After a few very interesting days in the markets, I got literally dozens of calls so I figured now would be a great time to post my observations.
After an 8000 point post election rally, stocks did something most people forgot they could do. They went, dare I say it, down. Down fast and hard. The selloff was initiated last week by of all things, great news. Friday the labor department reported job growth picked up steam and more importantly an increase in average wages. On the surface, this would seem like a market friendly event. However, in late stage recoveries, particularly one that has been fueled by impossibly low interest rates, wage growth is good for people, bad for equities, bonds, and real estate. Simply put, when wages uptick, inflation is often soon to follow. Yes folks, rates are finally going up and this time it is for real. The 10 year treasury has traded up almost a full percentage from its lows last year, which if it wasn't coming from sub 2%, wouldn't be a big deal. Friday's 666 point drop was entirely a result of an overstretched market getting a does of higher rates. The Monday swoon however was almost entirely a result of a derivative product which I happened to be short. Lucky or smart, doesn't matter I guess. I'll take it. Regardless, the carnage we saw was tied to a couple exchange traded funds and notes that lost almost all their value. To keep this from getting too technical, I will leave it there. Call me if you are interested to hear more about it.
The good news is that the derivatives risk has abated and markets have recovered. The bad news is rates are going higher. If you have followed my blogs in the past, you will know I have been very sanguine about rates over the last decade and discounted all the chatter about higher rates. Until now. An already accelerating economy just got several boosts in the form of tax cuts, repatriation of oversees funds, deregulation and a likely infrastructure bill. Each of those are extremely stimulative. January's wage growth was no anomaly. The era of ultra cheap money is drawing to a close. Check that, has drawn to a close. Given this, do not be surprised to see more stock market volatility as it digests the normalization of interest rates back to historic levels. You can expect to see 30 year fixed rates in the 5s this year with a 10 year above 3%. If you have a variable loan, I would suggest locking in a 30 year loan unless you plan on selling before your loan resets.
New tax laws should have a nominal effect on real estate demand, but are not likely to be a large risk to real estate values. Far and away the biggest headwind will be higher rates. Fortunately, inventory levels, even seasonally adjusted are extraordinarily low in the South Bay. After micro-corrections in the Sand and Tree Sections, last year and the year before respectively, we have seen homes selling early this season that were unable to find buyers last year. This on it's own, bodes well for our local market this year. As previously mentioned, interest rates will certainly be a headwind. How much, depends, not necessarily on the absolute rates, but the rapidity at which they move. Higher rates should loosen up a very tight income property market, so expect to have a bit more to choose from on that front.
I won't spend too much time on this. For those who follow me on Facebook, I sent a SELL warning in December when the price of 1 bitcoin was trading above 19,000. Sometimes one just gets lucky, but that day happened to be the all time high. It is presently trading around 7000 and my best advice is to steer clear. Any money committed to this new "asset class" should be the same money you bring to Las Vegas if that is your thing.
Well if you made it this far, you get to hear yet another non-news report fresh from the desk of Stephanie Katsouleas, Director of Public Works MB. She has met with SCE on several occasions, most recently last Friday. Not surprisingly, they are extremely slow getting the hard bid complete. Both Frontier and Spectrum are still working with her to get firm numbers. I asked her to give me her best guess when we would have numbers and ballots. Her answer was "hopefully by fall". Is it me or does the goal line just keep moving every time we are near? To her defense, she is understaffed and the service providers are intentionally slow to move. This will however happen this year barring any new developments. Stay tuned. Thanks for reading.