The Fed is forecasting that GDP will continue to grow slowly over the next few years and rates will remain lower than we might have predicted. The ramifications of this and the demographic trends are very concerning. Here are the economic outcomes which will happen if the Fed forecast proves correct.

Continued misallocation of capital due to artificially low rates

Pension funds will go further into deficit due to low returns, creating a real crisis in a few years. Illinois is the canary in the coal mine. In order to cover the unfunded pension and union healthcare liabilities, governments will be forced to use funds for police and infrastructure, and taxes will go up.

The rapid growth of aging baby boomers will mean less consumer spending as these people retire and go into slow down mode, instead of acquire and spend mode. China has a major problem with these demographics, as does Japan. With low rates for savings, and minimal increases in stock prices, the average retiree will have less to spend, meaning hospitality and other spend will decline.

Healthcare costs will increase and Obamacare will implode.

As a result of continued slow growth of GDP, and slow consumer spending growth, corporations will limit cap ex spending, further slowing economic growth. This will also hold back improvements in productivity.

Low productivity and a slow economic forecast, with low inflation, means stagnant wage growth and slower job growth. This means lower consumer spending. A vicious cycle.

With lower corporate profits and low wage growth, tax revenue is slow to grow, so there will not be the funding for infrastructure spending that is so desperately needed. Without that, costs for business increase and productivity is restrained. Taxes will therefore increase on upper income people and tax benefits of real estate and LLCs will come under further attack as we see in the Sanders/Warren faction.

With limited inflation, repayment of debt becomes harder for some. The over-levered will find it harder to refinance.

Sovereign debt will continue to grow around the world as economies remain slow and tax revenues stagnate. Nations will be forced to borrow more despite the recent efforts to control deficits. Europe and China already have too big a debt burden, and little hope of any relief from this.

As the standard of living around the world continues to stagnate, it will lead to more political and social unrest. It will also lead to more restrictions on immigration, leaving the world with an unsolved crisis in the Middle East. Over time there will be more shift to the far right as we are seeing in Germany and other countries. More Brexits will possibly follow. It is this sort of economic stagnation and lack of improving standards of living that lead to dictators coming to power who promise to fix it all, which they will not be able to do, so there will be more oppression and a more unstable world. Without major immigration reform in the US, and a good influx of educated immigrants, who tend to be hard workers and entrepreneurs, not an influx of displaced Muslims from Syria, and illegals from Latin America, we will suffer slow population growth as the US birth rate is barely above replacement levels. Without population growth there is limited economic growth.

So with low rates continuing, real estate stays subsidized, values for awhile stay higher than they should be, and returns from CRE will remain better than almost anything else. However, office demand will slow, hotels will decline in value as occupancy continues to decline as it has all this year, ADR will also begin to decline along with occupancy. Retail will continue to suffer.

If Hillary wins we get Elizabeth Warren and her gang of radicals, more deficits, more regulation, especially of banks which is bad, higher taxes, and an influx of uneducated immigrants burdening the social welfare system and schools, and no relief of the pension crisis or healthcare problems. If Trump is elected nobody has a clue what we get.

So hunker down, don't lever up, preserve capital, Risk off. We all need to see what the election brings us and how this plays out next year.

Continued misallocation of capital due to artificially low rates

Healthcare costs will increase and Obamacare will implode.

Low productivity and a slow economic forecast, with low inflation, means stagnant wage growth and slower job growth. This means lower consumer spending. A vicious cycle.

With limited inflation, repayment of debt becomes harder for some. The over-levered will find it harder to refinance.

So hunker down, don't lever up, preserve capital, Risk off. We all need to see what the election brings us and how this plays out next year.

Instant Insights /

The Ramifications of the Fed's Slow Growth And Low Rates Forecasts

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