Won’t Get Fooled Again
In June 1971, The Who released their fifth studio album, “Who’s Next,” which included one of their all-time greatest hits, “Won’t Get Fooled Again.” When reflecting on the meaning of the song many years later in his diary, Pete Townshend noted, “Don’t expect to see what you expect to see. Expect nothing and you might gain everything.”[1]
Since the last FOMC meeting and a 50bps rate cut on September 18th, to the date of this writing, we have seen the treasury rates increase approximately 40bps, aided by a “blowout jobs report,” on October 4th, as reported by most media and financial news outlets. Quotations were used around the mention of the blowout report as questions remain surrounding what extent the adjective accurately describes the move in the equity and bond market, rather than the actual data points in the jobs report. For example, the headline of average hourly earnings increasing 4% year over year can be misleading to those who only read headlines. One would believe wages are up, and inflation may be back on the table, so the Fed’s easing schedule is called into question. The more nuanced reason the hourly earnings were up, but less noted, was because the hours worked, or the denominator in the equation, is going down (not good.) Hourly earnings are calculated by average weekly earnings divided by average weekly hours worked.
One other interesting aspect to consider is the seasonal adjustment used for this September report was the most aggressive adjustment going back more than 80 years. That is somewhat intriguing because September is one of the top reports that applies a seasonal adjustment to hiring in the month, due to back to school hiring and shifts in construction. Finally, just remember these jobs numbers have been revised down 75% of the time in the last 12 monthly reports. What is my point? The point is the jobs report – with a drastically declining participation rate – is anything but a blowout report. In my view, that makes it suspect. None of that matters though, the algorithms, traders, and bond market participants took that narrative and ran with it, and rates are up.
What now? Maybe we will take some advice from Pete Townshend and don’t expect to see what you expect to see. Rates can go back down, or they could easily go up another 40bps. The truth is that no one really knows what direction rates will move, and how high or low they will go. The good news for most of us in the commercial real estate financing industry, predicting interest rates is not our day job, rather we are in the business of owning, financing and building real estate. Our job at Slatt is to help you make the most informed decision possible when it comes to the financing options for your property. Most of our life insurance correspondent lenders are offering 90-day rate locks at application right now, taking the interest rate risk off the table, and allowing you to focus on owning and operating your real estate. If you prefer the optionality and flexibility of a floating-rate loan, reach out to your Slatt banker as we are seeing more of our LifeCo relationships rolling out core floating-rate products. These are true floaters, for stabilized deals. Regardless, let’s not get fooled again.
John Darrow
Principal | Managing Director
D: 214.717.6301
john.darrow@slatt.com
[1] http://www.petetownshend.co.uk/diary/display.cfm?id=285&zone=diary