The Commercial Real Estate Alpha Site

via REM Capital LLC

Economic Update With the yield curve severely inverted, we will see continued talk about a recession.  Typically 12-18 months after the yield curve inverts, we see a shrinking GDP.  Overall labor market conditions continue to be very strong, as I mentioned last week.  This is leading the Fed to continue its hawkish stance.  Earnings growth is deteriorating in the stock market, driven primarily by margin compression and slower growth. Higher yields will also most likely further depress bond prices. The latest predictions are a bottom sometime Q4 of this year or Q1 of next year.  The market has already priced in a couple more 25bps hikes based on the previous month of economic data. Not surprisingly we’re also seeing a continued pullback of lenders as the market gets dicier.  What’s the answer during all of this?  Focus on cash flow and wait.  The yield curve is at a historic 40-year extreme and with the risks of a 1970s-style stagflationary environment fairly minimal given the massive reduction in M2 money supply, we could also be seeing the tipping point where, in the next 12 months, the Fed is rapidly decreasing rates to shore up a falling economy.  TBD.  Circling back to last week’s comment about wages and employment, I did find some good news with regard to the reason behind overall input cost inflation.  Some of it has come from wage inflation, but even more of it has come from a drop in productivity.  A bad sign for overall profitability but not as dangerous in the overall inflation scenario.  See below…