Hi guys. I'm sorry I missed last week's note. Its been a big week. I've been seeing a number of clients, and its super interesting to hear different investors' points of view. From commercial property devaluations, hard landing, soft landing, no landing, recession, credit crunch, the list goes on.
I attended a property briefing earlier on in the week, hosted by an equity property investors. Many investors will tell you not to invest in commercial property right now, and for good reason. I don't disagree with this statement. But the statement is nonsense. What does commercial property mean? What segment are you referring to? What market are you referring to? The premise is that valuations are too high and that capitalisation (cap) rates need to rise. We all know this. Its common sense. But can anyone tell me how common sense has prevailed over the last few years. Everything you read, everything your learned about markets and economics, everything you thought would or should happen, didn't happen. And if everyone knows that cap rates need to rise, will they? Landlords are as well informed as you and I. Their financiers are as well informed as you and I. And guess what, we know exactly what happens when financiers push just that little too far.
Remember the GFC? I'm not saying cap rates won't rise, I'm not saying property valuations won't and shouldn't fall. Maybe they will, maybe they won't, and maybe they will not for the reasons we think. It doesn't matter what I think. All I'm really curious about is whether there is a small possibility that private markets get away with not having their valuations fall like a brick in the ocean, or the possibility that we could be wrong. I merely ask that you keep an open mind.
Let's use the imminent recession as example. The one that should already be here by now as indicated by the most talked about recession indicator. I mean c'mon, it's predicted every recession since 1955.
Yet there is virtually no evidence that the economy is contracting (at least in the US economy). The curve (above chart) has been inverted for some time, and now, its clawing its way back toward normal as the yield between the 3-month and 10-year treasuries shrinks.
According to avid yield curve watchers, the recession comes after the curve starts to re-steepen. This is evident in the last three recessions (2000, 2010, and 2020). Presently, employment is at 3.60%, economist are raising their third-quarter GDP numbers, manufacturing investment is booming, and company earnings are putting expectations to shame.
As we have seen over the last few years, anything can happen. And this current state of play can go on for a long time. But, right now, it does not feel or look or smell like the economy is teetering on the brink.
If the last 25 years have taught me anything about financial markets, is that most people are wrong most of the time. Timing is everything, yet the timing is the hardest part of the equation to nail. And investing is not a binary decision. Portfolio investing and diversifying your investments is the only free lunch in town.
Invest in harmony with your personal aspirations and plans. Not based on what the expert wearing a necktie is telling you from across the room.