German Industrial Orders On The Rise

The German economy is a highly developed social market economy. It is the largest national economy in the eurozone, fourth in the world by nominal GDP, and fifth by Purchasing Power Parity. According to the IMF, in 2017, the country is projected to account for 28% of the eurozone economy. In addition, Germany recently recorded the highest trade surplus in the world worth $310 billion in 2016, making it the biggest capital exporter globally.

In August, German industrial orders rose from the previous month, posting the biggest increase of 2017, showing signs of strong foreign and domestic demand. According to the German federal statistics office, new manufacturing orders climbed 3.6 % from the previous month on a seasonally and working-day adjusted basis.

Furthermore, domestic orders climbed 2.7%, exemplifying the strength of the eurozone’s powerhouse economy. International orders, outside of the eurozone are also up 7.7 %, proving a strong euro has made little impact on demand. Due to strong erratic monthly movements in the first eight months of the year, on average new orders increased by only 0.1%. The German economy is a big reason for the overall bullish performance by the eurozone economy in 2017.

Keith Knutsson of Integrale Advisors states “Combined with strong business data, showing production expectations as well as orders books close to record highs, the German industry is set to end the year at maximum speed. Thanks to the strong data provided by the German Economic Bureau, 2017 now looks as good as ever.”

Fiscal Year Comes To An End: Political Uncertainty Ensues

The end of September is a time where key political issues could increase volatility and shake up financial markets. With the Federal Emergency Management Agency (FEMA) running out of funds to deal with the aftermath of recent disasters, Congress went to work. A disaster relief bill was proposed. U.S. Treasury Secretary Steven Mnuchin saw the bill as an opportunity to add a provision stating a suspension of the debt ceiling until after midterm elections in 2018. Democrats, however, seeking to maintain political pressure on the U.S. budget, leaned towards a more timely solution to the problem.

In the end, a bill was passed that suspends the debt ceiling and extends government funding for three months. However, the passing of the bill does not solve the underlying issues causing political and financial uncertainty. The Republicans are eager and hoping to pass tax reform by the end of the year. Currently, the plan is to use reconciliation to prevent a filibuster and force it through the Senate by majority vote. However, a few of the president’s priorities, such as border wall funding and cutting the EPA budget, are increasing bipartisanship among leaders.

“As long as both sides of the aisle hold out hope of using the debt ceiling for political gain, it will be difficult to come to an agreement that would lead to a viable, long-term solution” said Keith Knutsson of Integrale Advisors.

Looking ahead to 2018, politicians will focus their efforts on the November election cycle, making it even harder to vote for anything controversial because of the need to preserve constituent support. As a result, a debt ceiling increase would be a tough provision to pass. On the other hand, delaying the bill could help separate the budget from the debt ceiling. Now that government funding for fiscal year 2018 was passed, Democrats could utilize their leverage on issues such as immigration reform and health care.

U.S. Household Net Worth Rises in Q2

The total net worth of U.S. households is currently higher than ever, helped by improving home values and stock prices. According to the Federal Reserve, the net worth of U.S. households, the total of all assets minus all liabilities, rose by $1.7 trillion in Q2 2017 to a record $96.2 trillion.

“The U.S. household balance sheet is healthy and continues to be one of the key themes of our view that the current economic expansion is far from over” said Keith Knutsson of Integrale Advisors.

Household wealth in the stock market climbed by $1.1 trillion in Q2. Despite a smaller increase than in the first quarter, the performance still reflects a steady trend in equity prices supported by business and consumer confidence around the world.

The value of real estate in the U.S. rose by $564 billion last quarter. Home prices are rising at a perfect time when there is a high demand for housing and a continuously low unemployment rate. One of the reasons for why we are seeing an increase in home values is due to a low inventory of homes for sale. Economists are estimating that a third of all homes in the U.S. have regained their pre-recession values.

During the recession, the equity and housing market both took some heavy losses. U.S. households lost around $12 trillion in wealth. However, total American net worth recovered by the second half of 2012, and has seen an increase in most quarters since.

Interest Rates and The Federal Reserve’s Reversal of The Stimulus Program

Federal Reserve chairwoman Janet Yellen stated Wednesday that rates are being held, but hinted of a possibility that a rate-hike is under consideration. Additionally, Yellen confirmed that through unanimous decision the Fed will reduce its balance sheet starting in October this year. The statement shows confidence that recent stagnant inflation measures are temporary. The dollar bounced back from losses earlier in the day as announcements were being made.

The balance sheet, which roughly quintupled in size to $4.5 trillion since before the financial crisis, is supposed to be reduced in October by $10 billion and $10 billion for every month after. One year later, on October 2018, the Fed is planning on approaching normalization at a rate of $50 billion per month.

Some investors are worried about the lack of precedent in reducing the balance sheet to this size. Keith Knutsson of Integrale Advisors argued, the Fed has undoubtedly been playing an increasing role in recent years in the US economy but it is to be noted that a misstep with its current size could send US markets in a frenzy.

The meeting did acknowledge recent damage attributable to natural disasters, but policymakers remain confident that long-term economic growth is not harmed by these events. The damage inflicted by recent hurricanes is solely affecting things near-term, with the New York Fed President even suggesting that rebuilding efforts could give a boost to the economy.

Despite already positive-looking economic developments, the Fed commented that consumers are continuing to spend, and business investments are picking up.  New GDP data has been adjusted and now projects a faster growth this year of 2.4 percent, an increase from the 2.1 percent previously forecasted. Unemployment projections have meanwhile been lowered to 4.1 percent, .1 percent lower than before.

Wall Street Does the Money Dance

A stellar performance by the major indices of the U.S. equity market serves as a sign of strong economic growth. The three major US equity indices; DJA, Nasdaq, and the S&P 500 finished the week with strong gains and new record highs.

The Dow Jones Industrial Average continued to gain traction, led by industrials. Aerospace giant Boeing, finished the day up 1.5 % and 4.3 % higher than the previous week. The Dow closed on Friday up 0.29 % to 22,268.34, the fourth consecutive day closing with a record high. This week, the Dow gained 2.16 %, marking the largest weekly gain since December 2016.

The Nasdaq Composite was up 0.3 % to 6,448.47, climbing back from a tough day on Thursday. For the week, the index gained 1.37 %, rebounding after a previous week of losses.

The S&P 500 surpassed the 2,500 mark for the first time. On Friday, the S&P 500 closed at 2,500.23, bringing its weekly gain to 1.56 %.  The industrial, telecommunications, and financial sectors all saw profits, while the healthcare industry lagged behind.

“The performance of the market is lifting the spirits of consumers, investors, and businesses, as well as raising confidence in U.S. equity” said Keith Knutsson of Integrale Advisors.

The positive performance comes despite lower than expected economic data released Friday morning, following a deadly terrorist attack in London and the recent North Korean missile launch over Japan. Wall Street investors are looking ahead to next week, when the Federal Reserve Board is set to meet. Economists are expecting the Fed to leave interest rates unchanged while proposing a new plan to unwind its massive balance sheet.

U.S. Productivity Growth Q2

U.S. worker productivity expanded faster than previously expected in the second quarter, signaling a slow but steady economic growth.

According to the Labor Department, nonfarm business-sector productivity, measured as the goods and services produced per hour worked, increased at a 1.5% seasonally adjusted annual rate in the second quarter, up from a 0.1% growth rate in the first. Economists had expected a 1.4% revised second-quarter growth rate from a previously reported 0.9%. Overall, output increased 4% from the first quarter, while hours worked were up at 2.5%.

“Productivity growth in the second quarter delivers an encouraging sign for longer-term growth” said Keith Knutsson of Integrale Advisors.

The cost of a unit of labor at nonfarm businesses rose 0.2% in the second quarter from an initial estimate of 0.6%. In 2017, unit labor costs are down 0.2%.

Despite the positive outlook, U.S. annual wage gains have remained stagnant at 2.5%, even though the unemployment rate has been at a 16-year low in recent months. Weak productivity gains can result from demographic factors like slowing population and labor force growth. If a downshift in productivity growth occurs, it can put serious pressure on business profits, making it difficult for employers to justify increasing wages.

It is currently unclear whether the increase in productivity signals a broader, more sustainable shift in the economy. A strong performance of productivity, such as the technology boom of the late 1990s and early 2000s, can boost household incomes and spur economic growth throughout the nation.

 

Harvey Damage on Commercial Real Estate and Economic Activity

Despite roads reopening last week, the damage hurricane Harvey has created for commercial and residential real estate could make it the costliest natural disaster in American history. Harvey generated more than 50 inches of rain over some parts of Texas, breaking records for the U.S. mainland. Texas Governor Greg Abbott estimates the damages to accumulate to a total loss of between $150 and $180 billion, and the Federal Reserve stated that the natural disaster has “created broad disruptions to economic activity along the Gulf Coast in the Dallas and Atlanta Districts.”

The focus of attention was Harvey’s effect on petroleum production capacity and rising oil prices in the US. Meanwhile roughly 27 percent, about 12,000 properties, of Houston’s commercial real estate was affected by the flooding. Those 12,000 affected properties are made up of 167,281 apartments, 73 million square feet of retail space, 60 million square feet of office space, and 11 hospitals, totaling 433 million square feet at an estimated value of $55 billion.

Keith Knutsson of Integrale Advisors commented, “the damage Harvey has done is beyond any comprehension; pictures don’t do it justice. Flooding can create a lot of invisible damage that is often dismissed until years later.”

In the short-term the housing market will appear to tighten with demand dropping relatively little compared to the drastically lower supply. Yet investors looking forward must consider the possibility of factors such as readjusted risk premiums, conjunctions of banks foreclosing on destroyed homes and a lower long-term demand in the Houston market.

With more storms brewing in the Atlantic, it is possible that incoming hurricane Irma’s damage will permanently shift interstate investments near the Gulf of Mexico downward as a result of a quick succession – a factor many investors will keep their eye on.

Economic Sentiment Soars

Eurozone

In August, economic sentiment in the eurozone recorded its highest level in over 10 years. This was led by rising confidence among consumers as well as companies in service and industrial sectors.

The Economic Sentiment Indicator, which tracks business and consumer confidence in Europe, jumped to 111.9 from 111.3 in the previous month. This records the highest level since the summer of 2007. Economists are predicting steady, continuous growth in the coming year.

Italy recorded the sharpest rise in economic sentiment among the Eurozone economies, followed by France and Spain, a signal that the recovery is spreading throughout the continent. The increase in confidence further promotes expectations that the eurozone will remain on a solid growth path in the second half of the year, despite a stronger euro. In addition, the European Central Bank is set to begin the reduction of its stimulus program, mimicking the actions of the U.S. Federal Reserve last week. ECB President Mario Draghi could signal for a gradual decrease as early as the bank’s next policy meeting, set on September 7th.

“Robust confidence in eurozone countries suggests that growth will accelerate through the rest of the year” said Keith Knutsson of Integrale Advisors.

The European Economic Commission said industrial companies in the euro currency bloc increased employment plans and selling-price-expectations. On the other hand, consumers’ price expectations were not affected. An improving economic outlook also prompted Moody’s to lift its growth forecasts for the eurozone to 2.1% in 2017 and 1.9% in 2018.

Lagging capital flows: A Sign of Safer Financial Markets?

With gross cross-border capital flows totaling 65 percent less than in 2007, the global financial crisis is continuing to shape the global financial system; large European and US banks have retrenched from foreign markets. Investors should be aware that these facts don’t symbolize a detrimental future for financial globalization. Despite inherent risks, the slow recovery from pre-crisis conditions signals towards an increasingly stable and risk-sensitive opportunity for financial globalization. Measurements in the volatility of foreign direct investment reveal a larger share in global equity than before the crisis. Overall, current financial and capital accounts imbalances have decreased – dropping from 2.5 percent of world GDP in 2007 to 1.7 percent in 2016.

One of the major factors towards the retreat of gross cross-border capital flows are the Eurozone banks.  The total of foreign loans and other claims in 2016 were down by $7.3 trillion (45%) since the crisis. Close to half of the retreat in investment occurred at the hands of intra-Eurozone borrowing, with interbank showing the largest decline. This retrenchment reveals that global banks are reappraising country risk. Domestic policies aimed at promoting internal investments, and new regulations complexifying foreign operations result in the current market developments.

Blockchain, new digital platforms and machine learning will create new systems for cross-border capital flows and further broaden participation. Keith Knutsson of Integrale Advisors argues, “New technologies most definitely increase transaction speeds and reduce cost barriers to transact across borders, but the challenges arise through the methods regulators will employ to monitor and manage a new financial age.”

Indeed, central banks of developed countries have been increasingly prevalent in capital markets, providing both capital as well as liquidity through unconventional policies. Assets of the European, Japanese, English and US central banks have nearly tripled since 2007, reaching $13.4 trillion in 2016. Central banks were forced to intervene in the money and financial markets to ensure liquidity.

Real Estate Programs: How the Universities of the USA stack up

The unpleasant working hours and the grim atmosphere in the Finance industry has caused many gifted students to jump ship into the sector of real estate and Entrepreneurship. Firms like Google and Facebook have long taken over major banks as dream employers while real estate offers a myriad of job opportunities.

Yet compared to (investment) banking and consulting, recruitment for jobs in the real estate sector is less structured. Large companies in this sector don’t focus their recruitment like tech firms and investment banks at prestigious campuses with set amounts of students hired per year, rather revolving it through personal connections.

This approach seems logical, as many of the skills for real estate jobs for hedge funds or private equity firms require skills like those used in Finance: analysis, pricing, logic. A major difference are people skills.

With such similarities, and current development in job prospects, real estate programs and business programs carry many similarities. It is therefore vital to evaluate both: undergraduate business programs and real estate programs to judge among the most exceptional programs in the nation.

The rank of each program is usually measured through various metrics, as the methodology of Forbes, Princeton Review, and the US News & World Report suggest. Unfortunately, many of these rankings are geared towards prospective students with wellness in mind, emphasizing various metrics that are of little importance for recruiters and businesses.

“It is always important to keep in mind the different interests of the parties involved; the characteristics of a university that stand out to a student are not necessarily aligned with those of a recruiter” said Keith Knutsson of Integrale Advisors.

For example, the Forbes ranking bases 50% on the happiness and debt level of students, and an additional 7.5% on students’ graduation rates.

The Princeton Review bases its ratings “on surveys of 137,000 students at the 382 schools,” with each survey covering 80 questions. The questions cover a student’s opinion on:

  • school’s academics/administration,
  • life at their college
  • their fellow students
  • themselves

While this approach certainly creates results with large samples, the qualitative nature of the questions, unreliable nature of peoples’ opinion, and lack of relevant information make it difficult to take such results as a serious metric for program rankings.

The US News & World Report on the other hand arrives at its results for Undergraduate Business rankings by surveying “deans and senior faculty members at each undergraduate business program accredited by the Association to Advance Collegiate Schools of Business.” The opinion of those surveyed is assessed, creating the ranking seen on the website.

Additionally, those same respondents nominate the ten best programs in business specialty areas like accounting, marketing finance, and real estate. Those programs that received the most mentions in each area appear on the site ranked in descending order by number of mentions.

Under these metrics, the real estate rankings for 2017 are as following:

  • University of Pennsylvania
  • University of Wisconsin – Madison
  • University of California – Berkeley
  • University of Georgia
  • University of Southern California
  • New York University
  • University of Texas – Austin
  • University of Florida
  • Marquette University
  • Cornell University

This mention-only ranking notably differs from the results of the overall best undergraduate business programs which are:

  • University of Pennsylvania
  • Massachusetts Institute of Technology
  • University of California – Berkeley
  • University of Michigan – Ann Arbor
  • New York University
  • Carnegie Mellon University (tied)
  • University of Texas – Austin (tied)
  • University of Virginia (tied)
  • Cornell University (tied)
  • Indiana University – Bloomington (tied)

Other methodologies such as the College Report from Payscale rank schools by the average starting pay and mid-career pay of alumni. The value behind such information is well-reasoned, but the data lacks information regarding graduate degrees and doesn’t cover a considerable portion of students. Until such data can be more comprehensive, it seems as if the US News & World Report has the most usable information for businesses and recruiters alike.