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Why I Love Christmas In My Bathing Suit

by trusted insight posted 5years ago 1543 views

Our thinking has been that Government Bonds would be the recipient of any flight to safety during an equity market sell-off which is indeed how things have worked out -- so far.

Despite which we note that yields on Moody’s AAA Investment Grade Bonds are actually HIGHER this year. Confirming our belief that this is a flight to safety and not a pro-credit move.

Our expectation is that equities could fall further during the first half of this year thus keeping rates low(er).

Our thesis for higher rates however was predicated on an unexpected increase in inflation expectations and we cited how national minimum wages had seen incredible hikes simply by edict of elected officials. And long-term rates are highly sensitive to inflation expectations.

Inflation, the price kind (not the expansion of the monetary base) is a surreptitious creature nowhere to be seen one minute and suddenly all-present the next as if by magic.

When we first made our prediction for higher rates because of inflationary fears we were laughed out of the room. That told us we were onto something!

About a month later I received anecdotal evidence from my wife, the primary grocery shopper and not a financial person, who made an interesting comment somewhat out of the blue.

She said, “You know we are spending more money on food recently AND that food prices have been going up?”

Core-CPI is defined as CPI ex Food and Energy which makes no sense to us because it is hardly practical but nevertheless, the Fed is suddenly faced with an unexpected increase in CPI despite deflationary conditions globally and a stronger Dollar! Incidentally the increase in core-cpi was from shelter, transportation and medical expenses.

Rising domestic price pressures won’t allow the Fed to leave interest rates at near-zero levels for that much longer. We stand by our prediction that the BIG story of 2016 will be higher rates across the board.

If rates are destined to remain low due to global disinflationary pressures and the US is growing at a positive albeit anemic rate, we are as near as dammit to a goldilocks real estate environment -- low carrying costs and ok credit quality.

VNQ is a diversified REIT exchange traded fund comprised of exposure to most major real estate sectors. VNQ has been trending lower since the beginning of 2015. Hardly a ringing endorsement for a market pumped up on positive sentiment.

In all fairness, people have been warning about a heated Australian real estate market for more than a decade … all for naught so far!

Remember, based on sentiment alone, one would think we are jubilantly breaking ground on more and more new home construction.

Housing starts per peaked in June 2015 at an annualzied rate of 1.2 million homes and has been range bound ever since.

“…confidence among homebuilders fell in February amid concerns over "the high cost and lack of availability of lots and labor." Builders were less optimistic about current sales.” - US housing starts, building permits fall in January

As real estate investors ourselves the Yellow Light (or is it an Orange light?) is blinking CAUTION.

We are more inclined to harvest our real estate investments right now then make new broad allocations.

That said, there are still conservative areas in the real estate market where we see clear opportunities for yield and capital protection.

Greg Silberman is the Chief Investment Officer of Atlanta Capital Group. Atlanta Capital Group specializes in creating custom private market solutions for RIA/Family Office clients and is an active acquirer of independent wealth management practices.

Nothing in this article should be interpreted as a recommendation to buy any security. Please conduct your own due diligence.  

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