fighter plane shot down a highly experienced F-16 human pilot 5 out of 5 times. There is separately a new AI program called GPT-3. Apparently it can reason in some ways like a human. The one shown had 175 billion parameters. Google is experimenting with one with 600 billion parameters and Microsoft has one in design with 1 trillion parameters. I have no clue about any of this as it is so far over my paygrade I don’t even know what they are talking about. What I do know is we are getting close to a thinking AI computer. The ramifications are immense. One day very soon we will have this AI built into our fighter planes. The AI functions in nanoseconds, and so can identify, engage and fire before the enemy pilot has time to even figure out what is happening, and make the any move. The AI has no adrenalin, or stress, or gravity impact. It simply uses sensors to instantly assesses and targets the threat, pick its weapon, and launches attacks with no emotion or thinking time, in a nanosecond, scoring a kill each time. The human enemy pilot has no chance against an F 35 when this technology is eventually installed. Star Wars for real. Since the F35 is essentially invisible to radar or many sensors, the enemy will not even know what happened.
All of these things need a lot more thought and discussion, and the ramifications for investing, and politics need to be analyzed. As things develop, the Rant will try to continue to bring some objective perspective