HNY from your Business Partner, The Space Place, Inc. (forecast below)
Most of you know that we are 100% devoted to representing/advocating for tenants in office leasing negotiations….
And that our website offers you scores of educational articles written just for tenants….by local architects, contractors, real estate lawyers….and yours truly.
One of our regular contributors – known only as our “Deep Throat” – is a multi-$-billion tech VC, whose pulse on the economy is well worth following.
Below please find his New Year’s forecast, just in.
Please call me with questions or comments. Cheers to you and yours for a fabulous 2020!
“In our last musing in mid-June we wrote that the case for the Fed to cut rates was building, and that a recessionary scenario was developing if the Fed did not act. The 10yr2yr and 10yr1yr spreads subsequently inverted in August and remained inverted for roughly 1 and 2 months, respectively. Three Fed rate cuts, "not QE" balance sheet expansion, and trade deal optimism drove a reversion of the yield curve and a belief that the Fed has successfully affected a "soft-landing" macroeconomic outcome. As such, the S&P 500 finished the year strongly, up roughly 30%.
Our view is that it is too soon to know whether we have soft landed. As we have written before, we primarily focus our macro analysis on three leading indicators: the yield curve, real money growth, and credit risk spreads. The former two indicators tend to lead recession by three to six quarters. Curve reversion does not necessarily indicate that we are out of the woods. The 1990-1991 recession hit over a year after the curve first inverted, the 2001 recession came 8 months following inversion, and the 2007-2009 recession was nearly a year and a half post inversion. In each of these cases yield curve inversion reversed before the recession hit. On average, the story is similar following a return to positive real money growth.
As such, we are closely watching risk spreads, our remaining indicator. Risk spreads tend to be a shorter leading indicator than real money growth or the yield curve. Following the 2006 inversion high yield risk spreads compressed for nearly a year before widening dramatically. Risk spreads currently remain benign; if we do not see risk spreads widening in the next three to six months, we will have more confidence in a soft landing scenario.
We will also be watching several other short leading indicators to confirm or deny the soft landing scenario: claims, confidence, and temporary employment. If we can get through the bulk of 2020 without a negative inflection in spreads plus these three indicators, we will be willing to concede that the Fed has successfully soft landed the US economy.
A recession anywhere from early to late 2020 would be consistent with the history of yield curve inversions. To be clear, we are not calling for this outcome, we are just noting that the return to real money growth and the reversion of the yield curve does not yet indicate that all systems are go. We are happy to tread lightly for the next 6-8 months until shorter leading indicators confirm or deny the soft landing thesis.”
Dan Mihalovich | Founder & CEO
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