Gas Prices And Change

The Bauman Society warns of the problems related to falling oil costs:

As you likely realize every time you pump gas into your car, the cost of fuel has dropped by about 50% over the last two years.

The Fall of Crude

See larger image

This is great news for consumers, but it’s bad news for the exploration companies extracting black gold from rocks and sand. 

And as bad as it is for those companies, it’s absolutely awful news for the states that have been collecting “severance” payments from all that oil being recovered. Oil provided a massive tax base for these states. Alaska, for example, made so much money from crude, it’s been known to pay residents an oil dividend every year.

This year, the governor said he’s going to give residents half as much as they received last year and cap the total payout to just $1,000. Yet this actually understates their problem: Alaska has a $4 billion hole to patch up thanks to lost oil-severance payments.

In an interview with MarketWatch, Alaska’s director of Office Management and Budget said: “We could close every school in the state and that still wouldn’t be enough to close the budget gap.”

While Alaska has the biggest problem, it’s not alone. Oklahoma and North Dakota each have a $1.3 billion deficit to fill. Louisiana’s is $2 billion.

So how will these budget gaps be rectified? By cutting spending and raising taxes, that’s how. That means more unemployment and less spending. In other words, these four states — which previously led the U.S. economy — will now become a drag.

That’s terrible news when the GDP of our nation is barely growing at a 1% clip. The last thing we need are more problems to hold back our economic potential.

And I’m afraid things are going to get worse before they get better. As James Dale Davidson and Charles DelValle have mentioned countless times, we are in the midst of a major shift in the global economy. The rules that were once considered “conventional wisdom” are fading away.

 All the various economies around the world are increasingly intertwining and becoming more complex. As author and historian Joseph Tainter pointed out in his book The Collapse of Complex Societies, the deeper the integration between these various economies, the more susceptible they become to a major problem.

So now, rather than wonder about what’s happening in the oil patch exclusively, we have to worry about what China’s future monetary policies will be … what Russia may do with its hoard of treasury bonds … or whether the European Union will splinter apart and push the entire globe into a new financial crisis.

We are heading full steam toward a collapse. And while we don’t have a crystal ball to tell us precisely when this will all take place, we do know that it’s inevitable. Because as every day goes by, we see more and more pieces falling apart.

All of which could mean big changes for the local real estate market...stay tuned!

Happy Investing! 

Seattle Real Estate Market

The number of new listings is increasing week over week (139 new listings last week); however pent up buyer demand from the lack of winter inventory is far out-pacing sellers right now.  The Seattle inventory count fell to 552 – 32 homes above our record low set a couple months ago. 

As you might expect with a white-hot market, buyer competition and escalation clauses are driving prices skyward.  We blasted through the $300 per foot mark a couple weeks back, and look to be at $325 per sq foot in the next week or so.  Thought:  If the cost to build new is about $125 per sq foot…eventually we’re going to get to a point where even fewer people are going to want to sell.  Instead of buying a move-up home, people will just tear down or renovate their current one – this will further decrease potential new inventory moving forward. 

Combine that thought of building new for about $125 per sq foot with Fannie Mae’s new guidelines a few months back where proposed rental income can be used to offset a current mortgage (thus, allowing current homeowners to keep their homes and buy another one instead of being forced to sell it); and I don’t see any inventory relief coming to Seattle anytime soon.  It’s beginning to look like a downward spiral for inventory…which should make builders happy, and the Seattle economy chugging along for quite some time.  

Mortgage interest rates were the victim of some pretty good news last week on the two fronts that have been driving them lower since the start of 2016 – 1) Oil prices rose, and are trading at $36.98 per barrel as I write this; and 2) domestic economic news was positive in the face of global turmoil. 

Oil prices continued rising last week despite an EIA reading of over 10m barrels added to inventories.  The reason:  US oil production is down (because so many oil rigs have had to shut down due to the low oil prices), and Venezuela may get shut out of the global oil market if they default on their debt…which it looks like they might.  There were conspiracy theories that Saudi Arabia has been driving down oil prices to kill off some of the weaker producers so that the price of oil would stabilize and remain high in the long run.  It looks like their hopes may be coming to fruition.  The price of oil has become an important topic as of the last few months.  The lower it goes, the more it hurts US companies and our economy.  When the price of oil falls, fears arise, and investors park their money in the mortgage bond thus lowering mortgage interest rates.  However, when the price of oil rises, economic fears lesson, and investors take their money out of the mortgage bond to invest is other higher risk/higher return assets.  This, in turn raises mortgage interest rates.

On the jobs front last week, the Bureau of Labor Statistics reported on Friday that US Payrolls increased by 242,000.  This was much higher than the forecast of 190,000.  Not only that, but unemployment is at 4.9%; the labor force participation rate increased to 62.9% (highest level in just over a year); and the employment-to-population ratio increased to 59.8% (the highest since April 2009).  This is great news for the US economy!  And surprising as well – People’s worst fears over what the fallout would be by lower oil prices putting oil workers out of work, and the slowdown in China have at least been quelled for now by this outstanding employment report. 

We’ll see what happens moving forward, but at least for now, sentiment is starting to change, and mortgage interest rates are starting to trend higher as a result.    

Today's blog courtesy of Kyle Berquist, Guild Mortgage Company

Happy Investing!

Good News Bad News

We are enjoying the greatest economy here in the Puget Sound area. However inadequate transportation planning could cut it short. There are other dark clouds on the horizon as well.

Jon Talton recently outlined a number of macroeconomic concerns in his January 30 article for the Seattle Times. China and other emerging economies dependent on Chinese investment have been struggling; oil and commodities prices have been collapsing; tech stocks may be overvalued; and there is trouble in the manufacturing sector, often a precursor to economic downturn.

The NY Times reported recently that American businesses are hoarding $1.9 trillion as a hedge against future economic turmoil.

While our tech industry has buoyed our local economy, other markets dependent on housing or manufacturing have been left behind in an uneven economic recovery. But there are several other concerns in Seattle's economy. Venture capital that fuels local tech start-ups actually declined in the fourth quarter of 2015. Boeing's employment numbers have dropped in 2015 to 79,238 employees versus more than 86,000 in 2013. Seattle risks overbuilding in its hot commercial market. Global economic slowdown has already impacted rail traffic dependent on coal and oil, and could also have significant impact on the new ports alliance between Seattle and Tacoma.

Chris Mefford, president of the research group Community Attributes, expects the metro Seattle economy to grow in 2016, albeit slower than in the past. Robert Kiyosaki has predicted a big crash in the national economy in 2016. Jason Dimond of JP Morgan Chase dismisses this possibility. The Federal Reserve puts it at a ten percent possibility; while Citigroup puts the chances at 65%.

What are you doing as an investor to prepare yourself?

Happy Investing!

Stock Market Highs

My financial advisor, partner and Aquila Legacy Catalyst Paul Carag sent me this article, which I found fascinating and wanted to share with my readers. It underscores the need for a financial plan to deal with future swings in the economy. CPA and Attorney Mark Kohler, at a REAPS meeting last week, advised investors to own or start a small business, invest in real estate, and take advantage of operating in a tax-free or tax-favored environment. This article below makes it clear why this is so important.
What the Dow Jones Industrial Average Reaching a New High Really Means
~ by Michael Lombardi, MBA
I’ll be the first to admit it. I never thought it would happen, the Dow Jones Industrial Average moving to a new record high. But who was I kidding? When trillions of dollars in paper money are created out of thin air and interest rates are simultaneously reduced to zero, where else would investors put their money?
But in the end, we’ll find out that the bigger the rise—a rise in stock prices based not on fundamental improvements to the economy, but on artificial changes to the money supply—the bigger the fall.
Look for a chart of the Dow Jones Industrial Average at www.StockCharts.com
From the chart, we see a long upward trend in the Dow Jones Industrial Average culminating in new highs reached yesterday. To me, the chart above depicts the end result of increased paper money printing and artificially low interest rates. Sadly, as the headlines have changed, investors have become more optimistic than ever—and this is very dangerous.
What if all we have seen since 2008 is a sucker’s rally in stock prices? After all, corporate earnings growth has turned negative. The U.S. economy is close to contraction. Unemployment in the U.S. remains pathetic. The eurozone situation is deteriorating. Corporate insiders are selling stock at record levels. Bullishness amongst stock advisors sits at multi-year highs. U.S. corporations are buying stock and cutting payrolls to keep profits up because consumers have pulled back on spending. Under the above scenario, how can the rise in the Dow Jones Industrial Average be real?
By implementing quantitative easing and low interest rates, what the Federal Reserve has essentially done is drive investors to stocks. Just look at 30-year U.S. bonds. They provided investors with a five percent yield prior to the financial crisis; now the yield on the same U.S. bonds is 40% lower at around three percent.
Investors are taking on extra risk just to get back to the returns they once enjoyed. As a result, they are rushing toward the companies in key stock indices like the Dow Jones Industrial Average, not because they are cheap, or undervalued, but because there aren’t many other options for investors out there. Ten-year U.S. Treasuries are yielding negative real returns when you take inflation into account.
I believe the longer the Federal Reserve continues with its quantitative easing and easy monetary policy, the bigger the eventual problem is going to be. Consider this: what happens to the Dow Jones Industrial Average when the Fed stops printing paper money, stops purchasing U.S. bonds, and starts to raise interest rates? The opposite of a rising stock market is what happens.
The Federal Reserve has increased its balance sheet to over $3.0 trillion through quantitative easing and continues to do the same in multiples of $85.0 billion a month. An eventual Fed balance sheet of $4.0 trillion isn’t farfetched.
Dear reader, don’t get lured into the belief that the economy has recovered and the stock market is a safe place to invest again. I’m preaching caution.
Michael’s Personal Notes:
When it comes to looking at the economic growth of a nation, most economists look at indicators such as the unemployment rate, consumer spending, business conditions, and growth in gross domestic product (GDP).
Ironically, as the stock market moves to new highs, all these key indicators of economic growth are painting a scary picture of the U.S. economy.
As I have been harping on about in these pages for far too long now, the unemployment situation in the U.S. economy is a big hurdle to overcome on the way to economic growth. There are millions of Americans still unemployed and looking for jobs—more job seekers than job openings. In real economic growth, you don’t have this scenario.
Similarly, consumer spending, hands down the biggest contributor of economic growth in the U.S. economy, looks to be tumbling. In January, the disposable income of households in the U.S. economy, after taking into consideration inflation and taxes, dropped four percent—the biggest single-month drop in 20 years! If consumers in the U.S. economy don’t have money to spend, then economic growth becomes questionable.
As for business conditions, they appear bright only if you look at the stock market. In reality, they are deteriorating in the U.S. economy. For the first quarter of 2013, the expectations of corporate earnings of companies in the S&P 500 have turned negative. Corporate earnings were negative in the third quarter of 2012, too.
According to FactSet, so far, 105 companies in the S&P 500 have issued guidance for their corporate earnings for the first quarter of 2013. Of these 105 companies, 77% provided a negative outlook. If the percentage of companies with a negative corporate earnings outlook stays at this level, it would be the highest number of companies providing negative outlooks since the first quarter of 2006. (Source: FactSet, February 28, 2013.)
In its initial release, the Bureau of Economic Analysis reported that the fourth-quarter GDP adjusted for inflation in the U.S. economy contracted for the first time in 3.5 years. Its second estimate showed a miniscule increase of 0.1%. (Source: Bureau of Economic Analysis, February 28, 2013.)
With all this said, let me ask you this question: how can we have economic growth in the U.S. economy when economic indicators are showing the opposite?
The sad reality is that there’s no economic growth in the U.S. economy.

Puget Sound Economic Forum

Last month I attended the Second Annual Economic Forum sponsored by Pacific Continental Bank. Panelists included Roger Busse, president and chief operating officer of Pacific Continental Bank; Dr. Fariba Alamdari, VP marketing, Boeing; Steve Johnson, director of the City of Seattle's Office of Economic Development; and Erik Ristuben, chief investment strategist for Russell Investments.

Overall, panelists predicted a mediocre recovery in US financial markets, with world GDP growing at a much faster rate; Europe remaining a threat on the verge of a "fiscal cliff" that could impact economic recovery in the US (see my previous post for some insight as to the links between the US and world economies); and Seattle in particular doing well in this post-recovery period. Boeing is a major player in the region's economic health and their growth forecast is very healthy.

Currently, the US government spends 24% of GDP, but takes in only 15% in taxes, one of the lowest tax receipts since the 1950s. When the US last balanced its budget under the Clinton administration, it spent about 19% on GDP and took in the same percentage in tax revenue. This is sustainable, Mr. Ristuben argued. Spending must go down, and tax revenue must go down in order to balance our budget in the long run.

Ristuben characterized the velocity of money as "moribund," but did not consider inflation to be an immediate concern. Johnson quoted Thomas Friedman in the September 8 NY Times as stating, "More than ever now, lifelong learning is the key to getting into, and staying in, the middle class."

In terms of publicly-traded equities, REITs have been the best performing asset class in the recent past. So real estate has outperformed other equity classes, demonstrating once again that investment in real estate makes financial sense.

Panelists were particularly optimistic about Seattle's economic prospects for the future. Seattle was recently ranked as the seventh best commercial real estate market in the United States. Apartment vacancies are down to 3.8% and rents are up 2.7%. Construction permits are up 50%. Job growth is up 5.1% and unemployment is down 1.3%. This job growth is more than double that of the United States average, and more than three times that for the rest of the state.

Talent is attracted to Seattle's vibrant neighborhoods. The economy has become extremely diversified as it transitioned from resource extraction to industrial and manufacturing to today's economic engine with high tech, Boeing, and biotech among the major employers.

Concerns centered around recent City Council decisions regarding the sick leave ordinance, and non-disclosure of criminal backgrounds. In addition, the Port of Seattle competes rather than collaborates with the neighboring Port of Tacoma; which means that both will lose out to port traffic in Los Angeles, the Suez, Panama, and Lake Rupert, Canada.

Overall, most panelists described the economic forecast for the region to be "cautious optimism."