Monday Morning Cup of Coffee: Let’s all call a recession


Monday Morning Cup of Coffee takes a look at news coming across the HousingWire weekend desk, with more coverage on bigger issues.

*** Let’s all call a recession, let’s all call a recession,

             Let’s all call a recession, ’cause it’s the trendy thing to do. ***

By this point, everyone is saying that a recession will happen by 2020 (see here and here). Ok, so we’re all agreed on that, but how about some greater insight into what this recession might look like?

The Institutional Risk Analyst (author, Christopher Whalen) recently attended an evening presentation by Professor Edward Altman of NYU Stern School of Business at The Lotos Club of New York.

In the following piece, Altman’s predictive analysis is credited with predicting roughly 80-90% of all non-financial bankruptcies since it was first published back in the late 1960s.

So, is another recession coming? Of course, and here’s what it will look like (hint: think corporate debt layered with rising household defaults).

Altman states that as the amount of debt leverage has increased in the global economy there has been a compression of credit ratings:  “How many ‘AAA’ rated companies in the US? Two. Johnson Johnson and Microsoft.  Two left. Why is it that there are not more ‘AAA’ rated companies? Leverage.”

The migration of companies down to “BBB” ratings simply reflects the fact of more debt and the desire to stay this side of the line of investment grade.  “What rating would you like to be as the chief financial officer of a company,” ask Altman.  “We did a survey many years ago and the answer was ‘A.’  What is it today?  ‘BBB’  The ‘BBB’ category is exploding.  That is the preferred rating.  Why?  Because if you are ‘A’ it means that you are not exploiting low cost debt.  If you are ‘BBB,’ it means that you have higher effective returns for your shareholders.  This is why over the past fifty years credit risk has migrated from very low to very high.  It has exploded into a global debt bubble and this is not just companies.  It’s governments and households.”

The good news is that, while the term “global debt bubble” sounds fairly ominous, all indications are the next recession will not be as bad as the last. So, something to look forward to!

We may be two years away from the expected recession, but the economy is already beginning to slow down, according to the economics team at Goldman Sachs, the good news in the explanation to clients below, is that housing investment is actually improving.

GDP growth was revised down in the third estimate of Q1 to +2.0% (qoq ar) from +2.2% in the second estimate, and the year-over-year rate was unchanged on a rounded basis at +2.8%. The downward revision reflected a diminished contribution from consumer spending (+0.9% qoq ar vs. +1.0% in the second estimate), net trade, and inventories, each of which contributed -0.1pp to the headline revision. This was partially offset by a faster pace of business fixed investment (+10.4% vs. 9.2%) and housing investment (-1.1% vs, -2.0%). Real Gross Domestic Income (GDI)—an alternative measure of aggregate output derived from different source data—expanded at a solid +3.6% annualized pace in Q1, consistent with a firmer underlying pace of growth in the first quarter.

Inflation and jobless numbers remain relatively stable, for now, the Goldman economists added.

And where is all this housing investment coming from? Well, a small part of it may start coming from the building of tiny houses (Best. Transition. Ever.), if two legislators out of New Jersey get their way.

A new bill proposing a pilot program to house homeless veterans is making its way through the New Jersey Senate and is sponsored by Senators Brian Stack, D-Hudson, and Troy Singleton, D-Burlington, according to this article on by Bill Duhart.

“They hope the new effort can be a prototype for helping homeless veterans and the indigent to find shelter and help municipalities meet legal obligations to provide affordable housing,” Duhart explains.

From the article:

The three-year program would be administered by the New Jersey Housing and Mortgage Finance Agency (HMFA) and cost $5 million. Stack and Singleton expect federal funds to pay for the pilot program. The HMFA would pick which towns participate in three regions of the state. Towns that participate would receive grants for the housing and two-for-one credits towards their affordable housing obligations.

That’s it for this week’s Monday Morning Cup of Coffee, have a happy Fourth of July, everyone!

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