Economic Update (October 12, 2020)

2 Replies

                                                               Economic Update
                                                        (Monday, October 12, 2020)

Make no mistake: no one has enjoyed this Pandemic and its accompanying array of stress, challenge, and heartbreak. Even the most positive person in the world has felt frustration and dismay at times during this ordeal. That said, the power of “Mindset,” essentially the combination of our attitude and core values, is most crucial when times are tough. A positive mindset enables you to maintain your ability to function and take action. A negative mindset sinks you deeper into a hole, causing you to see despair rather than hope. As you can see, your mindset is the foundation you had in place before the virus arrived. Which are you? People with a healthy, positive mindset were those most likely to reach out and help others in those early, unnerving days of March and April. In the seven months since then, mindset has given people the energy to connect with friends and family, to sew masks, to organize food drives, to honor health-care workers, to approach each day with a “how can I help?” attitude. This also plays a huge role in our business, because a positive mindset fuels an “I am, I can, I will” attitude. And that’s what drove so many of our members to reach out to others, to check-in, to take action, and to stay in the game by helping anyway we can. With that positive mindset in place, let’s wash our hands, put on our facemasks, social distance, and get under the hood…

Fed Meeting Minutes. The Federal Open Market Committee consists of members of the Federal Reserve System overseeing open market operations, the buying and selling of U.S. Treasury securities, and establishing short-term interest rates. The Committee consists of 12 member of the Federal Reserve and the Fed Chairman (Jerome Powell). The Committee meets eight times a year (every six weeks) and their 2-day meetings are held behind closed doors. Fortunately for us, the Committee issues a formal statement immediately thereafter and then several weeks later the minutes of the meetings are released to the public. So, if you want to know what the members of the Committee are really thinking (and the direction of our economy) - pay close attention to the Minutes! The Committee last met on September 15-16, 2020. After the meetings, they released a statement vowing to keep interest rates near zero until inflation moderately exceeds the central bank's 2% target. Fed officials also released projections showing they expect rates would stay near zero until the end of 2023 at least. But Chairman Powell (and his allies on the Committee) faced skepticism and opposition in trying to guide markets about the future path of interest rates, the minutes reveal. There were two dissents on the new policy guidance from the voting members of the Committee. More troubling, it wasn't known until the minutes were published last week that unease about the new policy was fairly broad among the remaining seven officials who didn't vote. According to the minutes, "several" Fed officials balked at the strategy, in part because the guidance could limit the central bank's flexibility. They also argued that by influencing the market's view about the future path of short-term interest rates it will make it more difficult for the Committee to achieve its objectives in the future. In stark contrast, a couple of Fed officials argued against the strategy for different reasons. They want the Fed commitment to keep interest rates near zero to be even stronger and less qualified. They want the Fed to say that interest rates would remain near zero until inflation has moved above 2% for an extended period of time. Stay tuned.

ISM Non-Manufacturing Index. The ISM Non-Manufacturing index rose to 57.8 in September (levels above 50 signal expansion; levels below signal contraction.) Service sector activity accelerated in September, as companies continue the battle back from the COVID impacts that shut down supply chains and decimated the employment market. In total, sixteen of eighteen indexes reported growth in September, while just one (professional, scientific & technical services) reported contraction. The two most forward-looking indices – business activity and new orders – both moved higher in September, following a slowing in the pace of growth in August. New orders activity had the largest positive move in September, as businesses continue to re-open and retail activity picks up pace. Business activity, meanwhile, benefitted from the resumption of projects placed on hold as COVID hit, while companies are also putting end of fiscal year spending to work. Both orders and activity look likely to remain elevated in the months ahead, though it will come with fits and starts. The one main sub-index that declined in September was supplier deliveries, which rises when companies report longer delivery delays (typically a sign of more demand than companies can fill in a timely manner) and declines as delivery delays ease. While the index declined in September, it remains above 50 signaling that supply chain pressures continue to be a concern for many businesses. This – paired with stimulus spending and a loose monetary policy that has drastically increased the size of the M2 money supply – is a recipe for rising inflation in the months ahead. One of the best developments in September came as the employment index moved back into expansion territory for the first time since February. On the inflation front, the prices paid index declined to 59.0 from 64.2 in August. Cleaning products, medical supplies (like N95 masks), and construction labor continue to lead prices higher. Taken as a whole, today's report further confirms what the preponderance of the economic reports have been telling us over recent months; the recovery is underway, and the trend is higher.

New Jobless Claims (aka “layoffs”). Initial jobless claims filed through state programs slid to 840,000 last week from a revised 849,000 in the prior week, the Labor Department reports. An unadjusted 464,437 people also filed new claims under the Pandemic Unemployment Assistance Act, the federal law that temporarily made self-employed workers eligible for benefits for the first time. So although the number of Americans who applied for jobless benefits fell slightly to a new pandemic low, they are declining more slowly, a sign the labor market could be experiencing a setback amid another wave of corporate layoffs. New applications for unemployment benefits have gradually receded from a pandemic peak of 6.9 million in late March, but the weekly total has fallen by less than 100,000 in the past month. New jobless claims are still quadruple the pre-crisis average and are higher than any point during the severe 2007-2009 recession. For the second week in a row, the number of new claims in California was frozen at the same level as they were on September 19. The state stopped accepting claims for two weeks to process a large backlog and to install fraud-detection measures after widespread problems in its system. It's possible the claim figures in California have inflated the national total, but it won't be known until the state resumes reporting its data. California will start accepting applications again today. Overall, the economy is still growing, but not as rapidly as it was earlier in the summer. Nevertheless, consumer confidence surged in September to the highest level since the pandemic and the economy is still adding more jobs than it's losing.

Leaning Tower of Dallas. Forget about the leaning tower of Pisa, Italy. Dallas now has its own version of one of the world's most recognizable landmarks. The 11-story building was supposed to come down last month, but a failed demolition left it with a distinctive tilt — and nickname: "the leaning tower of Dallas." The implosion by Nabors Demolition was part of The Central, a 27-acre, $2.5 billion development project that will bring an office building, hotel, eateries, and other amenities to an area just north of downtown Dallas. But 300 pounds of dynamite wasn't enough to topple the old building on the development site. The building, which has a concrete and steel core, apparently "undressed itself" too quickly during the implosion. The middle core of the former Affiliated Computer Services tower remained standing with a distinct lean after the implosion didn't go as planned. What was left is 35 feet shorter and listing at 15 degrees. The remaining structure (which a Nabors Demolition spokesperson assured is "safely contained" within the job site) will be demolished later this month with a crane and a wrecking ball. In the meantime, a slew of comical photos showing people in the distance pretending to lift up — or push over — the leaning tower is making the new Dallas landmark infamous.

Angeles Crest Creamery. In 2014, Gloria Putnam opened Angeles Crest Creamery, a 70-acre ranch with a barn, two houses (for Airbnb), four milking stations, two classic Airstream trailers, and a tiny, yellow homesteading cabin, complete with a porch and an outdoor clawfoot tub, in the San Gabriel Mountains. The 72-acres held her 60 goats, 50 laying hens, four fluffy Pyrenees, two roosters and two pigs. At the Creamery, guests can milk goats, hike in the foothills alongside them as they forage, and eat food prepared by Putnam from ingredients sourced almost entirely on the ranch — colorful eggs, braised goat meat tacos, cajeta (goat's milk caramel), goat milk smoothies, and jalapeno dip for tortilla chips. The Creamery’s biggest selling product? Drum roll…goat cheese, of course! But as the Bobcat Fire approached, all of that threatened to go up in smoke. On Friday, September 19 in the early morning, Gloria Putnam's phone buzzed with an alert: "A wildfire is burning near Big Pines Highway and Highway 2. EVACUATION ORDER, LEAVE NOW." The Bobcat Fire, which has since burned over 120,000 acres and destroyed at least 80 homes, was in danger of destroying everything she had worked for. Putnam owns a horse trailer that fits up to 25 goats, and a dump trailer (the kind that brings your trash to the landfill), which can hold another 20. Several trips between the Creamery and her evacuation camp, located six miles downhill, brought her goats, safe and sound but skittish, to a large, empty lot with water and solar power. In the wake of the Bobcat Fire, the barn and cabin have survived but much of the shrubbery that the goats fed on has burned. The ranch's water structure has also been destroyed. This summer, she had to cancel bookings at the ranch because of the coronavirus pandemic and had only started taking reservations in mid-August. But since evacuating, Putnam has had to cancel and refund all of her Airbnb reservations, her bread and butter. On Saturday, September 26, when evacuation orders were finally lifted, Putnam and her goats returned to the Creamery. Now begins the arduous process of habitat restoration. Much of the area the goats once foraged has been destroyed and the property has a huge 100-yard red stripe painted across the center, a fire retardant called Phos-Check. The goats are fine, with their perky tails wagging, as long as they get their alfalfa. But until her goats can safely forage the land— Putnam has been feeding her goats alfalfa. She gets it from a local feed store, Van Dam Farms in Littlerock, where her feedbill comes to $180 per day to feed the little darlings. To offset the costs, Putnam has launched a crowdfunding campaign that allows donors to purchase feed in $20 increments. [If you want to help the ranch, you can "purchase" feed donations in $20 increments.]

Los Angeles Architecture. Will the pandemic change the face of Los Angeles architecture? Downtown architecture and design firm Omgivning (that’s Swedish for “environment ambience”) who has designed over 400 L.A.-area buildings, just published a report on what’s next for Los Angeles (“Report”). There are four themes driving their Report. One is “human-centered design,” which incorporates ideas for creating group and private spaces, bringing elements of nature into the environment, and, in general, creating spaces that are both useful and comfortable. The second is design that’s flexible. In other words, we need to be able to transform spaces as we go through time. As we go through a recession, as we go through our day, things need to be able to change. The more they’re able to change, the more accessible they’re going to be. Moreover, the Omgivning team is looking toward “blended use,” or spaces that can serve a variety of functions, as well as ways to cut costs for those who own or rent the spaces. The Report says it’s not the size of the space that matters, but rather how many uses it can handle. That means thinking about ideas like “pods” in offices that can be reconfigured for different uses to maximize smaller spaces as well as designs that allow multiple businesses to share larger spaces, all which can help businesses lower overhead and, hopefully, save more jobs. Other ideas include converting empty strip malls into housing. There are a lot of strip malls in Los Angeles, including many that have lost tenants. According to the Report, a strip mall is an ideal building type to become housing. As for multi-family housing, these buildings will need to be reimagined for longer periods of time spent at home in an increasingly dense city. The Report confirms that we need to keep densifying our cities to handle population growth. But we have to be providing a more humanizing experience in the process. This can mean incorporating more green spaces, areas for urban farming, and workspaces. The Report emphasizes that right now is the time to work for a more sustainable city and creative designs can help do that better. Better, in this instance, means designing urban environments that take into account everyone’s needs, not just the wealthy.

County Museum Home Listed. Are you looking for a Hancock Park mansion with a artistic pedigree? Last week, the Los Angeles County Museum of Art listed for sale the Hancock Park home of executive director Michael Govan for $6.575 million. The property on Muirfield Road is a five-bedroom, 5,100-square-foot Tudor-style home, built in 1926, on a 22,000-square-foot lot, including a swimming pool, guest house, and a stairwell area with a neon sculpture by Dan Flavin. LACMA provides the home to the director as a perk of employment, and it is reported as part of Govan’s compensation package on IRS 990 forms at a value of $155,000 per year. In May, public records show that the Museum acquired a less costly residential property in Mid-Wilshire, just three blocks south, for $2.2 million. The Spanish colonial-style home, also built in 1926, is considerably smaller: a 3,300-square-foot house that sits on a 7,800-square-foot lot. “The director has decided to sell the museum-owned residence to reduce maintenance expenses and free resources for other museum programs and operations,” said a LACMA spokesperson regarding the listing. It is not uncommon for major museums to provide housing for their directors. Presumably, this is because directors’ homes are also used to host fundraising parties, trustee gatherings and other museum-related events. But the practice has come under increasing tax scrutiny and it has become a favorite target of activists who point to issues of labor inquity within museums. If you’ve driven by LACMA on Wilshire lately, you already know that LACMA is undertaking a $750 million project to renovate its campus by replacing existing buildings with a single new structure (designed by Swiss architect Peter Zumthor). Unlike many other museums during the pandemic, LACMA did not lay off or furlough staff thanks to a $6.7 million loan from the federal Paycheck Protection Program. But the downsizing of the director’s home could indicate that institutional belt-tightening is now underway.

Malibu $100 Million Fixer. Looking for a Malibu fixer? Is James Bond distressed? Pierce Brosnan is shooting for nine figures in Malibu, where his Thai-inspired rehab on Broad Beach just hit the market for a mere $100 million. The mammoth price tag makes it the eighth-priciest home on the market in L.A. County. If it sells for anywhere close to $100 million, it'll mark a massive return on investment for Brosnan. Records show James Bond compiled the compound in 2000, buying one lot for $5.1 million and another for $2.25 million. The oceanfront retreat spans more than an acre with two homes that combine for five bedrooms and 14 bathrooms, all of which are out-of-date and need of an update. Past a pair of carved teak gates, the verdant grounds are filled with palm trees, tropical flowers, travertine courtyards and wraparound lanais. Known as Orchid House, the main home boasts interiors lined with glass and teak that take in commanding ocean and mountain views. On the main level, there's a great room and a kitchen with white crystal counters. Amenities on the lower level include a theater with tiered seating and a music room/recording studio. The spa adds two saunas, a steam room, Japanese soaking tub, cold plunge and shower. Sandy lounges and glass-enclosed dining areas dot the backyard, which centers on a saltwater pool and descends to 117 feet of beach. The two-story guesthouse also serves as a pool house with a bar. Brosnan and his wife, activist and journalist Keely Brosnan, put the property up for rent multiple times during their stay, listing it for $120,000 a month back in 2004. Brosnan, 67, starred in four James Bond films from 1995 to 2002: "GoldenEye,” “Tomorrow Never Dies,” “The World Is Not Enough” and “Die Another Day.” His other credits include “Dante’s Peak,” “The November Man,” “The Matador” and “Nancy Astor,” the latter two of which earned him Golden Globe nominations.

California Fires. I don’t normally cover fires, but this fire season has shattered all records with more than 4 million acres burned. California’s historic wildfire season reached a new milestone yesterday, more than doubling the state’s previous record. Before this year, 2018 was California’s worst year for wildfires, with more than 1.8 million acres burned. But this year’s fires have burned an area larger than the state of Connecticut. Let that sink in for a moment – larger than the entire state of Connecticut! According to the California Department of Forestry and Fire Protection, fires this year have killed 31 people, destroyed more than 8,200 structures, and displaced tens of thousands of people. The sheer magnitude is staggering. Of the 20 largest wildfires in California’s history, five burned this summer, consuming a combined total of nearly 2.4 million acres. Lightning in August ignited many of California’s biggest blazes, but scientists say climate change has also contributed to the conflagrations. It was the hottest August on record in California, and trees and brush were already abnormally dry and combustible after California saw exceptionally dry conditions last winter. With dried forests, the hotter it is, the worse it gets. The August Complex fire, the largest fire in our state’s history, came back to life Saturday night after winds pushed away the smoke and fed oxygen to the flames. The August Complex fire has burned 985,304 acres and was only 71% contained as of yesterday. In the Los Angeles area, crews fighting the Bobcat fire in the Angeles National Forest says they are mostly focusing on mopping up and strengthening containment lines. Fire officials said a 300-acre internal island of unburned fuel northeast of Mt. Wilson burned Saturday, producing a smoke plume. The fire has burned 119,548 acres, was 94% contained and has destroyed 87 homes and 83 other structures as of Sunday, though that number could rise as teams continue to perform damage assessments. The fire continues to wreak havoc on our region’s air quality, with officials forecasting it will be unhealthy through this week for those in parts of the San Gabriel Valley, as well as the San Gabriel Mountains. 

This week. Looking ahead, investors will remain focused on medical advances to fight the coronavirus and, of course, stop-and-start negotiations for additional government fiscal stimulus measures. Beyond that, the Consumer Price Index ("CPI") will come out tomorrow (10/13). CPI is a widely followed monthly inflation report that looks at the price change for goods and services. Retail Sales will be released on Friday (10/16). Since consumer spending accounts for over two-thirds of all economic activity in the US, the retail sales data is a key indicator of growth. Consumer Sentiment will also be released on Friday (10/16). By the way, if you're a lender or mortgage broker, mortgage markets will be closed today for Columbus Day.


Tuesday, October 13: CPI
Friday, October 16: Retail Sales
Friday, October 16: Consumer Sentiment

Weekly Change:
10-year Treasury: Rose 0.05 points
Dow Jones: Rose 800 points
NASDAQ: Rose 400 points

The Fed's inflation target is the thing that gets me the most. I can't believe it's not a bigger topic that the printers are going to run until the dollar's purchasing power erodes even faster. Low interest rates & inflation are good for those of us who own property, so I'll certainly take advantage of the continued low interest rates. I'm no Peter Schiff, but I can't see how the continued erosion of purchasing power is good for the Low & Middle Class in the long run.