Where Should the Smart Money Invest?

Jonathan D. Miller

The GDP is only growing at slightly above 1% for the year—pretty lackluster. Unemployment stands at 5% what used to amount to full employment or about as low as it can go. But most of the new jobs created in the now seven-year long recovery have been low pay/low benefit. The Fed holds fast and won’t raise the prime rate, which also remains almost as low as it can go. That’s still not a sign of great confidence about the state of the economy. Investors struggle over where to put money: the stock market appears overvalued and bonds return next to nothing. Hedge funds lose their luster—more than a few high-load, big name funds trail the S&P and some major public pension plan sponsors now back away as their overall annual performance badly lags actuarial requirements for meeting their payout needs to beneficiaries. And then there is real estate where basic core funds had been recording remarkably strong low double digit returns off mostly cap rate compression. Had been. The NCREIF Property Index for the second quarter returned 2.03%, a clear sign of the start of an inevitable reversion to the mean and growing skittishness off unrealistically lofty valuations, particularly in the prime 24-hour markets where institutional investments concentrate. It looks like property investors will need to rely on income as appreciation returns flatten out in coming quarters. An attendee at a recent conference for high net worth individuals says “everyone is pulling in their horns.” Without significant pre-leasing, development financing turns scarce for commercial projects, a sign of healthy skepticism about near-term prospects. Now election year political upheaval unsettles confidence. A decade plus of average wage stagnation mixes with signs of global terrorist contagion, high profile gun violence, and candidate fear mongering to create a sense of almost unprecedented dislocation—or at least not since the end of World War II and within the life times of most Americans. The big corporations and ultra rich have been helping push up values in the gateway markets where they tend to congregate and support the service sector. But “follow the money” real estate investing loses momentum in the political scrum about rigged systems in favor of the money elites and the need to share the wealth (new and higher taxes on them) with a majority of increasingly-agitated, have-not citizenry.  It’s pretty simple—if people don’t have enough to buy products and services, the top guys are in for a haircut—either they pay their employees more and take less for themselves or their companies will sink as their earnings falter. The problem for everyone is technology relentlessly reduces the number of traditional jobs and creates a global jobs market leveling wages in higher pay places like the U.S. Neither Donald with his wall or Hillary with her jobs program can do much about that. Only a needed and long-overdue national infrastructure overhaul could make a difference in creating more employment opportunities, but that will be at tax payer expense and won’t happen soon unless  the Republicans lose Congress in November—an unlikely prospect. So the smart money retreats, takes some gains, and doesn’t overpay.