The Black Swans Are Gathering For September
My infamous black swans are having a wonderful time. Things on all fronts are ramping up rapidly to potentially combine to be the perfect storm for September.
If Obama does not attack Syria along with the UK and France, we will have zero credibility in the world. Therefore it is likely we will launch cruise missiles and other forms of aerial attack, and then the real battle is on. Iran is likely to react in some way, as is Hezbollah by attacking Israel. That drags in Israel. The Saudis will probably go all in. Obama is likely to wait for the UN, but that just delays the inevitable since Russia will block any action in the UN. Then Obama has a Bush type go in anyway decision to make.
The biggest unknown is Israel which may decide the US is fully ready to go to all out war in the area so what better time to attack Iran. Israel has perfected its missile defenses and cyber, and electronic war capability, so it is now ready. If Syria blows, as it looks like it may, then all hell breaks loose. There goes oil prices and the volatility of the capital markets. The stock market will swoon.
Add to this wonderful story, Obamacare going into effect in October, and it is now very clear it is massive train wreck. After the UPS, U of VA, and Delta announcements, and the increasing waivers, deferrals, delays and now misrepresentations about “you can keep your same heath care”, this will likely just add enormous additional uncertainty to the economy. It is clear nobody really knows all of what is in the Obamacare bill and how it all really works.
Now just for fun the Fed is likely to go ahead with tapering unless Syria disrupts that decision. If war breaks out then the Fed is likely to defer until things are more clear which could be months. Nobody knows. So what do lenders, and especially CMBS originators and issuers do. How do you fully hedge all of this? You don’t. If the above scenarios do play out then the debt markets are likely to be much more cautious and spreads will widen as uncertainty prevails. Add to this the fiasco surrounding the public firing of Bernanke by Obama, and the unseemly political swirl around who will be his successor.
The whole debt ceiling and sequester battle will begin in earnest in September. It will get really ugly as the right wing foolishly believes they can shut down the government over Obamacare. Patty Murray and her lefties think the only solution is raise taxes again. This is a recipe for uncertainty and maybe worse since there is no goodwill between the White House and Capital Hill. Add to this the increasing revelations about the IRS, Benghazi, NSA, James Rosen being nearly charged, Holder having been found to have lied to Congress in a recent report by the committee, and the circus will be in full swing. If you thought the whole government was leaderless and dysfunctional, just wait until September and October.
With rates up there is already a pull back in home sales and a sizable pull back in refinancing. That slows the economy. Car sales might also get slowed. Cap rates on CRE are already showing signs of flat lining and in some places rising as rates rise. In major markets like New York there is already some indication that prices have actually softened a bit on some assets.
As Obamacare ramps up the labor market is increasingly shifted to part time hiring, which is not a solid basis for economic recovery. Hiring for 28 hours or whatever it may be just means more people are listed as employed, but they are not earning a living wage so they need two part time jobs. None of this helps buoy consumer spending.
The renewed attacks by Holder on JP Morgan in particular, and the banks in general, is not conducive to lending or economic growth. Now he wants to revisit all of what went on in 2008, and start new investigations and filing of charges. Financial firms are already spending billions of capital on lawyers and settlements, and that is capital they need to bolster balance sheets and lending. It is huge management time spent on five year old stories which have virtually all been dealt with already and corrected in most cases. None of this will be conducive to aggressive lending or investing.
While the economy is clearly better, it is not going to move strongly ahead with all of these events coalescing in September and October. Maybe all of these things will just go away, but nobody believes that. This is why I have been so cautious and, some would say, needlessly negative for all these months. If you believe in Santa Claus and the tooth fairy, go for it, but if you are a rational decision maker, consider all of what is happening and act accordingly.
Where are markets heading? Register for RealShare National Investment and Finance on June 24-25 for the latest intelligence. Our detailed agenda and information on accommodations are online.