Keith Knutsson, Author at Keith Knutsson

February 27, 2023

Real Estate Is The Hedge Against Inflation

As supply disruption starts to dissipate and the denominator effect leads to an inevitable fall in the rate of annual CPI increases. It is expected that popular concern to moderate and pressure on policy rates to ease next year. Interest rates will be higher than in recent years but will remain low by historic standards.

Theoretically, it is reasonable to claim that real estate is a good hedge against inflation appears. All other things being equal, during periods of inflation one would expect the rent on commercial property to rise along with the price of other inputs such as raw materials, goods, or labor. Lease renewals or rent reviews allow rents to be “marked to market”. Leases may also include explicit annual indexation of rents to some specified measure of inflation, or pre-set step-ups in rents over the term of the lease. They may also allow expenses such as maintenance costs to be passed through to tenants, protecting the net income of the owner.

The strength of the link between inflation and rental income growth will be heavily influenced by other factors – particularly the balance of supply and demand in the market which determines whether landlords can, in practice, increase rents. The type of inflation also matters. If costs are being driven up by “demand pull” from strong economic growth, it is expected that real estate demand – and rents – to rise. On the other hand, landlords would find it harder to raise rents when “cost-push” inflation is driven by rising prices but without an associated increase in demand. It is also expected that the relationship to vary between countries and property types depending on the way leases are typically structured. But overall, apart from short-term distortions due to the property cycle, it is expected that income – and thus property values – to keep pace with inflation over time.

Keith Knutsson of Integrale Advisors commented that “Real estate is a good hedge against inflation and the balance of supply and demand will determine rental income growth.”

February 23, 2020

China Uses Blockchain to Mitigate Coronavirus Damage

With the coronavirus outbreak, China has been forced to delegate close to 80 billion dollars in funds in attempts to control the spread of the virus. However, possibly the most damaging economic fallout from the coronavirus is it’s impact on the small to medium sized businesses that make up over half of China’s economic power. With Chinese businesses under an inordinate amount of pressure from the virus outbreak, stemming from loss of employees, mandated extension of holidays, and other friction, the flaws experienced in Chinese business practices are becoming even more threatening. In general, many businesses in China feel distrust towards fellow companies as they struggle with data sharing, verification inefficiency, and more. In attempts to mitigate the economic friction caused from damaging Chinese business practices being brought to the forefront in combination with the economic duress from the virus outbreak, China has developed and begun to implement a blockchain system to lend out cross-border loans to small businesses across the nation. According to China’s State Administration of Foreign Exchange, since the introduction of the blockchain system last March, around 16 billion dollars worth of loans have been processed through the system. During the coronavirus period, 87 businesses have received over 250 million dollars in support through this blockchain system.

The benefits of the blockchain system is potentially enormous, as it allows for extremely efficient processing of foreign currencies, and inherently grants the ability to record and retrieve virtual ledgers of recorded payments, allowing for fraud to be quickly identified. China is hopeful that their blockchain system will be able to help fix the short term economic pains caused by the coronavirus and the long term issues presented by current Chinese business practices.

Keith Knutsson of Integrale Advisors commented that, “The blockchain system implemented by China might not only solve some of their temporary issues, but could be a glimpse into the future of economies.”

January 17, 2020

US-China Sign Phase 1 Deal

On Wednesday, President Trump officially signed the Phase 1 Deal at the White House, taking the first major step in reducing trade tensions with China. In summary, the trade deal focused on increasing Chinese expenditure on American goods, reducing theft of American corporate technology, and eliminating currency manipulation. By signing this agreement both countries are notably making an effort to cooperate and reduce the economic strain felt by both countries and the world. Although the results of the agreement do not solve many of the important issues that the United States has with China politically, such as cyberattacks on American companies, Trump claims a Phase 2 deal will remedy these problems and strengthen our relationship with China. There is no specific date set for Phase 2 negotiations to begin, but based on activity from both governing bodies, Phase 2 discussions will not be until after elections.

Despite the low feasibility of a Phase 2 agreement being signed soon, the Phase 1 Deal already cements a good foundation for establishing fair trade between the two countries and ending the internationally damaging trade war. Chinese President Xi Jinping stated that the Phase 1 deal is “beneficial to both China, the U.S. — and the world,” showing the desire of China and the U.S. to cooperate as partners to globally release the economic strain that the trade war as caused. Although there are many critics of the Phase 1 Deal, pegging it as “underwhelming,” it positions both the US and China extremely well to resolve many long lasting problems in their political and economic ties.

Keith Knutsson of Integrale Advisors commented that, “The Phase 1
Deal represents hope for future negotiations that can not only generate greater wealth in China and the United States, but inherently help the world as well.”

June 3, 2019

Growth in Solar Industry

As the concern over environmental pollution increases, it is no surprise that the solar industry is booming. Another key factor driving the growth of solar photovoltaic (PV) industry is the immense support the U.S. government has offered. The government increasingly keeps pushing for the adoption of solar energy by offering incentives and tax benefits for both the consumer and producers. The Energy Policy Act of 2005 established the Investment Tax Credit (ITC), which allows homeowners and businesses to deduct the cost of solar PV systems up to 50%. Because of incentives like the ITC, the number of systems being installed has significantly increased in the past decade. In 2018, the U.S. reached 64.2 gigawatts of solar PV. With this capacity, solar energy is powering over 12 million American homes. Homeowners are not the only ones taking advantage of these incentives. Big businesses are also investing in solar PV systems. Walt Disney World, Walmart, and Apple are all switching facilities and offices to solar energy.

Over the past decade, the average annual growth rate of the solar industry has been 50% and is expected to continue to see this growth for years to come. After reaching one million installations in 2016, and over two million in 2018, it is on track to reach over four million systems installed by 2023. Through 2023, this industry is expected to see a compound annual growth rate of 14.9%. Therefore, with the rising demand and support this industry is expected to be valued over $250 billion within the next four years.

Assuming this growth will continue, solar PV will become one of the cheapest sources of energy. We already have seen a whopping 70% drop in the cost of installation. With this drop, the industry has been able to expand into new markets and deploy thousands of systems nationwide. Furthermore, the U.S. economy has also benefited from this emerging industry. The solar industry now employs, directly or indirectly, over 370,000 Americans at more than 10,000 companies. Not only is it generating jobs, but also money. In 2018 alone it produced a $17 billion investment into the U.S. economy. We should expect to continue to see these positive outcomes from this industry as long as people and governments stride for cleaner energy alternatives.

Keith Knutsson of Integrale Advisors says, “The solar industry is growing at a record pace. Not only will it continue to be a leading force in the race for cleaner energy, but it will also serve as an economic engine for the U.S. economy.”

March 11, 2019March 11, 2019

Energy Mix Transitions: Looking Towards 2050

The worldwide evolution of energy systems represents a hallmark of modern times. This trend is expected to not just continue, but accelerate; car fuel, heating systems, and industry power sources in the coming decades are projecting drastic changes attributed to regulation and innovation.

Taking a look at the demand perspective, Global demand for energy is projected to peak around the year 2030, marking an end to over one hundred years of rapid growth and driven by the growth in the renewable energy industry in the energy mix. In recent years both, wind and solar, made up more than fifty percent of new power generation capacity. This growth is expected to accelerate, yet solar is projected to have much faster growth. By 2050 solar growth is expected to increase sixty fold, with wind only growing at one fifth of that speed.

Major forces in energy transitions include rising incomes, declines in energy intensity (due to growth of service industries offsetting demand), electric vehicle sale expectation of 100 million

by 2035 (with more than 2 billion on the road by 2050), and a 85% increase by 2050 in Buildings-related electricity demand driven by higher living standards in non-OECD countries.

Meanwhile, Gas demand is expected to peak and then decline from 2035 on. This is mostly attributable to China’s gas demand growth which represents over half of demand growth and is larger than that of the next 10 largest growth countries. Oil and coal demand growth is going to slow down, with oil peaking in the early 2030s.

Keith Knutsson of Integrale Advisors commented, “Remaining on the frontier of energy supply & demand has defined the winners and losers of modern times; investors should remain vigilant on new opportunities, regardless of political stances.”

November 25, 2018November 25, 2018

Tightening Housing Supply

In the coming years, an increase in Millennials forming households will create robust demand for both single family homes and apartments. Why inadequate supply over the long term may bode well for apartment REITs. The hunt for housing is heating up. In several U.S. regions, average houses spark bidding wars, apartments rent within hours and homes list at ever-escalating price tags. One driving reason: dwindling supply due to rising Millennial household formations.

Analysts say, “We’re going to see strong demand for housing, both multifamily and single family, over the medium to long term.” Aging Millennials, the largest segment of the U.S. population—are now forming households in increasing numbers, a trend that is expected to continue for at least the next five years. One question investors should consider revolves around why this coming imbalance between supply and demand may bolster both single-family home prices and multifamily rent growth in big cities and smaller towns. It may also open up some unexpected opportunities in apartment REITs for investors keen on riding this real estate wave, with the added bonus that apartment REITs tend to outperform during periods when the broader equity market draws down. Although multifamily and single-family housing prices are now past their pre-recession peaks, analysts say they don’t expect a housing correction in the next five years.

According to research, income levels and total housing supply are key factors, but the outsized Millennial population and household formation trends underpin a coming surge in demand. Builders have been working hard to keep up, but this population surge will eclipse their efforts. Research also forecasts that the growth of apartment stock will slow by 2019 to around 1% annually. Meanwhile, as new single-family homes continue to come onto the market, the existing supply is contracting, with 110,000 fewer homes on the market last year than the year before. Not only that, but research also found that apartment REITs could be a smart defensive tool for investors. Regardless of the pending population drivers, the report found that apartment REITs tend to outperform in times of equity market dips.

November 11, 2018

Digital Banking

While consumer-facing tech like real-time payments and mobile banking hold great promise for banks, updates to behind-the-scenes infrastructure could be the key to cost savings and competitive advantage. With improved regulatory clarity and the prospect of normalized interest rates, technology will be the future battleground of differentiation for both consumers and investors. As an example, most bank consumers in developed markets are expected to have access to real-time payments by the end of 2018 allowing banking transactions to be completed with a swipe of the smartphone. But customer-facing applications aren’t the only differentiators that investors should be watching. As mobile banking increases customer traffic, having efficient scalable back-end systems becomes critical. Behind the scenes, digitization in banking has the potential to boost back-office efficiencies, reduce operational risk and improve profitability.

Over the long term, tech advances such as artificial intelligence (AI) and blockchain will clearly play a role in the evolution of banking. However, modernizing the infrastructure backbone that is, the core banking systems which handle the backbone of a bank’s activities, such as deposits and credits is the most important step banks will need to take. In order to remain competitive, banks will need to update technology on the back end in order to deliver a seamless experience on the front end since customers will have little tolerance for glitchy apps no matter how sleek the user interface. Investments in cloud computing and robotic process automation (RPA) should also take priority. Both of these investments offer an immediate opportunity for cost savings in the back office, while at the same time putting banks in a better position to compete with FinTech’s.

To better gauge infrastructure spending, analysts recently analyzed IT expenses over the last five years and earnings call transcripts over the last two years to better understand how banks are spending their IT budgets, gauge their progress against their competitors, and identify banks with the highest potential for improvement:

Core banking systems: With many banks still operating off a patchwork of legacy systems, most banks will need to make some improvements to their backbone. Migrating to a state-of-the art core banking system could reduce cost/income by 9%.

Cloud computing: Most of the banks are moving to the cloud, which offers the potential to shrink relevant infrastructure costs by 30% or more. Leaders have already moved 10% to 40% of their servers and operating systems to the cloud, and many are targeting up to 80% by 2020.

Robotic process automation: Among all of the technologies on the table, RPA may have the greatest potential in the near term. Put simply, these applications (robots) transfer information from one system to another, automating processes previously handled by humans; this can include everything from customer onboarding and payment reconciliations, to fraud prevention and compliance reporting.

July 25, 2018July 25, 2018

Streaming Services & Broadcasting Changes

With Netflix missing subscriber count estimates in the most recent earnings report published by the company, and Walmart announcing a attempt to join in the streaming service industry, the market is developing contrary to expectations. The overall shift afoot is due to the change of way TV content is consumed, causing revenues generated from pay-TV in Britain to fall for the first time after years of sustained growth.

According to BARB Establishment Survey data, the big companies in Britain – Netflix, Amazon and NOW TV- totaled a subscription count of 15.4 million subscribers in the first quarter, more than the 15.1 million pay-TV contracts the old industry holds. The numbers look rosy for new entrants, but investors should keep in mind that traditional pay-TV still generated significantly higher revenues than video-on-demand subscriptions. Pay-TV subscription revenue totaled over 6.4 billion pounds in 2017, which was down 2.7% from last year, but heavily beats the 895 million pounds generated by video streaming services.

In terms of user data, time spent watching broadcast television on a TV set decreased. Currently, the average figure is 3 hours 22 minutes a day, nine minutes lower than 2016’s and 38 minutes since 2012. Meanwhile, mobile devices are becoming increasingly popular among 16-34-year-olds. Less than 50% of this demographic (whose average watching time is 4 hours and 48 minutes) utilized broadcast content.

Keith Knutsson of Integrale Advisors commented, “The transition in viewing habits has broadcasting industry titans shifting strategies. Whether the broadcasting industry’s fate will assimilate those of railroads is to be seen, but with appetite in acquisitions the current leaders in streaming might see competition ramp up.”

July 4, 2018

Could Internet Sales Tax be a Good Policy?

In the past, online retailers were able to take advantage of a tax shelter that exempted them from sales taxes in states that they did not have a physical presence. Online retailers used this tax shelter to challenge entrenched incumbents and provide consumers with a bounty of new options. However, the tax shelter for online retail is being revoked. Looking at this more closely, it all seems pretty enlightened policy-making. Startups were given a leg up that increased competition and consumer choice, and once they succeeded, it was taken away. However, critics could argue that the tax shelter should have been taken away a decade ago. Keep in mind, Amazon.com Inc. started collecting sales taxes a year ago in anticipation of this internet tax shift.

Instead of letting the elected members of the Congress initiate the plan, it was done entirely by the people appointed by the president to decide legal disputes. Looking at previous cases, the U.S. Supreme Court held that mail-order retailers with no physical presence in a state shouldn’t have to collect sales taxes from customers in that state. The reasoning behind the other cases was that “state taxation falling on interstate commerce can only be justified as designed to make such commerce bear a fair share of the cost of the local government whose protection it enjoys.” This means that if a retailer had a store or even just a few employees in a state, it was deemed as enjoying the protection of the local government and thus obliged to collect sales taxes. Recently, the Supreme Court changed its mind, “modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill. E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule. Any alterations to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.” The Supreme Court has basically done Congress’ job, thus crossing the line built between the two entities.

As the Supreme Court now becomes in charge of e-commerce policy making, it could create problems between Congress and the Supreme Court for other tasks going forward. Investors should be wary that Supreme Court tax shifting is not one of the biggest problems in the year but could lead to distortion in the future.

June 16, 2018

Side Effect of Rising Oil Drilling

Higher oil prices are hurting companies that frack for natural gas while American shale drillers benefit at the same time. As companies unearth gas as a byproduct, they respond to rising oil prices by drilling more of it. This has weighted on already low gas prices thus adding more pressure to shale frackers in regions that primarily product gas. The average share price for the five top companies focused on the oil-rich Permian Basin in Texas and New Mexico are up more than 16% over the past year. Share prices for the top five producers focused on the Marcellus Shale in Appalachia, the country’s largest deposit of natural gas, are down more than 9%.

Similar to shale drillers, those focused on natural gas in the Marcellus – a group that includes Cabot Oil & Gas Corporation, EQT Corporation and Southwestern Energy Company have been under investor pressure to live within their means. According to S&P Global, “Those companies have spent about $106 million more than they made in the first quarter of 2018. That has been down from outspending cash flow by more than $274 million in the previous quarter and more than $735 million in the first quarter of 2017.

Investors are reluctant to put more money into gas drillers because gas has been cheap for years and doesn’t look primed to go up soon. Demand for natural gas is predicted to rise globally over the next decade as many countries switch from coal-fired power plants to gas-powered ones. It is predicted that U.S. gas production will outpace domestic consumption through 2009. In terms of numbers, natural-gas futures for July delivery closed at $2.939 million British thermal units on Tuesday and has been below $4 since 2014. Investors should consider the potential of average prices staying below $3 for years, meanwhile U.S. oil prices climb to more than $65 per barrel for the first time since 2014. For most companies, the ongoing strategy has been to cut costs and squeeze out efficiencies over the past years while weathering the storm.

Prices for gas-focused shale companies have rebounded a bit since earlier this year with investors having potentially seen a bottom for gas producers. These companies are no longer buying and growing for the sake of it. It is left to the investors discretion if the market has gotten too bearish on natural gas or not.