It’s 2019. Nothing really terrible or shocking has happened yet…at least by the standards of December. But it’s early yet. As a card-carrying member of the commentariat, I could not possibly pass up the opportunity to bloviate on the “Year Ahead” with the certain knowledge that no one will remember if I’m wrong, and if I’m right, I’ve got bragging rights! The temptation of course is to go full Nostradamus and say things like, “The path of the market will continue to repudiate and embrace the past and the Fed shall, at last, flom the gabberwobber!” Being Nostradamus is never having to say you’re sorry.

In the spirit of CrunchedCredit, which purports to be firmly rooted in the real world of capital formation, commercial real estate and markets, we feel more than a skosh of pressure to try to be a tad more prescriptive and to stick to things that might be useful for those trying to do stuff. However, seriousness of purpose and a bit of thoughtfulness should not be confused with any real likelihood of being right.

With all that said, here’s what CrunchedCredit thinks about 2019:

  • Hunkered Down Investors. The investor class largely hung it up late in Q4 this past year and we are all nervously awaiting their return. Like that pesky groundhog in Pennsylvania, they’ve got to show up! I am committed to a strategy of hope that the investors will return in early 2019 and embrace risk. We should know pretty soon after this is published whether those shy and anxious investors will poke their noses out of their dens. If not, it could be a rough year. If they do come out, don’t dismiss the possibility that they scurry back into their dens at the first whiff of powder.
  • US Domestic Politics. The cage wrestling in the swamp magnified by our sad headline machine will continue to cause gyrations in, at least, equity markets which seem particularly flighty. Is the problem spooked individual investors or are the equity markets now slaved to the dues ex machina of AI programs with algorithms tied to social media, Twitter feed and the news cycle written by a tattooed millennial with the social skills of a three-day dead carp and zero understanding or interest in the real economy or economic fundamentals? Saul of Tarsus may have found God on the way to Damascus two thousand years ago, so anything is possible I guess, but it’s hard to conceive of anything coming out of the US domestic political scene that would improve the economic environment or investor confidence. If we’re going to have a good year, we’ll all just have to ignore the noise.
  • Ditto Geopolitical Events. Brexit might not be awful but it certainly is not going to be good. Western Europe continues to get weirder and weirder as the tide of political small “l” liberalism continues to recede. As we have observed in this commentary before, absent some remarkable political rapprochement amongst the major players, the question is not whether the European Union survives in its current form, but when it fails. The Euro is, eventually, toast. While Western Europe is always the hands down winner of the Kick-the-Can-Down-the-Road Award, there will be a bridge too far someday soon and the center will not hold. We trust that it is not this year. Revanchist China and Russia are just plain bad news. The ambitions of Russia and China on the world stage during periods of their rapid economic growth may not have been great, but those two bad boys on the world stage in a period of economic financial distress at home is even more frightening.
  • Regulatory Burden. The regulatory burden here in the states is somewhat abated from the “if it moves (or certainly makes a profit), regulate it” heyday of the Obama administration. Moreover, our friends at Basel seem to be quiet at the moment and regulatory initiatives such as the Fundamental Review of the Trading Book and other capital raising regulatory regimes seem to be on a pause for at least as long as the European economic machine continues to stutter. Here at home, the incurred loss methodology of recognizing credit losses might have another day in the sun as the quietly criticized and broadly loathed CECL model (thank you, FASB) looks like it may also be on pause for a while longer. Capping it off, we may get good news on HVCRE, Volcker, etc.
  • Heads I Win, Tails You Lose. There’s a real chance that either interest rates begin to retrace their upward path downward because the economy sucks, or both the short and long end of the curve start to move upward without a concomitant refreshing of economic growth because of inflation and stagnant productivity. In both cases, the economy will contract and the cost or availability of debt will begin to stress businesses in the real economy and imperil capital formation in the commercial real estate space. Have faith in the Fed?
  • The Fed Behaving Badly? Speaking of the Fed, we’re fascinated with the Fed these days. It’s not like we haven’t had a Fed for ages. Nor is it that the Fed didn’t have the same tools in the toolbox, nor the same dual mandate to both protect the value of our currency and insure full employment for decades. What’s different? The media has turned the Fed into a rock star (presumably, however, without the fun of booze, drugs, roadies and wild parties). It’s the shiny thing that we can’t bear to look away from. That fascination keeps moving markets and creates volatility. This would maybe make sense if the Fed were rightly and widely known for its infallibility. However, if they have a secret Rosetta Stone which supports perfect, predictive forecasts, it’s about time they pull it out and start using it, isn’t it? So, it’s likely the Fed will over or undershoot as the Fed attempts a soft landing here. And that’s okay, it happens all the time. A quiet “Oops” is muttered and we adjust. If you’re rooting around for something special to worry about (it’s different this time), it’s the Fed’s balance sheet and its current “autopilot” reductions. If increasing the Fed balance sheet from $1 trillion to $4+ trillion during the Great Recession gets credit for stabilizing the economy and militating against a more significant economic crisis, then shouldn’t we think that shrinking the balance sheet might have a significant economic impact as well? Who knew? We’re in the “Here Be Dragons” part of the economic treasure map and I’ll guess we’ll find out.
  • Entropy. All systems degrade, whether that’s the sun lit uplands of the 2010-18 expansion here in the US, or simply the larger arc of the end of history fantasy born in the late 1990s. Things that work break; systems degrade. It’s been good for a long time. Moreover, as the world gets more complex, interconnected and technologically dependent, it seems to us less rugged and more susceptible to the knock-on consequences of bad things happening. Our economy is a brilliant construct delivering high octane economic performance, but fundamentally pretty fragile. Stone cairns survive from the time of the ancients while beautiful glass vessels shatter. Don’t we feel a little glass vessel-ish to you?

So taking all that on board, I want to announce that It’s Going To Be Okay. It’s fine. And you thought this was going to be another one of those morose, zombie apocalypse type of things that I periodically pen. Nope, not this time.

I mean it’s easy to wring ones’ hands and there’s always something riveting about a train wreck (as long as you’re not on the train…are we?), and all those bad things could happen and could upset Goldilocks. But, take a deep breath, folks. There’s still good news out there. GDP growth has been strong. The real economy has so far shaken off the noise of the stock market. Even the fiddling stock market has roared back this past two weeks. There’s been a number of business-friendly changes in tax and regulatory policy over the past couple of years, and certainly there’s a more business-friendly environment inside the federal judiciary. Trade policy? Well, it could end up okay…right? The banks are stronger. (I hesitate to use the phrase “fortress balance sheet” only because the Europeans do so without any sense of irony.) We’ve got a relatively amiable interest rate environment and significant consumer confidence without overwhelming consumer debt. The corporate debt situation is benign and while government debt is going through the roof, no one seems to care…at least for now. What’s the likelihood of exogenous shocks? None of the geopolitical players, either at home or abroad, presumably are actually intent on blowing up the world. Let’s face it, we’re all pretty good at kicking the can down the road. So while big ticket macro and geopolitical risks abound, odds are that really bad things won’t happen and the economy will continue to grow, albeit at somewhat more muted levels for 2019 and perhaps more years after that.

Let’s talk recession. Here’s the shocking headline: We’re going to have a recession at some time. Put on the big boy and big girl pants and face up to that. There’s nothing wrong with a recession. After 10 years of this expansion, we’ve lost perspective. A recession is not the end of the world. They happen periodically. Always have. Always will. And from the burning embers of every recession a new expansion is born. Like the old adage about generals fighting the last war, when we think recessions these days, we see the Great Recession of 2007-2009, which would indeed suck. But, do we really think that’s the template of the next downturn? Seems to me the next one will be more like the preceding four or five relatively short, intense V-shaped recessions that have characterized the American economy since World War II. It’s just not the end of the world. (Trust me, if you’re a banker and have never seen a recession, and maybe that’s most of you these days, it’s really not all that bad.) If it doesn’t happen in 2019, it’s going to happen in 2020, 2021 or 2022. It’s going to happen. When it occurs, it’ll present everyone in the business community with challenges, but challenges that we have regularly met in the past and will meet this time as well.

So here’s to a good 2019. It might be the last year of this expansion, but maybe not. Someday soon we’ll have to deal with a recession. Not today. Investors are coming out of their Q4 dens, capital formation will continue, the economy will continue to grow, commercial real estate will continue to function reasonably well and the Bad News Bears will tut-tut while continuing to invest and we’ll all have a bloody good time. Enjoy it. It will end, but not yet. So there.

 

 

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Photo of Rick Jones Rick Jones

Richard D. Jones (“Rick”), co-chair of Dechert’s Finance and Real Estate group, focuses his practice on capital markets and mortgage finance. Mr. Jones was designated as a leading lawyer for real estate in the 2005-2009 editions of Chambers USA, a referral guide to leading lawyers in the United States based on the opinions of their clients and peers. Mr. Jones was described as “one of the savviest capital markets / mortgage finance lawyers in America’s real estate sector” in the 2007 edition of The Legal 500 (U.S.), which also named him one of New York’s top capital markets attorneys in its 2008 and 2009 editions. In addition he is listed in The Best Lawyers in America.

Mr. Jones recently received the Commercial Mortgage Securities Association’s (CMSA) Founders Award for his leadership. He has also received the Distinguished Service Award from the Mortgage Bankers Association of America (MBA) which is given annually to one person who has provided sustained and effective leadership to the industry.

Mr. Jones is past president of the CRE Finance Council; a founder of the Commercial Real Estate Institute (CRI); a member and past governor of the American College of Real Estate Lawyers and a former chair of its Capital Markets Committee; and a member of the Executive Committee of the Commercial Mortgage Board of Governors (COMBOG) of the MBA. Mr. Jones is a member of the Real Estate Roundtable, serving on its Capital and Credit Policy Advisory Committee. He also serves as the chairman of CRE Finance Council’s PAC as a member of the Commercial Real Estate Working Group of the Financial Services Roundtable, and on the MBA’s blue ribbon Council on Ensuring Mortgage Liquidity.

Mr. Jones is widely published and a frequent speaker on a wide range of issues affecting the capital markets and mortgage finance markets.