Skip to main content

Are Cycles Dead?

Anyone with even a casual understanding of business and human nature understands cycles.  Investment success always encourages greater volumes of investment capital to accept more risk and to seek higher returns, which become harder to find in these times as the increased funds in the market compete heavily.  Inevitably, this bull market investing part of the cycle leads to investments that turn troubled, as the underlying companies or properties in the case of real estate don’t achieve or sustain the high levels of income that were targeted.  As the optimistic cycle turns negative investors retrench, making access to capital increasingly difficult and leading to downturns in consumer spending, corporate investment, and employment – all of which combine to exacerbate the depth of the cyclical downturn.


Today’s investment and economic environment is starkly divergent from the traditional boom/bust periods.  In the wake of the very deep economic downturn that accompanied the global financial crisis of 2008 prices of financial assets have all largely fully recovered in the U.S., however, by most measures the economy has not experienced anything like the traditional recovery of prior cyclical upturns.  To just pick one point to illustrate this – as of 2014, the most recent year for which the stats are available, average household income in the U.S. adjusted for inflation is lower by $1,000 since 2008.  Yet in a great anomaly, despite not experiencing much in the way of a real economic recovery since the ’08 downturn we find the entire investment world in bubble territory - with real estate, stocks, and bonds all participating, and the hunt for yield on the part of investors frenzied, and approaching desperate.  Investors today are understandably confused.  For years now many of the smartest and most experienced have sat in cash waiting for the proverbial shoe to fall.  They’ve been wrong.  The shoe has not fallen.  Are cycles dead?

In my mind, everything today has to do with the cost of capital, or in other words “interest rates.”  If rates remain ultra-low, near zero, we can and I believe will remain in a very benign financial market environment.  And there are many, many reasons to believe rates will need to remain ultra-low including: massive global government debt levels, stagnant global economies, growing social safety nets that add to government debt, and great geopolitical instability.  The governments of the world, using their central banks, which had previously thought to be independent of political pressure, have managed rates to these levels and will likely continue to attempt to do so.  With nearly free money people can afford to pay more for homes, businesses can afford to sustain if not attempt to expand, landlords can survive if not thrive with reduced rent rolls, and governments can borrow still more money to support and even try to re-engage those who are displaced.  With massive investment capital seeking yield and finding it unavailable in traditionally safe investments like high-grade bonds, it is not unreasonable to expect stocks and real estate to remain highly bid for.

What has passed for this recovery since the ’08 downturn has been a recovery that has benefited the upper echelon of our society far more than the rest, thus creating a troublingly wide gulf between those at the top and everyone else.  Yet with the high level of stock prices and the generally self-congratulatory comments from the Obama administration, the populace seems more placated than might otherwise be expected.  I wouldn’t be surprised to see sort of this lethargic complacency continue for a while.  As I said to a friend this weekend:  “You’ve got to be an idiot to not figure out to make a profit with free money.”  I think that the only way this ends is if rates move higher, which is hard to imagine today.

Popular posts from this blog

Greed & Laziness

In this most contentious and fascinating of election cycles, when nearly each conversation leads to politics, and when polarization runs so high, I ask myself - what is the essence of the debate between left and right?  What does it really mean to be a Conservative or a Liberal?

Why Rates Must Remain Low

There is an old bond trader joke that I first heard in the 1980’s when I traded mortgage-backed securities at Drexel Burnham Lambert.  It went like this:  “Upon dying, Albert Einstein finds himself in what he is told is heaven.  He encounters another individual there and asks him what his IQ is.  When he is told that it is 175 he is overjoyed, knowing that he’s found an intellectual peer with whom he can share much.  Upon meeting another, he discovers that person’s IQ is 140 and is pleased to have met another highly intelligent person with whom he can enjoy chess and other pursuits.  He is feeling pretty good about heaven, when he comes across a person who tells him that his IQ is a mere 90, and he is flummoxed.  What, he wonders, is this guy doing in my heaven and what can I even say to this person?  Then it comes to him.  ‘Where,’ he asks, ‘do you think interest rates are heading?’”

CMBS In Flux

The CMBS market has been in a period of upheaval, with dramatic spread widening on bonds and a resulting much more expensive cost of capital for real estate borrowers who depend upon this channel for their debt financing.Market participants today wonder whether we’ve entered a period like the summer of 2011, when spreads on bonds last widened this dramatically and then snapped back within a year to provide tremendous returns for those who were courageous enough to purchase bonds at the time when there was panic selling.Or, people wonder, is this recent downturn a prelude to a structural or systemic problem, like what was experienced in 2007, when spreads widened and sucked investors in, only to punish those early responders with a much more dramatic price collapse in the next 24 months.