Tuesday, June 28, 2016

My Amazon Review of Peter B. Doran's "Breaking Rockefeller: The Incredible Story of Ambitious Rivals Who Toppled and Oil Empire"

An Unlikely Oil Baron

Peter Doran tells the story of Marcus Samuel Jr. a Jewish 19th century trader who rises from the hard scrabble neighborhood of Houndsditch, London to the heights of the global oil business and a high peerage in the Court of Saint James. Doran’s book is in the tradition of Daniel Yergin’s “The Prize” and Anthony Sampson’s “The Seven Sisters” and is filled with the high drama of the early years of the oil industry.  The oil business of 1900 was far different than today. Rockefeller’s Standard Oil dominated the industry like no other and kerosene, not gasoline was its main product.

However change was in the wind. The oil production capital was moving from the depleted oilfields of the United States to the booming Baku oil fields of Russia. There the Nobel Brothers and the Rothschild’s were beginning to upset Rockefeller’s hold on the global oil market. Into this milieu comes Marcus Samuel. He has the strategic vision to move Russian oil through the Suez Canal to the Asian markets he knew so well.

The one problem was that the Suez Canal, for safety reasons, refused to allow oil tankers to enter the canal. It here where Samuel has designed and built a double-hulled tanker that convinces the canal officials to allow passage. Of a sudden, Standard Oil was threatened with cheap Russian oil in Asia under the name of Shell Transport and Trading, the Shell Oil name of today.

Competing with Samuel in Asia was Henri Deterding’s Rothschild backed Royal Dutch. Using geological science Deterding discovers a gusher in Sumatra that underprices Shell. After several years of competing with each other Deterding gains the upper hand by forcing a merger with Shell that forms Royal Dutch/Shell Group of today based on a 60/40 split favoring Royal Dutch.

This combination along with the anti-trust beak-up of Standard Oil in 1911 ends Rockefeller’s grip over the global oil business. Doran’s theme throughout is as his title suggests is breaking Rockefeller and the monopoly he represented. He ends his story with the death of Samuel in 1928, but in the same year Royal Dutch/Shell joins up with Standard Oil and other oil majors with Achnacarry and Red Line Agreements which effectively cartelizes the global oil industry, so much for competitive markets.

Doran is a good story teller whose work was handicapped by the burning of most of Samuel’s files at his death. Although he takes a few side trips away from his basic story, he holds the reader’s interest throughout.

The full Amazon URL is:

Saturday, June 25, 2016

Understanding Brexit

British electorate just stuck it to the man. In voting to leave the E.U. British voters said "no" to both global capitalism as represented by the "City" establishment and the left-liberal cognoscenti who supported remaining in the E.U. The left liberals responded with their typical bed-wetting attributing racism to the anti-immigrant stance of the Leave voters and the markets responded with a global sell-off rightly fearing a contraction in both global trade and capital flows.

Over the intermediate term those fears might prove to be justified. As Adam Smith taught us almost a quarter of a millennium ago, "the division of labor is limited by the extent of the market." Britain leaving the E.U. will likely reduce the size of the market causing economic output to decline. Moreover the British example has lit a fire under the E.U. skeptics in France, Italy and the Netherlands. Trust me, the politics ain't gonna be pretty.

However there is a way out, although its chance is small. To be sure the Leave voters were concerned about unchecked immigration and the impact of globalization on their daily lives, there also was the resentment of being under the control of the 40,000 nameless and faceless Eurocrats in Brussels who seem to be running their lives without any electoral accountability. Simply put national sovereignty was being eroded away to the E.U. Hence it was no accident that the Leave voters proclaimed last Thursday as "Independence Day."

Thus the way forward would be to fundamentally reform the E.U. by reducing its bureaucracy and rule making authority by devolving power back to its constituent nation states. This will require a coordinated revolution in thinking from above; otherwise the E.U. will face a very messy revolution from below. What the British people sensed and the elite did not, was that the E.U. wasn't working for the average European. Thus it has to reform if this noble experiment is to survive.

Thursday, June 23, 2016

My Amazon Review of Clara Bingham's "Witness to the Revolution: Radicals, Resisters, Vets, Hippies, and the Year America Lost its Mind and Found its Soul"

The Late 60’s Through Rose Colored Glasses

Journalist Clara Bingham, born into the Louisville Courier Journal family, reflects her elite bias that was typified by the “radical chic” of 1970. Born too late (1963) to experience the late 1960’s she writes as a “wanna be” member of the Weather Underground. Her book is series of oral histories to describe the period between Woodstock (Summer 1969) to the end of 1970 as the anti-Vietnam War movement reached its apogee. The interviewees are a mixture of new left political types, veterans, G.I.s, pop culture figures, feminists, Black Panthers, LSD/marijuana entrepreneurs, high Nixon administration officials, occasional police officers and F.B.I. agents. She is at her best with histories of the Army math center bombing at the University of Wisconsin and National Guard killings at Kent State.

Although she has a host of interviewees her sample is biased towards her focus on the Weather Underground and in particular, Bernadine Dorhn and Bill Ayers. Recall that the Weather Underground glorified violence by initiating the “Days of Rage” in Chicago in 1969 and three of their members died in a bomb making factory in a very toney section of Greenwich Village. The victims of the bomb were to be G.I.s at Fort Dix, New Jersey. Ayers and Dorhn, both children of privilege, are unrepentant to this day. Not true of Michael Kazin and Mark Rudd who dropped out of the organization and moved on. Kazin is now a distinguished historian at Georgetown and Rudd taught for years at a community college in New Mexico. Rudd noted, and this is important, that it is results, not intentions that matter. Bingham’s failure is to look more to intentions than results.

I was more than a casual participant in the milieu of the late 1960s. In fact I knew several of her interviewees including Tom Hayden, Jane Fonda, David Mixner, Barry Romo and Carl Bernstein. But unfortunately in her over-coverage of Dorhn and Ayers she leaves out her opponents in SDS who did not go the bomb making route. For example she could have interviewed Mike Klonsky and Marilyn Katz, both Chicago neighbors of Dorhn and Ayers. She also avoided interviewing the folks involved in what was then called the Revolutionary Communist Party. She fails bringing out the fact that there were an awful lot of little Lenins running around. They were hardly democratic and they worshipped at the altar of the Castro and Ho Chi Minh dictatorships. However, that would not have been consistent with her story line of how the late 1960s gave birth to the new soul of America.

She also quite accurately how much the new left was in thrall of the Black Panthers as the vanguard of the revolution, but she neglects to bring out that all too many of the panthers were street thugs. To bring out that point it would have helped if she interviewed former Ramparts editor David Horowitz who over the following decades moved from left to right. He witnessed the thuggery of the panthers in the Oakland of the early 1970s.

To be sure the reaction to the horrors of the Vietnam War and the Cultural Revolution of the 1960s changed America to its very core, but it would have helped if Bingham gave a more balanced account. Although on balance the 1960s were a force for good, the era left quite a bit of wreckage in its wake. 

The full amazon URL is:

Tuesday, June 21, 2016

Sheryl Sandberg: An Out of the Box Choice for Hillary's VEEP

Although I am not the first to mention her, I believe that Hillary Clinton would hit it out of the park if she named Facebook COO Sheryl Sandberg as her pick for vice president. In Sandberg you have an accomplished woman with a national reputation as an executive and author. Her technology cred would make her both a favorite of millennial voters and their suburban parents. She would make a very stale Hillary look fresh.

Moreover Sandberg is not without Washington experience. She served as chief of staff to Treasury Secretary Larry Summers from 1996-2001. Although she and Hillary may not be BFFs, they both know each other. Think about it in this exceptional year, does Hillary want a dull boring politician or does she want to bring some excitement to her campaign and some one who is far more familiar with emails than she is? 

Wednesday, June 15, 2016

My Amazon Review of Adam Yuval's "The Fractured Republic: Renewing America's Social Contract in the Age of Individualism"

You Can’t Go Home Again

National Affairs editor and conservative policy wonk Adam Yuval has written a very important and very dense book as to how we arrived at our current political mess and how we may get out of it. He argues rightly that both the baby boomer Right and the baby boomer Left are nostalgic for the 1950s and early 1960s. As more than a few wags have put it liberals want to work in the 1950s while conservatives want to live there. In the words of Thomas Wolfe, “you can’t go home again.”  Simply put the 1950s represented a unique period of economic and social consolidation that was rendered obsolete by the full weight of globalization, technology, immigration and the social revolution of the 1960s. Thus no matter how the politicians may yearn we are not going back to the social mores of the 1950s  and similarly the cozy big labor/big business model of that era has long been buried.

To Levin our politics today evolve around the radical individualism brought about by the rights revolution of the 60s and 70s joined by a highly centralized national government that has crowded out the space for intermediating institutions. Levin elevates the principle of subsidiarity which entails that policy ought to be implemented closest to the local level as possible. By this he means family, religious institutions, civic organizations (including by the way labor unions) and local government. Where Levin is dead right he notes that radical individualism has brought with it rights without obligations and those obligations are largely to the local institutions mentioned. How we modify the rights mentality to accommodate is vision of subsidiarity is a big question mark. Further the forces of globalization and technology that are still well in train work to destroy the local institutions he wants to strengthen.

I also wish he would have discussed the implications of Jonathan Haidt’s “Righteous Mind….” on healing our fractured republic. Haidt’s thesis is that conservatives and liberals differ because they have different moral matrices. While liberals and conservatives are informed by care/harm, liberty/oppression, and fairness/cheating; however conservative morality is also informed by loyalty/betrayal, authority/subversion and sanctity/degradation. Thus if our republic is to be made whole the conservatives are going to have to give up on a host of obligations or the liberals are going to have to buy in to the idea that some of their individualism is going to have to give way for the good of society. We can hope, but it is going to be tough slog.

Friday, June 10, 2016

"Letting the Air Out of the Commercial Real Estate Balloon," UCLA Anderson Forecast, June 2016

                               “U.S. properties are priced to perfection.”
                                  Christopher Ailman, Chief Investment
                                  Officer, California State Teachers’ Retirement
                                  Quoted in Bloomberg, April 13, 2016

Fueled by cheap money, low levels of new construction except for apartments, and modestly improving demand commercial real estate values have more than doubled off their financial crisis lows of 2009. (See Figure 1) The best properties are trading at record low capitalization rates (net operating income divided by purchase price) of below 5% and the required unleveraged return over a ten year time horizon ranges from 5%-6%. We are truly living in heady times for commercial real estate.

Figure 1. Green Street Advisors Commercial Property Index, Dec. 97 – April 16, 2007 Peak =100

Source: Green Street Advisors

Nevertheless prices are leveling off as investors have become concerned that the period of extraordinarily low interest rates may soon be coming to an end and stresses have emerged in the all-important commercial mortgage backed securities market (CMBS) with new issue volume expected to be off by more than 50% this year. Although credit spreads of come in from this year’s high they are still well above what prevailed a year ago. (See Figures 2 and 3) With new risk retention rules scheduled to be phased in, the investment banks have become more cautious with pricing.

Figure 2. CMBS Issuance, 1999 – 2016F, In $ Billions

Sources: Real Estate Alert and UCLA Anderson Forecast

Figure 3. CMBS Spreads, 10Year AAA Senior vs. 10 Year BBB- to Swaps, Jan 23, 2015 – May 12, 2016

Source: Trepp

On the equity side the demand for yield seems to be insatiable and has been enhanced by legislative changes in the Foreign Investment in Real Property Tax Act (FIRPTA) that makes it easier for non-U.S. domiciled investors to access U.S. real estate. However, the fact remains that the behemoth sovereign wealth funds of the petro-states are suffering under the weight of low oil prices. Simply put, reduced cash flows and increased domestic priorities are curbing their appetite for international investment.

Domestically the implementation of fiduciary investment standards by the Department of Labor for retirement accounts has already and will continue to reduce the demand for high fee private real estate investment trusts (REITs). To be sure these investments would have been banned under earlier drafts, but the fact remains that the $20 billion flow into private REITs in 2014 will be cut by at least half in 2016.
In terms of operating fundamentals, job growth, the source of much real estate demand, will inevitably slow as the economy approaches full employment. After gaining 675,000 jobs a quarter over the past three years, quarterly job gains will slow to 400,000 in 2017 and a much lower 125,000  in 2018. (See Figure 4) Just as job growth is slowing, supply will pick up as the new construction started in recent years and the construction now in planning stages break ground are delivered in 2017 and 2018. (See Figure 5) The increases in new construction will be somewhat mitigated by the growing caution on the part of construction lenders and their regulators.

Figure 4. Payroll Employment, 2007Q1 -2018Q4F, Quarter over Quarter Change, In Thousands

Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 5. Real Commercial Construction Spending, 2000Q1 -2018Q4, In Billions of 2009$

Source: U.S. Department of Commerce and UCLA Anderson Forecast

Into this mix we are forecasting that interest rates increase modestly over the next few years with the federal funds rate approaching 3% by the end of 2018 and the yield 10- year U.S. Treasury notes reaching 3.5% in 2018. (Figure 6) These yields are high compared to today, but on a historical basis remain low. Thus the overall environment for commercial real estate will become less favorable over the next few years and the sector will continue to be pressed by the technological disruption coming from e-commerce and reduced square footage per office worker.[i] But make no mistake, we are not forecasting a real estate crash, but rather we are about to enter a period of modestly declining commercial real estate prices. If you are looking for an analogy you can look at the recent behavior of stock prices which have been flat to down since December 2014. We will next discuss the retail, warehouse, office and apartment sectors in turn.

Figure 6. Federal Funds vs. 10-Year U.S. Treasury Yields, 2007Q1 -2018Q4

Sources: Federal Reserve Board and UCLA Anderson Forecast

High Drama in Mall Real Estate

As if on cue following the Wall Street Journal headline “Glut Plagues Department Stores” on April 25th, both Macy’s and Nordstrom in early May reported poor first quarter results and weak guidance for the entire year. The Journal noted a report by Green Street Advisors indicating that roughly 800 department stores about 20% of all anchor space in U.S. malls will likely close over the next few years and with that many malls will close with them. The stock market response was vicious taking the share prices of both Macy’s and Nordstrom down more than 50% from the recent highs. Simply put, the department store business hasn’t been good for years and the stock market is now recognizing that sobering fact. Remember Nordstrom is a staple in most of the best malls in the country.

Moreover the problem in the mall is not just limited to the anchor department stores. In the first quarter Simon Property Group the largest owner of regional malls in the U.S. once again reported that same-store sales for in-line shops were down on year-over-year basis. And it is not that Simon owns lower quality assets, they, in fact, own among the best assets in mall land. Generally speaking Class A+ malls have sales in excess of $700/square foot while Class B and C malls have sales below $350 a square foot.

It is not that overall retail sales have been declining, to the contrary retail sales have been increasing, albeit at a modest pace. What has been happening is that there has been a decided shift toward e-commerce. For example in April on a year-over-year basis department store sales declined by 1.7%, clothing store sales advanced by 1.3% and non-store retail (e-commerce) surged by 10.2%. Indeed since 2000 the e-commerce share of retail sales advanced from just under 1% to about 8% in the first quarter. (See Figure 7) However this data understates the full impact of e-commerce on retail sales because if you back out those sectors of retail that are not amenable to e-commerce (automobiles, gasoline, food and restaurants) the e-commerce share rises to 14%.  Moreover since 2000 e-commerce has taken about 30% of the growth in retail sales less the categories mentioned above.

Figure 7. E-Commerce Sales as a Percent of Total Retail Sales, 2000Q1 – 2016Q1

Source: U.S. Department of Commerce via FRED

In order to stay competitive major mall operators have ramped up capital spending to make their assets more attractive to consumers to include more restaurants and experiential activities. Note that these forms of retail are not subject to internet competition. Examples of the high level of capital spending include Westfield’s Century City with an $800 million program and Taubman’s Beverly Center clocking in at $500 million. Both of these assets are in West Los Angeles and compete with each other.

Nevertheless the competitive pressures mentioned above have only modestly showed up in the vacancy data as vacancy rates have yet to decline to the levels achieved in 2006. (See Figure 8) However it is important to note that the vacancy data do not include the population of shuttered malls. Indeed the stock market is reflecting the prospect of increased mall closures with the shares of the Class B operator CBL yielding a very high 10.2%, while the shares of Class A+ operator Simon yielding a far lower 3.3% as of May 18.  The yield differential indicates that the stock market in real estate investors view the Class A+ mall as near “bullet –proof” while the Class B mall is vulnerable to closure.

Figure 8. Mall Vacancy Rates, 1980 – 2016Q1

Sources: Calculatedriskblog.com and REIS.

Thus far the operators of grocery oriented shopping centers have been immune from the onslaught of e-commerce competition, but with Amazon making moves to get into the private label grocery business and attempting to do same-day deliveries convenience oriented retail may soon be disrupted as well. Indeed the still prized Whole foods anchor is now suffering from increased competition in the organic food space. Simply put the retail environment is brutal.

Two years ago we noted that the real bright spot in retail real estate was street level retail in dense urban centers that have a significant tourist component to support underlying demand. That thesis proved true until very recently when the impact a strong dollar and weakness in much of the global economy has diminished international tourist spending. As a result asking rents are beginning to drop in, for example, Manhattan which was a major beneficiary of the luxury international tourist boom.[ii]

Industrial: A Beneficiary of E-Commerce

What has been bad for retail real estate has been good for industrial real estate.  E-commerce is warehouse intensive and as the need to shorten delivery times has increased, the demand for close-in modern warehouses in major population centers has soared. While overall warehouse rents have recently been growing at a 5% clip, in such markets as Los Angeles, East Bay San Francisco and northern New Jersey rents have increased at a double-digit pace over the past year. The increase in rents has been buttressed by the long decline in the availability rate. According to CBRE the industrial availability rate declined from 14.5% in 2010 to 11% in the first quarter of 2014 to a cyclical low of 9.2% in the first quarter of this year.

Of longer term importance is the widening of the Panama Canal to accommodate the larger container ships scheduled for opening later this month. This mega-project has spurred port expansions along the east and gulf coasts in such cities as Houston, Savannah and Charleston that will offer new competition for the west coast ports and has the potential to negatively impact the demand for warehouse space in the giant southern California market.

Office: In a Late Cycle Recovery

After seven years of economic recovery, albeit slow, the national office vacancy rate has barely come down from about 18% to 16%. To be sure new construction has been very sluggish until recently, but the demand has been far more muted than in past cycles. (See Figure 9) Two of the pillars of office demand are not what they once were. Financial Activities employment, though now on the rise, is still below its 2007 peak and legal services employment growth has stalled as both of these industries are still in the throes of a fundamental restructuring. (See Figures 10 and 11).

Figure 9. National Office Vacancy Rate, 1980 – 2016Q1

Sources: Calculatedriskblog.com and REIS

Figure 10. Financial Activities Employment, 2000Q1 – 2018Q4F, In Millions, SA

Sources: Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 11. Legal Services Employment, Jan. 2000 – Apr. 2016, In Thousands, SA

Bureau of Labor Statistics via FRED

Perhaps more important has been the demand depressing factor of the decline in square footage per employee. Technological disruption is obviating the need for physical file space and reference rooms along with a shift to open floor plans has led and is continuing to lead to the reduction in the square footage needed per employee. Instead of allowing for 200 square feet per employee, space planners are now allowing for only 150 square feet. This trend is far from running its course.

The one really bright spot in for office demand has been the rapid growth of office employment in the technology sector. The cities with vibrant demand are generally those with a strong base of employment in the technology, advertising, media and internet sectors or TAMI in the lingo of the industry. Thus it is no surprise that such tech heavy cities as San Francisco, San Jose, Seattle, Boston and West Los Angeles are booming. Within cities it the tech portion of the economy that is driving office demand. For example the traditional high priced Park Avenue market north of Grand Central Station in New York City is relatively suffering when compared office submarkets one mile to its south.

A simple example of technology as demand driver can be seen in the growth in the computer systems design and related services sector. Here, instead of total employment we use the year-over-year change in employment and we can see surge to 120,000 jobs a year in 2015. (See Figure 12) However, as the boom venture capital funded technology start-ups wanes, employment growth has slowed to 80,000 a year. This decline, in part, has given rise to worries about the sustainability of office demand growth in the above referenced tech hubs.

Figure 12. Computer Design and Related Services Employment, Jan. 2000 – Apr. 2016, Year- Over- Year Change, In Thousands

Bureau of Labor Statistics via Fred

Multi-Family Housing: Running Out of High Income Renters

                       “…operating trends will likely cause same
                         store revenue growth to fall modestly
                        short of our original guidance midpoint.”

                          Equity Residential, First Quarter 2016 Earnings Release

Multi-family residential housing has been in a sustained boom since 2011. Despite a surge in new supply with starts on track to reach 400,000 units this year, rents continue to rise much faster than the overall prices. (See Figure 13) According to the official data residential rents were up 3.7% year-over-year in April, but because of quirks in the data the true increase in market rents is in excess of 4% and in more than a few markets, twice that. (See Figure 14) The rise in rents is supported by a dramatic decline in the apartment vacancy rate, which, of late, has leveled off at a very low 4.5%. (See Figure 15)

Figure 13. Multi-Family Housing Starts, 1990 – 2018F, Annual Data, In Thousands

Sources: Bureau of the Census and UCLA Anderson Forecast

Figure 14. Consumer Price Index, Rent of Primary Residence, Jan. 2000 –Apr. 2016, Percent Change Year Ago

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 15. Apartment Vacancy Rate, 1980 -2016Q1

Sources: Calculatedriskblog.com and REIS

One of most powerful factors effecting rental demand has been the long decline in the homeownership rate. (See Figure 16) Whether out of choice or necessity, consumers are opting to rent. Part of this phenomenon is due to a shift in preferences for a more urban lifestyle and a delay in such life cycle events as marriage and childbirth as well as far more stringent lending criteria than was prevalent a decade prior. With the gradual rise in single-family home starts, we believe that the long decline in the homeownership rate has about run its course.

Figure 16. Homeownership Rate

Sources: U.S. Department of the Census via FRED

Nevertheless as investor demand continues to drive supply, tenant demand begins to ebb with a slowdown in employment growth coupled with a leveling off in the decline in the homeownership rate, apartment owners are discovering there might not be enough tenants to support $3500 a month rent for one bedroom apartments. That in fact was the gist of Equity Residential lowering its guidance range and the once white hot Manhattan and San Francisco markets begin to cool. The apartment business now appears to be in transition from great to good.


The combination of a less favorable financial environment along with weakening fundamentals arising from increased supply and reduced demand will likely bring to an end the seven year bull market in commercial real estate. To be sure we are in no way forecasting a “crash”, but rather an extended period of sideways to down prices. Simply put financial conditions will transition from being extraordinarily easy to just plain easy making it unlikely for us to witness a repetition of the events of 2007-2009.

[i] For a full discussion on this topic see, Shulman, David, “The Changing Landscape of Commercial Real Estate,” UCLA Anderson Forecast, June 2014.
[ii] See Weiss, Lois, “Shopping Pall Trashes NYC Commercial Real Estate,” New York Post, May 16, 2016.

Friday, June 3, 2016

Hillary Gives a Speech

Yesterday Hillary Clinton delivered a major foreign policy speech in San Diego. It was certainly a speech that Bernie Sanders, crybaby Donnie Trump and yes, Barack Obama would not have given. Although the press picked up all of her criticisms of Donnie Trump, what was really important was her full throated endorsement of American exceptionalism and the internationalist foreign policy our country has engaged in since the late 1940's.

Her words included such phrases as "And if America doesn't lead, we leave a vacuum," (so much for leading from behind) "Stick with our allies," and "Israel's security is non-negotiable." She also bashed those who would start a trade war with China. Not a bad speech, and one one that former Defense Secretary and CIA Chief Bob Gates could have delivered along with several of the also ran Republican candidates for president.

Of course she didn't, and couldn't, go into the foreign policy failures of the Obama Administration in which she played a major role. Nevertheless she made an important start towards both a general election and governing strategy. Let's hope she keeps it up.