Keith Knutsson

November 2, 2017November 2, 2017

South Africa’s economy struggles

In concurrence with macro research performed by Integrale Advisors two months ago, emerging markets are struggling. The rand and South African government bonds have endured their worst week since the ousting of its finance minister in March of this year. A combination of economic uneasiness and political tension causes investors to expect another credit-rating downgrade.

The implications of a weak rand include an increasing cost of imports and inflation. The 10-year Yields on the government’s benchmark rose as high as 9.3%, the highest level since June 2016.

The updates from ratings agencies S&P and Moody’s on South Africa’s debt are due in November. In the past year, both ratings agencies downgraded the government’s debt once. A further cut would see the local-currency debt fall into junk territory. This would implicate an expulsion from Citi’s widely-tracked World Government Bond Index.

The South African Reserve Bank continues to struggle against stagnant growth despite high inflation, with this development further amplifying fundamental issues. In August, the central bank employed quantitative easing through rate cuts, but the increasing inflation make it doubtful for such a measure in the future.

Political turmoil exists due to allegations that the renown Gupta family used connections with the president to influence and profit off government business.

Keith Knutsson of Integrale Advisors commented, “forecasts for South African growth exceeded rationality; a cautious eye on the developments hinted at such predicaments for quite some time now.”

The current Minister of Finance, Malusi Gigaba, reduced growth forecasts and issued a warning for higher than previously expected fiscal deficits until 2020.

October 21, 2017

Blockchain: a Revolutionary Real Estate Tool?

The surging blockchain market could prove itself to be a valuable tool in real estate purchases. With the abundance of government regulation and brokers, blockchain could increase the liquidity of the real estate market. The additional liquidity could foster demand and command a shift towards higher real estate prices.

Blockchain enables authentic purchases without physical presence. A shift in use from paper to blockchain for physical assets would improve time, security and transactions costs.

Keith Knutsson of Integrale Advisors commented, “even if the impact of blockchain dictates only a small percentage on the overall real estate market, we are talking about an over $200 trillion market; a fraction of a percentage could proof itself to be a valuable niche for investors.”

Currently a host of start-ups are tackling the blockchain real estate market with goals of providing simple transactions, such as a property in the Ukraine that was recently sold, or raising of funds for commercial and construction projects, an area the young company BitProperty focuses on.

Due to the blockchain ledger receiving updates on thousands of computers at the same time, exploitive attacks to alter an entry are mitigated. Even if an attack was possible, the blockchain is transparent and audible. A current hurdle is the digitization of previous records digitization, whose various formats and jurisdictions prove a challenge.

While transactions could see a revolutionary change, blockchain could also impact the ability to alter renting of land and airspace through automatic verification of property ownership in blockchain records, creating new forms of real estate ownerships.

October 9, 2017

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.”

October 1, 2017

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.

September 26, 2017September 26, 2017

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.

September 22, 2017September 22, 2017

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.

September 18, 2017September 18, 2017

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.

September 10, 2017September 10, 2017

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.

September 8, 2017

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.

September 5, 2017

Economic Sentiment Soars

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 7^th.

“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.