ApproachingtheRedline

Dr.MarkG.DotzourCollegeStation,Texas

mdotzour@gmail.com

RedlineAsetamountofRPMswhichyourenginecanputoutbeforeyouprettymuchblowitup.Thisisusuallywherethenumbersonyourtachometerturnred.-UrbanDictionary

TheEconomyin2006

TheEconomyin2008

TheEconomyin2009

AStrongerEconomy

• Createsjobs• Laborshortage• Wageincreases• Higherinflation• Higherinterestrates

JobOpeningsinAmericaLookingforWorkers

Source:BureauofLaborStatisticsBLSreleaseonAug.8,2017

Total JobOpenings 6,163,000Construction 225,000

Manufacturing 388,000Trade,Transportation,Utilities 1,040,000Professional&Business Services 1,208,000

Education&HealthCare 1,222,000Leisure&Hospitality 819,000Government 575,000

KeyIssues in2017:EconomicStrength

• FedwantstoraisetheFedFundsrateto“normalize”interestrates.

• KeepinmindthatcapratesandCREfinancingratesarelargelydeterminedbythe10-yeartreasuryrate,whichtheFedhasnocontrolover.

TheNeutralRateofInterest

“Itisverydifficulttoknowwherethatso-calledneutralrateis.Butweprobablywillknowitwhenwearetherebecausewewillobserveacertaindegreeofbalance,whichwehadnotperceivedbefore,whichwouldsuggestthatwearesomewhereveryclosetowherethatis.”AlanGreenspan,FinancialAdvisorNews,June9,2005

“Researchsuggeststhattheneutralrealrateisprobablysomewhereina1.5percentto3.5percentrange.Thatprobablytakesustoaneutralnominalrangeofaround3.5percentto5.5%atthispoint.”JanetYellen,TheInternationalEconomyMagazine(Spring2005)

BlackMondayOctober19,1987

KeyIssues in2017:EconomicStrength

• Economystillhasalotofenergyleft• Oilandgasindustriesarerebounding• Single-familydemandisincreasing,butsupplyisconstrained,costsareincreasingandstudentdebtisagrowingproblem

StudentLoansaBigProblem

“Analysisof1000collegesandtradeschoolsshowedthatatleasthalfofthestudentshaddefaultedorfailedtopaydownatleast$1ontheirdebtwithinthepastsevenyears.”

“Repaymentratesaregettingworse.”

Source:WSJ1/19/17

KeyIssues in2017:FiscalPolicy

• Reducedregulationgoodformanyindustries• Taxreformbullishforjobs,butunlikelytohappen

• Infrastructurespendingunlikelytohappeneither

• Can’tpayfortaxcutsorbridgeswithoutaborderadjustmentorgettingridofloopholes

KeyIssues in2017:InterestRates

• Laborshortagecouldcreatewageinflation• StrongerUSdollarwillmakeallimports

cheaperandoffsetinflation• Slowerapartmentrentgrowthwithreduce

inflationpressure• 10-YearTreasuryandcapratesunlikelyto

increaseverymuchin2017

CPIInflationSince1914WW1

WW2andKorea

OilShocks

OilPricesandInflation

OilEmbargo Shah

Deposed

ChinaStockpiling

IranBack

2.07% 2.34% 7.09% 5.55% 3.00% 2.57% 1.62%

InflationRatebyDecade

InflationExpectationSurvey

0

2

4

6

8

10

12

Jan-78 May-83 Sep-88 Jan-94 May-99 Sep-04 Jan-10 May-15

Percen

t

Source:ThomsonReuters/UniversityofMichigan

UniversityofMichiganInflationExpectation©

U.S.LeadingIndexofEconomicIndicators

-4

-3

-2

-1

0

1

2

3

4

1985 1990 1995 2000 2005 2010 2015

Percen

t

Source:FederalReserveBankofSt.Louis- FRED

LendingIndexfortheU.S.

MonthlyIncreaseinJobs

-300

-200

-100

0

100

200

300

400

500

600

2010 2011 2012 2013 2014 2015 2016 2017

Chan

ge,Tho

usan

dsofP

ersons

Source:FederalReserveBankofSt.Louis- FRED

AllEmployees:TotalNonfarmPayrolls

RateofGrowthinAverageHourlyEarningsofAllEmployees

1.5

2.0

2.5

3.0

3.5

4.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Percen

tCha

ngefrom

YearA

go

Source:FederalReserveBankofSt.Louis/USBureauofLaborStatistics

AverageHourlyEarningsofAllEmployees:TotalPrivate

Source:TheConferenceBoard

ConsumerConfidenceIndex

30405060708090

100110120130140150

Aug-00

Feb-01

Aug-01

Feb-02

Aug-02

Feb-03

Aug-03

Feb-04

Aug-04

Feb-05

Aug-05

Feb-06

Aug-06

Feb-07

Aug-07

Feb-08

Aug-08

Feb-09

Aug-09

Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Feb-14

Aug-14

Feb-15

Aug-15

Feb-16

Aug-16

Feb-17

Aug-17

SmallBusiness“PlanningToHirePeopleInNextThreeMonths”

-10

-5

0

5

10

15

20

25

Oct-98

May-99

Dec-99

Jul-0

0 Feb-01

Sep-01

Ap

r-02

Nov-02

Jun-03

Jan-04

Au

g-04

Mar-05

Oct-05

May-06

Dec-06

Jul-0

7 Feb-08

Sep-08

Ap

r-09

Nov-09

Jun-10

Jan-11

Au

g-11

Mar-12

Oct-12

May-13

Dec-13

Jul-1

4 Feb-15

Sep-15

Ap

r-16

Nov-16

Jun-17

Net%ofR

espo

nden

ts

Source:NationalFederationofIndependentBusiness

PlanningtoHirePeopleintheNextThreeMonths

SmallBusiness“NowIsAGoodTimeToExpand”

0

5

10

15

20

25

30

Oct-98

Oct-99

Oct-00

Oct-01

Oct-02

Oct-03

Oct-04

Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

%ofR

espo

nden

ts

Source:NationalFederationofIndependentBusiness

NowIsAGoodTimetoExpand

Q2-17 Q1-17 Q4-16 Q3-16

MoreJobs 36% 41% 35% 27%

LessJobs 16% 18% 30% 36%

LargeCorporateHiringPlans:Next6Months

Source:BusinessRoundtable

NewPrivateREFundsRaisedinSecondQuarterof2017$29billioninclosed-inprivateREfundsclosedin2Q17.

$13.00billionforN.America$15.60billionforEurope$.74billionforrestoftheworld

74%wasforopportunisticandvalueadd

Source:Preqin

NewPrivateREFundsRaisedinSecondQuarterof2017Arecord557fundsareinthemarketraisingmoneyattheendofJune,2017.

Theyaretargeting$177billionincapitalcommitments.

Source:Preqin

PrivateRealEstateInvestment

$247billionin“drypowder”attheendofMarch,2017.

95%offundsexpecttomaintainorincreasetheirallocationtorealestate

Source:Preqin

Source:NREI6/1/2017

Investmentsalesinthefirstfourmonthsof2017weredown17%fromthesameperiodin2016.

Theystillseemultifamilyasstrong….HNWIswillstayinmultifamily…Theydoliketriplenetlease(NNN)investmentssoarelookingatretailandofficeNNNassets.Industrialsingle-tenantnetleaseisalsopopularwiththem,butdemandformultifamilyseemsstrongest.

Source:Bloomberg5/16/17

Bloomberg)— BlackstoneGroupLP,theworld’sbiggestprivateequityfund, toldinvestorstodialbacktheirexpectationsforpropertyreturnsasthe“greatrun”ofthepastfiveyearsbecomeshardertoreplicate.

LeeKok Sun,GIC’smanagingdirectorandchiefinvestmentofficerforrealestate,toldtheSingaporeforumthatabout7percentofGIC’sportfoliohadbeeninrealestate,lessthanthetargetedallocationof9percentto13percent.Asa“disciplinedinvestor,”GICsoldsomeassetsthatincreasedinvalue.Butsellingpropertieswhiletryingtoraisetheallocationwaslikerunning“fasterandfaster”onatreadmill,hetoldtheAsiaPacificRealEstateAssociationevent.

PrivateRealEstateInvestment

LargeInstitutionsThatInvestinRealEstate

• PublicPensionPlans(CalPERS)• InsuranceCompanies(SunLife)• AssetManagers• PrivatePensions• SovereignWealthFunds(Norway)• Banks

PrivateRealEstateInvestment

LargeInstitutionsThatInvestinRealEstate

• Stocks• Bonds• AlternativeInvestments

PrivateEquityPrivateDebtHedgeFundsRealEstate 5-12%allocationInfrastructureNaturalResources

TheEnergyWarContinues

OPECBreakevenPricestoBalanceTheirBudgets

$107 Bahrain$96 SaudiArabia$93 Algeria$76 Iraq$70 Iran$58 Qatar$52 Kuwait

Source:IMFandWSJ1/20/16

NobodyKnowsHowLow2014

Oct3 Dropsbelow$90afterSaudipricecut

Oct13 Kuwaitoilministersays“naturalfloorforpricesat$76to$77

Oct17SaudiprincesaysArabianeeds$80to$90

NobodyKnowsHowLowNov7 “At$70therewillbepanicinOPEC.”

-OPECofficialNov7 “Werepricestofallbelow$70,therewillbe

actionfromOPEC.”Nov7 OPECdoesn’texpectpricetofallbelow$75

Dec4 Saudissayoilcouldstabilizeataround$60,apricetheybelievetheycouldwithstand

Jan6,2015 WTItradesat$48

NobodyKnowsHowLow2015

Apr17 “TherelentlessincreaseinUSoiloutputappearstobeatanend.”WTIat$56

May6 WTIoilpricegoesabove$60.

June IranandtheAyatollaharenewbusinesspartners

August Oilpricefallsbelow$40

$65isa“FairPrice”

OPECpresidentMohammedbinSalehal-Sada saidaminimumpriceof$65abarrelis“badlyneededatthemoment.”Hecautionedthatthesecurityoffuturesuppliesisasrisk

becauseofthepriceslumpthathassqueezedoilproducerssince2014.

Source:AssociatedPress5/24/16

TheSaudiBinladin GroupisthelargestconstructioncompanyinthePersianGulfregion.Theyhaven’tpaidsubcontractorsandsuppliersformonths.TheSaudigovernmentisdelayingpaymentforcompletedprojects.

WSJ3/26/16

MiddleEastBudgetStrains

ThousandsofIndianworkersinSaudiArabiahaven’tbeenpaidformonths,promptingIndia’sgovernmenttohandoutfoodtohungryworkers.

Assisting10,000IndianworkerswhoNewDelhisaysarewithoutajob,payandfood.SomeworkersforSaudiOger reporttheyhaven’tbeenpaidinsevenmonths.

Source:WSJAugust1,2016

MiddleEastBudgetStrains

SaudiGarageSale

SaudiArabiaKingwantstolist5percentofAramco,atavaluationofaround$2trillion.Lowestestimatefrombankersis$400billion.Hopestoraise$100billioninIPOinlate2018,andusethemoneytodiversifytheSaudieconomy.

“ThereissomuchemphasisinthehigherlevelsandlowerlevelswithinthekingdomthatthisI.P.O.willtakeplace,”hesaid.“TheirvisionistomakeSaudiAramcolikeExxonMobil,butmuchbigger.”