Commercial Real Estate Finance

Which one of these kids is doing their own thing?

What is interesting about this chart?

I’ll give you a hint: it’s the blue line. More specifically, it’s the bit at the end that pops up when all the others go down. This is the S&P 500 going up while the dollar rallies, gold drops and treasuries sell off. If you haven’t been following, this is unusual.

For the last while, the dollar and equities have been inversely related. Even before the crisis, the rally in stocks beginning in 2003 was accompanied by a decline in the dollar. A strong US economy meant consumers buying stuff made overseas. As the crisis unfolded, the dollar rallied for two reasons: 1) people plowed capital into US treasuries, the safest/deepest asset market on earth, and 2) in times of crisis, capital heads home as the sources of capital try to get their money back.

As markets recovered since March of this year, the stocks-up/dollar-down trend resumed. And, with each hiccup along the way, the dollar rallied as stocks sold off.

So, what happened this past fortnight?

Two possible explanations:

1. End of year unwind

2. Fed reducing liquidity

#1 is a technical Wall Street phenomenon that doesn’t really concern us. Basically, as we approach the end of the year, traders tend to decide to wrap things up. So whatever trade they had on, they begin to unwind, and markets reverse course. It’s the widely held positions that move the markets. From where I sit, it looks like lots of speculators were long gold, long Euros, long treasuries and short stocks. Basically, people were betting on continued dollar weakness catching up to stocks sometime soon and causing a sell off.

#2 could really end up effecting real estate. Within this timeframe, I’ve been noticing the Fed beginning to end some liquidity programs. In “normal economic recoveries” (whatever that means), the beginning of a Fed tightening cycle is a sign of good things to come. i.e. things are going so well that we need to tighten up the reigns a bit.

As I’ve written about before, pervasive fear of “pre-mature tightening” would be a good place to start with #2. If asset markets just go down every time a fed program ends, they might decide we need a little more lighter fluid. i.e. they Fed will end up keeping rates lower for longer. If, however, the reduction in liquidity leads to a rising dollar and rising equities, we could be off to the races! (think gold in the 90’s)

Take it from my old boss at Starwood…the direction of interest rates is critical for the future of commercial real estate.