NEW YORK CITY—Two topics appear to be on people’s minds lately, Scott Shay observed in a keynote presentation here last week: geopolitical issues and World Cup soccer. The relationship between the two is closer than you might think, the chairman of Signature Bank told his audience: alluding to the progression of many of the games in the 2014 edition of the now-concluded championship series, Shay said, “We seem to be in an economy that’s stuck at 0-0.”
In his keynote address to the Commercial Lender’s Forum, co-presented by Bloomberg and the Real Estate Services Alliance, Shay offered an explanation for why the economy, globally as well as domestically, is stuck between positive and negative factors. On the plus side, private sector job growth in the US is gaining strength—although it hasn’t kept up with population gains—and interest rates remain at historic lows, while monetary easing has been widespread among the world’s central banks. “Everybody has been easing, and that’s got to have a positive effect on the global economy,” said Shay.
Also on the asset side of the ledger, in Shay’s view, the housing market is improving and, in spite of government action seemingly intended to prevent it, the US is achieving energy independence. Further, US fiscal policy has turned around, even if only because of a stalemate in Congress.
On the liability side, economic growth in World Cup host country Brazil and other emerging markets has slowed, and Europe generally has slipped into a period of stagnation. Shay noted that he used to worry about the US falling into a Japan-like economic rut. He no longer sees that as a concern, but instead, “Europe is the new Japan.”
Other negatives identified by Shay included the eventual normalization of interest rates and the turbulence caused by geopolitical events, including some that are not widely discussed. He also posed the question of whether we’re seeing a credit and asset bubble, and pointed to the complementary domestic headaches of stand and local tax increases together with a looming day of reckoning for entitlement programs.
With the regard to the possibility of a credit bubble, Shay observed that one downside of central banks’ tactic of increasing the money supply is the risk of creating just such a bubble. He noted that Federal Reserve chair Janet Yellen is talking about using more macroprudential tools to tamp down banking and lending excess. The trouble is, such regulations don’t cover non-bank lenders, and so “this strategy would have worked better in the 1950s or ‘60s.”
On a macroeconomic level, Shay sees a 10% chance of a double-dip, a 60% chance that the economy will experience choppy or moderate recovery, a 25% likelihood of a strong recovery and a 5% risk of stagflation. Within commercial real estate, he noted that as cap rate declines have been governed mainly by low interest rates, if cap rates and interest rates rise sharply, then many properties may no longer meet loan-to-value requirements. “I tell my clients to refinance now, and pay the pre-payment penalty,” he said.