FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 23, 2018

1. Overview – I’ve Been Preoccupied With a Flood!

2. The US Economy: 3-8 Eight More Years of Expansion?

3. Conclusions: You’ll Have to Draw Your Own

Overview – I’ve Been Preoccupied With a Flood!

You have probably heard that we experienced record or near-record flooding in Central Texas over the last week or so. The lake we live on outside of Austin, normally beautiful Lake Travis, surged almost 40 feet higher in just a few days due to heavy rains. The lower floor of our home – which consists of garages and a big workshop – is a few feet into the 100-year floodplain.

The lake authority predicted that Lake Travis would rise to the point where the water would inundate our garages, workshop and a guest house we have on the property with 1-2 feet of water as early as last Saturday or Sunday. So, we spent the next several days emptying the garages, the workshop and everything from the guest house.

That’s a LOT of stuff – including furniture, beds, appliances and most everything from the workshop! I rented a big UHaul truck and rounded up a large enclosed car hauler to hold everything until the lake goes back to normal. Because we had to move fast, I had my yard/landscape crew and several good friends help us with the moving and loading.

Late in the day on Friday, after we had moved all the stuff out, the lake authority revised its lake level forecast lower by several feet, and we were not inundated with water. It stopped short of their earlier projection that prompted us to move everything out ASAP. Thankfully, we dodged a bullet, at least for now.

One last thing you might be wondering about: Why did I build my home in a floodplain? In 1989 when we bought the lakefront property, there was no evidence that it was in the floodplain. We didn’t find that out until 1991 when a similar flood occurred. We didn’t build our home until 1993 and made sure that all the living space was above the 100-year floodplain.

I share this with you because I had little time to read or write over the last week. As a result, I am reprinting most of a very interesting article I read week before last by Mark Armbruster of the CFA Institute (Chartered Financial Analysts).

Mr. Armbruster makes a compelling case that the current US economic recovery could continue for another 3-8 years. He cites some very interesting stats in making his case. Since this is already the second longest recovery on record, I have some doubts about Mr. Armbruster’s forecast for another up to 8 years of recovery. But I think you’ll find his forecast interesting.

“The US Economy: Eight More Years of Expansion?
by Mark Armbruster, CFA

Where is the US economy headed?

Recent news coverage about an inverted yield curve, potential trade wars and troubles in emerging markets have created some unease. Moreover, the current US economic recovery is now 111 months old, according to the National Bureau of Economic Research (NBER), making it the second longest on record after the 120-month expansion that ended with the bursting of the dot-com bubble in 2001. Could the present bull run simply die of old age?

Since 1854, economic expansions have lasted less than 40 months on average, making the two mentioned above all the more impressive.

Though economic cycles have lengthened since the end of the Great Depression, perhaps due to the ascendance of the US Federal Reserve or a general maturing of the US economy, the current period appears anomalous, and its extended duration begs the question of when the next downturn will occur.

No one has been able to consistently predict the length and magnitude of business cycles, but there is a strong case to be made for significant further growth. Many have noted that the current expansion has been weaker than historical recoveries. Indeed, despite its august age, the present expansion lags behind the mean.

The graph below compares the current recovery to the average post-1960 as well as the strongest recovery over that time, the one that ran from February 1961 to December 1969.

There have been eight NBER recessions in the last 58 years. We compared the four measures of economic growth — industrial production, personal consumption, and nominal and real GDP — to determine the strength of each recovery, focusing on the raw data rather than the growth rates to determine the dollar value of each measure created in aggregate from each recession’s end to the outset of the next one.

For example, the 1990 oil price shock resulting from Iraq’s invasion of Kuwait and the subsequent Gulf War helped push the economy into recession. Prior to the downturn, real GDP hit a pre-recession high of $9.4 trillion (in 2012 dollars) and a low of $9.3 trillion during the recession. It then expanded to a new high of $13.3 trillion just before the outset of the dot-com recession in March 2001. Thus the US economy expanded 43% from the trough of the 1990 recession to its 2001 peak.

During the current recovery, however, real GDP sits just 23% above its nadir during the Great Recession of 2008 and 2009. What’s more, the recession of the early 1990s was mild by historical standards, but the recovery was much more robust than the current one by every measure we studied.

This is not usually the case. In the past, deep recessions have generally been followed by steep recoveries. Why has this recovery, which followed the worst recession since the Great Depression, diverged from the historical pattern? Some have theorized that the housing market has not rebounded as quickly as in past recoveries or that policy uncertainty is to blame.

Certainly, the regulatory environment shifted in the wake of the last recession. Large financial penalties were levied against those deemed to be at fault and has impacted corporations’ willingness to spend and invest.

But things are turning around.

During those early recovery years, policy uncertainty hit record highs. Currently, however, it is below its long-term average, according to the baseline policy uncertainty index created by Scott R. Baker, Nick Bloom, and Steven J. Davis. This may be because of the recent regulatory rollbacks under the current administration…

…This suggests that the present expansion, while long in the tooth, still has room to run. In fact, our research indicates that further growth at the average long-term rate for each of the indicators we studied could mean another three years of economic expansion. This assumes only average levels of economic recovery are achieved during this business cycle. If the US economy experiences an expansion like the more robust recovery of the 1960s, it could grow for an additional 8.8 years.

There are fundamental reasons for optimism. Policy uncertainty is low. Monetary policy is accommodative. While short-term interest rates are rising, they are still well below the levels that create economic distortion. Longer-term fiscal policy is also stimulative.

The corporate tax cuts, like low policy uncertainty, could spur further capital spending, which could drive a virtuous circle of corporate activity that creates further economic growth. Finally, the United States may be taking growth from other nations.

The United States may not be able to stand alone forever while other nations lag behind, but there is cause for bullishness.

After all, even former Fed chair Janet Yellen once stated, ‘I think it’s a myth that expansions die of old age . . . So the fact that this has been quite a long expansion doesn’t lead me to believe that . . . its days are numbered.’….” END QUOTE

Conclusions: You’ll Have to Draw Your Own

Gary again. For all the reasons cited above, Mr. Armbruster believes this economic expansion can continue to run for quite some time. He believes the recovery can continue at least another three years, using only average growth assumptions. He also believes the recovery can last another 8+ years if the recent stronger than average growth continues.

Either way, that would make this the longest economic expansion in US history.

As for me, I have my doubts that the US expansion can last another 3-8+ years without a recession. There are lots of things that can spark a loss of confidence and a recession. Most of these things – like wars – are unpredictable.

So while I’m not nearly as bullish as Mr. Armbruster, I am confident the economy can continue to expand for at least another year or two – UNLESS the Democrats win control of the government and reverse President Trump’s tax cuts and deregulation efforts just ahead.

In that case, all bets are off!

Our webinar last week with Broadmark Capital was a big success and a recording of that presentation is now available to watch at your convenience. Adam Fountain, one of the founders of Broadmark, explained how their successful strategy works and then took questions from the audience.

As you may recall, Broadmark writes short-term, first deed of trust mortgages to homebuilders and builders of condominiums or apartments. They need this short-term financing to fund the construction of the properties they are building. As of October 1st, both Funds are now Real Estate Investment Trusts (REITs), which offer a number of tax advantages to investors. 

You really don’t want to miss the opportunity to hear from Adam about this strategy for accredited investors that you probably won’t find from your typical money manager. It gives you the potential for consistent income, while limiting your downside risks. And now that these Funds are REITs, there are even more reasons to consider this investment strategy.

You can see the actual returns of Broadmark’s two real estate lending funds here.

You can always call us at 800-348-3601 if you want to learn more about Broadmark. As always, keep in mind that past results are not necessarily indicative of future results.

All the best,

Gary D. Halbert

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