Wednesday, December 13, 2017

Mall Valuation Post Unibail-Rodamco/Westfield

Earlier this week France based Unibail-Rodamco announced the acquisition of Australian based Westfield, a major owner of A+ malls in the U.S. and Europe for a total valuation of $24 billion. There was a significant difference of opinion on the transaction between The Wall Street Journal and The New York Times today. The Times headline read "Acquisition Signals Hope For the Future of U.S. Malls," while The Journal headline read "Big Name in Malls Heads for the Exits." We side with The Journal.

This is our fourth blog on mall valuation this year and readers familiar with our view know that the Class A mall business is in transition from being a great business to a good business which implies higher cap rates going forward. According to sources we believe to be reliable,  the U.S. assets were valued at a cap rate in the high 4% range, say approximately 4.7%-4.9%. In our view the seller received more than a full price and we might just get a hint of that tomorrow when November retail sales are reported. It is our guess that although traditional retail did well, online retail had a blowout month.

We believe that Westfield's founding Lowy family came to the realization that their huge investments in redevelopment (e.g. Century City) and technology might not payoff and that future investments in redevelopment would be of a defensive nature. Hence it was hard to turn down an offer that approximated Street net asset value.

Nevertheless the stock market responding by boosting the share prices of Simon Property Group, Macerich and GGP. We would view rally as a selling opportunity if only because one of the potential bidders (Unibail) will likely be out of the market for the next two years.

Friday, December 8, 2017

"Sunny 2018, Cloudy 2019," UCLA Anderson Forecast, December 2017

Sunny 2018, Cloudy 2019

David Shulman
Senior Economist
UCLA Anderson Forecast
December 2017

Of a sudden, propelled by strength (8% quarterly growth) in equipment spending, the economy is growing at a 3% clip and the near term outlook has become decidedly sunny. (See Figures 1 and 2) Moreover the 3% pace of growth is expected to continue through the second quarter of 2018. However as the unemployment rate drops below 4% and employment growth stalls in the face of a labor shortage, economic growth will drop back to the 2% growth rate we have been used to since the end of the financial crisis eight long years ago. Indeed by the end of the forecast horizon in 2019 real GDP growth could very well be running at a rate below 1.5% as the outlook becomes cloudy. (See Figures 3 and 4)

Figure 1. Real GDP Growth, 2007Q1 – 2019Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 2. Real Equipment Spending, 2007Q1 – 2019Q4
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 3. Nonfarm Employment, 2007Q1 -2019Q4
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast
Figure 4. Unemployment Rate, 2007Q1 -2019Q4
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Questions about Fiscal Policy

As we are writing in late November many questions remain about the major tax bills now working their way through Congress. There is uncertainty surrounding the corporate tax rate, state and local tax deductions, child credits and the permanence of the entire package. For modeling purposes we have assumed a ten year $1.5 trillion tax cut, with a 25% corporate tax rate (a compromise from 20%), some allowance for state and local tax deductions and $100 billion in revenues coming from a tax on repatriated corporate profits in 2018. This last point is one of the reasons why the federal deficit declines in 2018. (See Figure 5)

Figure 5. Federal Deficit, FY2007 – FY2019F

Sources: Office of Management and Budget and UCLA Anderson Forecast

We are more certain that the next few years will reverse the seven year annual decline in defense spending. (See Figure 6) With the potential for missiles from North Korea reaching the West Coast, continued fighting in the Middle-East and growing worries about Russia and China defense spending will likely be on the rise over the next several years. We are assuming real defense spending will increase by 2% and 2.7% in 2018 and 2019, respectively. If anything, our forecast is more likely to be low than high.

Figure 6. Real Defense Spending, FY2007 – FY2019F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Monetary Policy in the Post-Yellen Era

With the appointment of Jerome Powell as Fed chairman the Janet Yellen era is coming to an end. Because Powell’s views on monetary policy are very similar to Yellen’s we do not anticipate any significant changes. However, with respect to regulatory policy, Powell is believed to be far more open than Yellen to reviewing the financial crisis regulations that were put into place from 2009 – 2012.

Thus we expect that the gradual interest rate normalization policy that has been underway for a year will continue well into 2019 with a 25 basis point increase from the current 1.375% rate in December and three more increases in 2018. By the end of 2019 the fed funds rate will likely approximate 3%. (See Figure 7) We caution that the futures markets, in contrast to our forecast and the Fed’s “dot plots”, are forecasting only one rate hike next year.

Concomitantly with the rise in short term interest rates long rates will rise as well and we would not be surprised to see the yield on 10-year U.S. Treasury bonds to exceed 4%, up from the current 2.4%. Rising inflation will be the driver in the increase in long rates, more on that below.

Figure 7. Federal Funds vs. 10 Year U.S. Treasury Bond Rates, 2007Q1 – 2019Q4F
Sources: Federal Reserve Board and UCLA Anderson Forecast

The Powell Fed will also continue the policy of gradually shrinking the Fed’s bloated balance sheet that began in October. (See Figure 8) Simply put after three phases of quantitative easing that expanded the balance sheet from $800 billion to over four trillion dollars will be unwound over a period of several years with the ultimate target of $2.5 - $3.0 trillion, quantitative tightening if you will.  (See Figure 8) But make no mistake the balance sheet shrink the Fed is attempting to do is unprecedented.

Figure 8. Federal Reserve Assets, 2003 –Nov 15, 2017, In $ Millions, SA

Source: Federal Reserve Board via Fred

Inflation on the Rise

It now appears that the second quarter slowdown in inflation was transitory and the future quarterly track in inflation will be in excess of 2% throughout the forecast horizon. (See Figure 9) This will hold true for both “headline” and “core” consumer prices. Further oil prices now appear to be tracking about $10/barrel higher than our forecast of just one quarter ago.

Figure 9. Headline vs. Core Inflation, 2007Q1- 2019Q4F
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

The primary source of the rising rate of inflation will be a significant rebound in wage growth. After creeping along in the 2% range, we forecast acceleration in total compensation growth to approximately 4% by late 2018 on a year-over-year basis. (See Figure 10) The recent rise in labor productivity buttresses our view that the long anticipated increase in wages is at hand.

Figure 10. Total Compensation per Hour, 2007Q1 – 2019Q4
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Consumer Spending Supported by Rising Wages and Asset Prices

Real consumption spending is rebounding from the 1.5% increase in 2016 to 2.7% and 2.8% in 2017 and 2018, respectively. (See Figure 11) However, as auto sales slow in 2019 consumption growth will slip back to 2.2%. (See Figure 12) Simply put it is getting very late in the auto cycle. However as long as stock and house prices remain elevated the consumer, or at least the high end consumer, will remain in good shape. (See Figures 13 and 14) In the case of the lower end consumer we are encouraged by Wal*Mart reporting a strong 2.7% increase in year-over-year same store sales in their latest quarter.

Figure 11. Real Consumption Expenditures, 2007 – 2019F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 12. Light Vehicle Unit Sales, 2007 – 2019F
Sources: Bureau of Economic Analysis and UCLA Anderson Forecast

Figure 13. S&P/Case-Shiller 20-City Composite Home Price Index, Dec 1999 – Aug 2017, December 1999 =100, SA

Sources: Standard & Poor’s via FRED

Figure 14. S&P 500 Stock Index, 18 Nov 2007 – 17 Nov 17

Sources: Standard & Poor’s via

One of the big puzzles in recent years is the lack of robustness in new single family housing construction. Given low interest rates and strong employment growth housing activity should be doing much better. Two factors that are being discussed more and more are the unwillingness of the baby boom generation to move as they age in place and highly restrictive zoning in the booming coastal cities. As a result housing starts have remained below the underlying demographic demand of 1.4 – 1.5 million units a year for a decade. We are forecasting modest increases in housing starts from an estimated 1.19 million units this year to 1.27 million and 1.34 million in 2018 and 2019, respectively. (See Figure 15)

Figure 15. Housing Starts 2007Q1 -2019Q4F
Sources: Bureau of the Census and UCLA Anderson Forecast

Exports Rebounding, But NAFTA Risk Looms

In response to a recovering global economy real exports are recovering from the near zero growth of 2015 and 2016. Real exports are estimated to increase by 3.2% this year and 4.5% and 4.1% in 2018 and 2019, respectively. (See Figure 16) According to a recent Goldman Sachs report world economic growth is forecast to increase 3.7% this year and 4.1% in 2018.[i] Growth will come from, 2+% growth in the Euro Area, 6.5% in China, a very strong 8% in India and a rebound in Brazil from O.9% in 2017 to 2.7% in 2018.  (See Figure 17)

Figure 16. Real Export Growth, 2007 – 2019F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 17. Global Real GDP Growth, 2016 – 2019F, Annual Data

Euro Area
World (incl. U.S.)

Source: Goldman Sachs

The real risk to our export forecast and for that matter the entire forecast is political. In less than a year President Trump has blown up the Trans Pacific Partnership (TPP) trade treaty and the global climate accord. The North American Free Trade Treaty (NAFTA) could be next especially given the hawkish views espoused by Secretary of Commerce Wilbur Ross and Trade Representative Robert Lighthizer. Although news from the Mexico City negotiations is not on the front burner, it would be advisable to pay very close attention. Why? Leaving NAFTA is not so simple because it would undo countless supply chains among the three countries (U.S., Canada and Mexico) involved. Just as a reminder the gross trade volumes among the three NAFTA partners amounts to over one trillion dollars per year.[ii] Especially hard hit would be the U.S. automobile industry where parts cross borders several times in the manufacturing of a single automobile. In our view should the U.S. leave NAFTA the growth outlook would deteriorate and the chance of a recession in late 2018 or 2019 would significantly increase.


With our weather forecast analogy for a title we are hoping to be as accurate as modern weather forecasting. Economics has a lot to learn from near term weather forecasting. It looks like 2018 is shaping up to be a pretty good year. There is momentum coming from the recent strength in 2017, strong equipment spending, the likelihood of a tax cut and a consumer that is benefiting from higher asset prices and the prospect of higher wages. Unemployment will drop below 4% and remain there throughout most of the forecast horizon and inflation will experience an uptick. The Fed will respond by continuing to normalize short term interest rates with the Fed Funds rate on a path to 3% by 2019. However as we get into 2019 inflation could be approaching 3% and the economy will slow as it reaches capacity constraints.

The risks to the forecast include the unknowable consequences of the Fed reducing its balance sheet and the potential failure of the ongoing NAFTA negotiations. All told a sunny 2018 with clouds coming in 2019.

[i] See Hatzius, Jan, “As Good as it Gets,” Goldman Sachs, November 15, 2017
[ii] See Shulman, David, “Extreme Makeover: Second Pass at Trumponomics,” UCLA Anderson Forecast, March 2017

Sunday, December 3, 2017

My Amazon Review of David Ignatius' "The Quantum Spy: A Thriller"

Spy vs. Spy

David Ignatius, the Washington Post’s national security columnist, has written quite the spy novel whose backdrop is the ongoing war between the CIA and the Chinese Ministry of State Security (MSS). In this case MSS develops a mole in the CIA whose work involves funding contractors engaged in the development of quantum computers, a revolutionary computing technology that allows photons (Qubits)to superposition themselves in such a manner as to simultaneously be switched on and off. Instead of the current binary system of 0 and 1, the qubit can be both 0 and 1 at the same time.  There are primitive quantum computers in existence today, but once they are scaled up there is no encryption technology that cannot quickly be broken. Thus the first nation that develops such a technology will truly become the sole global super-power.

Thus the stakes are high. Ignatius’ protagonist is Harris Chang, ex-Army and now a CIA operations officer. He is tasked to find the mole. Along the way he sets up a Chinese scientist in Singapore, visits a lab in Seattle, spends quite a bit of time in CIA black sites in Washington D.C. as well as the Langley headquarters, meets up with an MSS operative in Mexico City and the book ends with a fast paced denouement in Amsterdam.

The book also deals with Chang’s ethnicity and how MSS uses that to put him under suspicion in the CIA. He maybe all-American, but to some in the CIA his loyalty is questioned.

We learn quite a bit about CIA tradecraft along the way. We also learn that the U.S. is likely at a disadvantage relative to China because there are far more Chinese students studying in America than there are American students studying in China. Simply put they know more about us than we know about them and there more than a few Chinese students studying computer science in the U.S. 

Although the book is slow at times, I recommend “The Quantum Spy” for those readers interested in what the post-Cold War spy versus spy is like.

readers interested in what the post-Cold Wa

Sunday, November 26, 2017

The Sexual Harassment Purge Trials of 2017 - ?

The very serious and likely criminal allegations against producer Harvey Weinstein have opened the floodgates for all sorts of sexual harassment charges in Hollywood, the media and politics. The charges range from child molestation in the case of Senate Candidate Roy Moore to groping in the case of Senator Al Franken. But given the mob mentality and the media firestorm most of the charges are being conflated.

However there are real differences and they range from what I would call petty infractions (boorish behavior) all the way up to felony rape. I am afraid that over the near term the very real distinctions are not going to matter. Thus the near innocent will be punished along with the really guilty.

In the case of the Congress, hypocrisy reigns; no surprise here. Pro-choice Democrats shouldn’t get a pass because they line up on the feminist side issues. If they do it would be akin the middle age practice of the Catholic Church where indulgences were sold to the highest bidder. Similarly conservative Republicans shouldn’t get a pass because they vote for tax cuts and support right leaning judges.  Simply put, sexual predators know no party labels.

Indeed my guess is that once we find out, and we will find out, where the $15 million paid out by Congress to settle employee disputes went, heads will really role. Further it is my educated guess that both Speaker Paul Ryan and former Speaker Nancy Pelosi were informed. Both of them know where the bodies are buried.   What will happen to them? Instead of passing bipartisan legislation we are now witnessing a bipartisan scandal. All the while the head “pussy grabber” is still the president.

My fear is that a short run unintended consequence of the enveloping scandals is that many men will become reluctant to mentor women. As a professor, a leader in a mentoring program and as a managing director I have had the occasions to mentor many women who have gone on to do great things. However with the temperature rising the simple solution for too many men might be to adopt the Mike Pence and Orthodox Jewish rule of never being alone with a woman not their wife. As a result the mentoring of women by men would likely decline. That would hardly be a consequence that even most feminists would desire.

Friday, November 24, 2017

My Amazon Review of Steven Kotkin's "Stalin: Waiting for Hitler, 1929-1941"

From Passenger to Engineer on the Locomotive of History

This is Princeton history professor Steven Kotkin’s second volume in his magisterial biography of Iosif Stalin. The Stalin of the first volume is a Stalin who is a passenger on the locomotive of history and thus the first volume is more history than biography. (My review of the first volume appears at: In the second volume Stalin is in command making history and this is where the story bogs down. Simply put there is too much detail for the lay reader and the book runs 1173 pages in the print edition. You need a scorecard to keep up with all of the players and you have keep names like Sergo Ordzhonikidze (a Politburo member in the mid-1930’s) in your head. Hence I reluctantly give the second volume four stars.

Kotkin breaks up his book into three broad epochs, the mass collectivization of agriculture (1929 -1934), the purge trials (1934 – 1939) and the great three card monte game between the Soviet Union, Germany and Britain (1939 -1941) as war envelops Europe.  Throughout it all Stalin is omni-present; he seems to see all and know all, at least in his own mind, and his attention to detail and memory is phenomenal. For example he knows the specifications of most of the combat aircraft under his control.

In Phase I, Stalin fearing the more or less capitalistic agricultural sector is a threat to the regime, decided to collectivize all of Russian agriculture and along the way causes the mass starvation of at least five million people.  It is basically an anti-Kulak (wealthier peasants) pogrom. He uses the proceeds to fund industry to modernize the Soviet state. The reasoning is more political than economic because under the Tsars Russia was well on its way to becoming a modern economy until world War I and the revolution upended it.

Kotkin like everybody else does not have a complete explanation for why Stalin’s purges, coupes against the party and the army if you will, reached into every nook and cranny of the Soviet state. It hardly makes sense, that with war clouds looming and his foreign minister Maxim Litvinov travelling throughout Europe urging collective security. In June 1934 Stalin looked approvingly at Hitler’s Night of the Long Knives where Hitler took out both his left and right opposition in a swift coup.

The purges start with the assassination of Leningrad Party boss Sergey Kirov in late 1934. Contrary to other historians Kotkin makes the case that Kirov was the victim of a lone assassin not a Stalin plot. From there huge swaths of the party and the army are taken out including the Bolshevik triumvirate of Bukharin, Zinoviev and Kamenev. Why did Stalin do this? There is no sane explanation, but a partial explanation is that Stalin wanted to create a new nomenclatura that would be loyal to him. By taking out the older party members, Stalin opened up opportunity for a new leadership that was thrilled to be part of the state building process. It also allowed those of very humble origins to rise up and live the Soviet communist dream. During this period we also see the origins of the Soviet-Chinese split where Stalin supports Chiang Kai Shek over Mao. Put bluntly it was in the Russian state interest to keep Japan occupied in China rather than have it turn its forces on Siberia. For Stalin the Chinese revolution would have to wait.

The final section of the book deals with the power politics of the three card monte game (Kotkin’s words) being played by Russia, Germany and Britain. Although Kotkin doesn’t believe that Stalin was the all-knowing policy realist that Kissinger ascribed to him, Stalin did a pretty good job in understanding the correlation of forces. His big mistake was that he failed to recognize that Hitler would win a swift victory in the West leaving the Soviet Union open to attack. World War II was not going to be a rerun of the trench warfare of World War I.

It is at this point that Kotkin writes history like a thriller. We get a day by day feel of the tri-party diplomacy and the buildup of German forces in the East. All sides are putting out disinformation and all parties were thrown for a loop when Rudolf Hess ends up in the English country-side. Stalin perceives it as potential Anglo-German coalition against him. Stalin is continually warned by Generals Zhukov and Timoshenko that Hitler plans to attack, but Stalin ever the realist believes that Hitler would not want to fight a two front war and believes instead that the troop build-up is part of an elaborate blackmail plot.  But as Kotkin notes Marxism-Leninism never anticipated a Hitler and Stalin did not learn from his early 1930’s policy of equating social democracy with fascism. Kotkin is at his best here.

I have one last quibble. I would have liked to know Kotkin’s take on Stalin’s role in the intra-party split in American communism in 1929. Why would the great leader involve himself in such a petty squabble? Nevertheless I highly recommend “Stalin: Waiting for Hitler..." for those willing to slog through this very long book.

The complete Amazon URL appears at:

for Hitler…” for all those willing to slog through this very long book.

Sunday, November 19, 2017

The Dice are Rolling in Mall Land

Last May we wrote "Thus if private equity or sovereign wealth funds don't come in soon to scoop up the apparent bargain, the Street, as I argued, is way off." ( Of a sudden, after a long period of sustained discounts to Street estimates of net asset value the dice are starting to roll in Mall Land. First Brookfield Property Partners offered to take in the 64% of GGP that it doesn't already own with a  cash and stock offer valued at $23/share. To be sure the offer was well above the $19/share the stock was trading at, but still well below the $28/share of value ascribed by the Street. As of this writing GGP is trading about 3% above the Brookfield offer price.

We then found out that hedge funds Starboard Value and Third Point have taken a position in Macerich causing its stock to rise from the mid-50s to the mid-60s, still below the $73 valuation estimated by the Street. Further Elliott Management, a $30 billion hedge fund, has taken a position in Taubman that elevated its stock price from the high 40s to the mid-50s again well below the $85 Street valuation. Remember the hedge funds are intermediaries and are ultimately looking for a final buyer like Brookfield to take them out. If no final buyer appears they will find themselves with dead money positions that will be sold back to the market.

Sitting on the sidelines watching and waiting are David Simon of Simon Property Group, the largest mall owner and Jonathan Gray of Blackstone, the largest private equity firm in the real estate arena. How they respond could very well be despositive as to how the price discovery process works out.

My guess is that the potential buyers of mall companies and/or mall assets are looking for what they perceive to be a bargain and with the Street still estimating mall cap rates in the 4-5% range, they will not find a bargain at those prices. Simply put the bid-offer spread is too wide, and as result I do not foresee transactions at anywhere close to the offer side of the market. But again, as we noted in May, time will tell.

Wednesday, November 8, 2017

Donald the Destroyer

The Republicans are reaping what they sowed by getting into bed with Donald Trump in 2016. Simply put Donald Trump is systematically destroying the Republican Party. In Virginia a weak Democratic gubernatorial candidate won by 9 points and perhaps more importantly the Democrats wiped out a 36 seat Republican majority in the Virginia House of Delegates. In New Jersey the Republican leaders (Kean and Bramnick) in the legislature were reelected by unusually close margins and local Republican officials went down across the state as the Democrats reclaimed the governorship from Chris Christie's failed regime. And in New York the Republican County Executive lost his job in Westchester County.

What last night's election showed is that Donald Trump is not playing in the wealthy suburbs of of Washington D.C., New York and Philadelphia. His very unpresidential behavior against a backdrop of removing the state and local tax deductions and his opposition to gun control means that across America's suburbs the Republicans tied to Trump are going to lose big next year and no matter how artful the district maps were drawn the Democratic Party is now the odds-on favorite to take the House of Representatives in 2018. Thus instead of being its savior Donald Trump has become the destroyer of the Republican Party.