Keeping Perspective

Joel Ross

The 10-year has popped, and may go above 3% in coming months. There will very possibly be four Fed hikes this year. But we have to keep perspective. The 10-year has mostly hovered between 5% and 6% historically and the world did not end. Borrowing at 8% or 9% was not so uncommon years ago. In fact, for many years that was considered the norm. We have simply been spoiled for the past 10 years with historic low rates and cap rates. This period is not normal and needed to end, and everyone knew it. Anyone who acquired assets over the past year or two and counted on a continuation of ultra low rates and cap rates was just foolish.

Rates are still well below the norm and should continue to be below for at least another year or two, and maybe longer. It all depends on inflation. My view is inflation will continue to remain relatively low for several more years. Labor today is in many ways, and increasingly global. Many things we previously thought had to be done onshore, are now done offshore. This includes financial modeling, legal research, and even Google uses India as a base for its researchers for searches in many cases. The tax bill and the section which allows immediate write off of cap ex costs, has started a wave of tech upgrades at many companies which will lead to greater productivity not just in the factory, but in the office. AI is just in its infancy. Most companies have formed management committees to determine the best AI for their business. The problem at the moment is these people barely know what AI is and fewer know how to implement it. This will change quickly over the next 2-3 years, and AI will enter the workplace in a much more aggressive and effective way leading to less workers and much more productive workers.