Market and Economic Commentary
By Adam B. Landau
Permit Capital Advisors, LLC
We are living in a world where central bank policy, primarily rates and liquidity provisions, appears to be driving markets more so than the real economy. Policies are being designed to help borrowers, not creditors, despite the fact that policies of a similar nature helped plunge the global economy into the very crisis from which it is recovering. Rather than question the sanity of policymakers, our challenge is to adapt and learn.
What we’ve learned is that the major central banks of the world have determined that the short-term advantage gained from balance sheet expansion exceeds any long-term damage that could be wrought. Over the last five and a half years the combined balance sheets of the Fed, Bank of England, ECB, Bank of Japan, People’s Bank of China, and Swiss National Bank, have grown from just under $5 trillion, in U.S. dollar terms, to $13.6 trillion. This global accommodative posture, along with improving economic data, has led to a significant “risk-on” tenor for markets of late. If there is a price to pay as a result of historically accommodative monetary policy it will come in the form of long-term inflation.
Given the fragility of the recovery it is highly unlikely that central bank support will be withdrawn any time soon, particularly in the face of fiscal tightening that is already in queue. The cyclically-adjusted government budget deficit (the best measure of the amount of discretionary fiscal stimulus) is expected to fall both this year and next in all of the major advanced economies with the exception of Japan, where there will be a boost from reconstruction spending after last year’s earthquake. Even including Japan, the fiscal tightening is expected to average around 1% of GDP in the advanced economies in both 2012 and 2013 based on IMF estimates.
The data points to date have been extremely encouraging. Regional Federal Reserve Bank surveys indicate that economic conditions are improving across the country. Capacity utilization rates have climbed back up to 79%, knocking on the doorstep of the historically important level of 80%, from a low of 68% in June of 2009. The employment picture has turned up and broadened out, as more industries are now increasing employment than shrinking it. While it is still early in the year this all bodes well for growth and the consensus expectation for 2012 U.S. GDP growth of 2.2% will likely be revised higher.
In conclusion, in a world that currently favors pro-cyclical opportunities but must guard against eventual inflation, commercial real estate sits in an enviable position. With funding costs remaining low and the country creating jobs at a meaningful rate, demand will likely continue to show signs of strengthening. Fundamentals in the industry should continue to gradually improve in 2012. This creates an appealing opportunity for investors, with increasing access to financing, looking to take advantage of the recent dislocation.
About Adam Landau
Adam Landau is Chief Executive Officer and Chief Investment Officer of Permit Capital Advisors, LLC.
He has 15 years of experience evaluating investment managers, developing asset allocation strategies, and coordinating the process by which the two disciplines are merged.
Visit http://www.permitcapital.com to see how Adam and Permit Capital Advisors, LLC help you grow your wealth in an informed and transparent manner.
