This year I will receive about 180 loan inquiries. Prior to the Great Recession the number of loan inquiries I received approached 300. That’s a lot of loan requests! Of these, less than 20 will eventually get funded using my services as a commercial mortgage broker. Some borrowers will go on to get their loan funded through other lenders or mortgage brokers but the vast majority will never get financed. Why? There are several reasons. Here are just a few: (more…)
In the book, Why I Left Goldman Sachs, the author Greg Smith describes himself as a “not very religious Jew” but that he appreciates the traditions around the Jewish holidays especially the Passover Seder. He particularly likes the part of the story discussing the reaction of the Four Sons to Passover: one who is wise, one who is wicked, one who is simple, and one who doesn’t know what questions to ask. He then goes on to say that just as in ancient Egypt it was told about the Four Sons, so too on Wall Street there are the Four Clients. (more…)
A couple of weeks ago Fed Chairman Ben Bernanke hinted that the Fed’s bond buying program known as quantitative easing would begin tapering down in 2013 and, assuming that the economic indicators were still positive, that the program would come to an end in 2014. We all know what happened next: the stock market plunged, precious metals prices were crushed, other commodities, such as oil and gas prices tanked and bond yields soared as the 10-year treasury notes increased by 50 basis points in the space of a week. This all occurred because Bernanke obliquely suggested a possible change in this Fed program. (more…)
The Federal Reserve last Thursday released a proposal that would implement a global agreement known as Basel III. This agreement is a regulatory standard that proposes minimum capital requirements and liquidity standards for all financial institutions worldwide. (more…)
Last week Bill Gross, who runs the world’s largest bond fund at Pacific Investment Management Co., sold all government related U.S. debt from PIMCO’s $237 billion Total Return Fund. You may be thinking, “Why is this tidbit of news important to us?” Good question. When someone who is as knowledgeable about the bond market as Mr. Gross decides to get out of U.S. bonds there’s a good chance that something signficant is about to happen. Gross is betting that the discontinuation of the Federal Reserve’s Quantitative Easing program (QE2) in June will have a negative overall impact on the bond market.
Let’s back up for a minute and explain some things. QE2 is the Federal Reserve program of buying U.S. government debt instruments for the purpose of stimulating the economy. In a period of only 28 months the Federal Reserve has become the largest owner of U.S. Treasury Bonds ($972 billion as of December) surpassing both China and Japan who took decades to accumulate their bond holdings. Yesterday, Mr. Bernanke, Chairman of the Federal Reserve confirmed that the Fed will discontinue QE2 as planned by the end of June.
Bill Gross wonders when the Fed stops buying bonds who will take their place? The Federal Reserve is currently buying $75 billion in U.S. bonds a month. That’s a huge amount. So what will be the impact when the Fed stops buying? It all goes back to the law of supply and demand. If the supply of U.S. treasuries remains the same but the #1 buyer of bonds is no longer buying, in order to get others to absorb the excess supply the market will demand a higher rate of return. It’s as simple as that. Gross believes that the current interest rate on 10 year treasuries is at least 100 basis points below the historical average.
If Mr. Gross is correct the logical result will be a significant rise in interest rates and it should happen before the end of this year. If true this could have a dramatic impact on the commercial real estate market. Rising rates would require a re-adjustment in cap rates upward to offset the decline in investment returns due to higher interest rates.
Years ago there was a TV ad by investment banking firm E.F. Hutton. The ad shows an E.F. Hutton fiancial advisor about to give confidential investment advice to his client in a crowded, noisy room. Before the advisor speaks the crowd stops talking and leans their ear to hear what he has to say. The ad ends with the slogan, “When E.F. Hutton speaks people listen.” Mr. Gross has just spoken and his actions speak loud and clear. Are we wise enough to follow his lead is the only question?
On a totally different note, treasury rates have plunged in the last few days. The 10 Year Treasury rate at this moment is 3.20%, down 55 basis points since January. On the surface this flies in the face of what is being predicted by Mr. Gross. In reality this substantial dip in rates is being caused by the crisis in Japan. Japan’s stock market, has plunged 16% in the last couple of days and investors are taking their money out of their stock market and putting it into the safest investment they know: U.S. Treasurys. How ironic.
Sources: Gross Sees Trouble Ahead for Treasurys, The Oregonian, March 15, 2011; Pimco’s Bet Against Treasurys Not Working (So Far), Wall Street Journal, March 15, 2011; Federal Reserve Enters Final Lap of Easing Policy, National Journal by Clifford Marks, March 15, 2011.
Doug Marshall, CCIM
Tom Potiowsky, the State of Oregon Economist, recently presented his most current status of the Oregon economy to the Oregon SW Washington CCIM chapter.
The good news: the economy, which bottomed out last fall, is now growing again, although ever so slowly. Shown below are the top 10 facts I gleaned from Mr. Potiowsky’s presentation:
1. As of April 2010 the state’s unemployment rate is 10.6% compared to 9.9% nationally.
2. Job growth (-1.7%) ranks 41st for all states for April 2010 over April 2009.
3. Total nonfarm employment dropped -3.0% year-over-year for the 1st quarter of 2010.
4. The rate of decline in job losses has slowed from 10,000 a month for the first six months of 2009 to 875 per month for the first four months of 2010. Job losses are anticipated to continue through this quarter with only mild job growth the rest of the year.
6. Personal income growth has almost stabilized at -0.1% for 4th quarter of 2009 over 4th quarter of 2008.
7. When compared to other states our unemployment rate is significantly better than Nevada and Arizona, about the same as Idaho and California and significantly worse than Utah and Washington.
8. From Oregon’s peak employment (which occurred in March 2008) it is estimated that it will take around 76 months (about 6+ years) to get state employment back to the same level. Only the 1980-82 recession took longer to recover from, that taking about 7 years.
9. U.S. employment is projected to take about 60 months to recover to the level it was prior to the recession. This is predicted to be the longest recovery period of the 10 recessions (by a wide margin) that has occurred since WWII.
10. Oregon’s Index of Leading Indicators is in positive territory for the first time since late 2007. The six-month annualized percent change is 3.3%. Nine of the
11 leading economic indicators are positive.
So where we go from here depends on many factors. For example, on the upside other parts of the world could recover more quickly increasing the demand for our exports.
On the downside, the potential for a real estate bubble in China or the affect of the Greek crisis on the Euro could adversely impact us and the rest of the world. Who knows?
We can focus on the unknowns or those things out of our control or we can roll up our sleeves and focus on those things we can change. This reminds me of an old African proverb:
Every morning in Africa, a gazelle wakes up.
It knows it must run faster than the fastest lion or it will be killed.
Every morning a lion wakes up.
It knows it must outrun the slowest gazelle or it will starve to death.
It doesn’t matter whether you are a lion or a gazelle.
When the sun comes up, you better start running.
Let’s all run in these difficult times as best we can to see another day!
An Old Law for a New Step at the Fed
by Sudeep Reddy
July 14, 2008 @ 12:24 am
The latest turn in the Federal Reserve’s efforts to prevent a deeper economic crisis came with its vote Sunday to authorize direct lending to Fannie Mae and Freddie Mac.
The central bank invoked powers established by Congress during the Great Depression to lend to individuals and companies, using a different piece of the law from March when the Fed started lending to investment banks. (more…)