Here are a few of my insights:
- The Fed is coming to terms with the reality that our world has changed. Our largest banks, the ones that could drag us into systemic failure if things go awry, fared well in the most recent stress testing. Increased reserves since 2008 have proven to be effective so far. That being said, the Fed imposed further bank restrictions on dividend payments to shareholders and blocked share buybacks. While bank investors reacted negatively and drove bank share prices down on the news, the opposite should have occurred. Banks will have more capital on hand to fund new loans and cushion the impact from borrowers that are unable to currently meet their payment obligations. The spread between the cost of money for banks and their lending rates has improved dramatically since the Fed reduced interest rates to near zero, leading to increased profits. This is an incentive to make loans, not refrain from doing so.
- More stimulus is on the way. Despite all of the rancor, the House and Senate are closing in on a new bill that will likely be signed by the President soon. Stay tuned for more real estate tax incentives and huge infrastructure spending plans. The essence of a New Deal is in the air.
- The daily drumbeat of business failures is troubling. While the retail, hospitality, and travel sectors are widely reported as suffering the most, it’s an across-the-board issue. Recognizing this is key to understanding the way forward. The future will not look like the past and “return to normal” has no basis in reality.
- In my own humble opinion, the stock market volatility seen this week is evidence of a disconnect between fantasy and reality. Remember street smarts. This time around, stock market valuations are not the great prognostication of the future.
- It’s election season. Political ads will soon be bombarding us from all sources. While the candidates for Chief Executive are well known, as are their policies and positions on most issues, the races to watch are local and congressional. There are some very bright and articulate candidates across our 50 states, many with new ideas and the energy to implement policies and programs that will speed up recovery and spur all of the creativity that is fermenting.
- Covid-19 hasn’t disappeared. We now have hundreds of mutations that are working their way through the world’s population. While most of those who are infected recover well, the mortality rate is significant, and some recoveries aren’t without lifetime health compromises.
- Opportunities for success abound for those who are aware, creative, and adapt their business plans to meet the challenges in this changed world.
So, you might be wondering – what do my insights this week mean for real estate investment in the Westside region of Los Angeles? The answer is – everything. The art of the deal is founded in examination of all macro events and distilling them down to a micro level, bringing clarity to potential new investment opportunities as well as existing portfolio investments. Clarity applied intelligently mitigates downside risk. That’s what we do.
Lawrence N. Taylor