Smooth Sailing Ahead?

Dr. Mark G. Dotzour

December is a time for reflection, family, celebration, and for planning ahead for the coming year. I attended a breakfast meeting this week and had the privilege of hearing the 2019 forecast from Dr. Mark Dotzour. As he will readily tell you, there is a 50% chance that anything he says will be WRONG; however, having reviewed my notes from many of his previous yearly predictions, he is usually dead-on!

Below is a summary of my key takeaways from his presentation. He was very down on China and their reprehensible behavior towards their own citizens (as we should all be).

My biggest takeaway is that we could have 2-3 (or more?) years of a buoyant economy before our next recession. Why, you ask? Read on and see……

2018-2019 Theme: Beginning our Initial Approach for this Flight

Dotzour (MD) is extremely frustrated with China and their dictatorship economy and stealing of our technology

  • In past three months, it feels like the air has dropped out of the economy
  • The wealthy have seemed to move to the sideline
  • Feelings of anxiety in the country are creating a problem
  • The country is still doing very well; we are starting a gradual descent
  • Recession may be coming; it is not a crash

Why will 2019 be slower?

  • Housing industry appears to have peaked
  • Auto industry appears to have peaked
  • Smart phone sales declined in 2018 for first time
  • Low oil prices will pressure oil & gas
  • Heavy duty trade negotiations with China
  • Business not using tax benefits to expand (per MD, this is the biggest threat to capitalism in his lifetime)
  • Congress won’t be interested in growth (Republican president and Democratic congress; gridlock)
  • Downdraft in stocks due to lower earnings growth
  • Defense spending may have peaked
  • Federal budget deficits can’t get too much higher……YIKES; Treasury is expected to print $1T of bonds this year
    Companies “buying ahead” inventory in front of tariffs
  • 3% interest on the 10-Year Treasury; Think of this as the indicator of future inflation; 3% tells MD that the economy is pretty “soft”; The Fed is raising rates so they can lower them again during the next recession
  • Oil producers in Midland/Odessa are taking a discount on their prices because there are not enough pipelines

Texas is the #1 state with the most employment growth in the 21st Century

  • Texas
  • California
  • Florida
  • Arizona

Net Domestic Migration in 21st Century (Texas has the TOP 4 in the entire COUNTRY)

  • 622,550 Dallas-Fort Worth-Arlington
  • 523,748 Houston-TheWoodlands
  • 416,602 Austin-Round Rock
  • 322,063 San Antonio-New Braunfels

DFW is poised for even more GROWTH

  • 2010: 6.4M people in DFW
  • 2030: 10M people in DFW (this is only 11 years away)

We are in Month 114 of the current economic expansion

  • Longest expansion so far is 120 months
  • Average is 7 years (84 months)
  • MD says we are not in a “reversion to the mean” situation because we have just recently had and economic stimulus (TAX CUTS)
  • 1986 Tax Cuts; Economy peaked 2 years later; it was 5 years after the tax cuts that we had our next recession
  • The last time this happened was 1964 (Kennedy Tax Cuts); it was 5-6 years until the next recession
  • MD thinks we could have 3-4 years until the next recession
  • We appear to be in BOOM times; the recession will not happen until companies start laying off lots of people

There are 7.1M open jobs in America today

  • We need a strong LEGAL immigration policy

Effective lower bound – rates at 0% (what with the Fed’s option be if this happens again in the next 10 years)

  • Print another $4T of bonds
  • Force mortgage rates back down to 3.5%
  • Allow the entire country to refinance their 5% or 6% interest rates at 3.5% or less
  • The Fed Reserve is NOT thinking that interest rates will be much higher over the next decade

Part of the slowdown in luxury spending is that the wealthy Chinese are not spending like they were

  • Chinese government does not care about human rights; they send their dissidents to “re-education camps” which are really modern-day concentration camps
  • Chinese have cameras up everywhere; they use facial recognition to track everyone’s activities and “grade” them; poor grades take away health care, education, etc.
  • New York prices are dropping because the Chinese are not buying

MD thoughts on real estate / cap rates

  • Last year, GreenStreet said prices have peaked (on properties owned by REITs)
  • CoStar and RCA graphs still show prices going up (because these services pick up sales in 2nd tier and 3rd tier cities)
  • “Buyers need to get used to lower cap rates” the alternative is stock and bonds…..not a great alternative
  • There is a huge difference between owning a REIT stock vs. owning a building; owning a building outright performs considerably better
  • TIAA-CREF Report
  • Total average return was 9.25% on private RE (over past 20 years)
  • Stock total average return as 7.86% (with huge volatility) over past 20 years
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