Although many thought 2012 would be the year that the global economy finally recovered some vigor, the three largest economies, the U.S., China and Japan, all struggled again in 2012. However, despite considerable headwinds, the U.S. economy kept rocking along and showed very real, albeit moderate, gains in both job growth and GDP.
The recovery will continue to be somewhat choppy and uneven due to excessive debt, anemic hiring and partisan bickering, but due to steady progress the U.S. continues to lead the developed world. This combined with a host of factors – record-low interest rates, lower gas prices, a Fed now injecting $85 bn per month in stimulus, a weak dollar and continued low inflation rate – should broaden the economy and make it less susceptible to shocks and reversals.
Initial December employment number 155,000.
U.S. is neck-and-neck with Russia and closing in on Saudi Arabia in crude oil production; on pace to top Saudi Arabia within 2 years.
U.S. producing 10.14 million barrels a day vs. Saudi Arabia at 11.15 million barrels.
Biggest one-year gain in production since 1951 due to horizontal drilling and fracking.
The International Monetary Fund estimates the global economy grew 3.3% in 2012, down from 3.8% in 2011 and 5.1% in 2010.
HOUSING
Continues to show signs of real recovery.
30-year home mortgage rate is 3.35% – a 60-year record low.
New home sales climbed a sharp 3.6% as inventories fell to 142,000, the lowest level since 1963.
December sales of existing homes dropped 1% from November.
December existing home prices up 11.5% from December 2011.
Inventory of existing homes is at an 11-year low.
The “shadow” overhang of properties headed to foreclosure has fallen to 3.4 million from 4.7 million in 2009.
TAXATION
Last minute deal to avoid the fiscal cliff only deferred budget cut discussions and debt ceiling talks for another six weeks.
Carried interest was spared in the fiscal cliff deal primarily because of complications in determining whether this tax hike would help raise additional revenue or hurt by prompting investors to scale back their activity.
Long-term capital gains and dividends raised from 15% to 20%.
Healthcare surcharge still expected to add 3.8% to LTC gains and dividend rates in the second quarter.
THE HEADWINDS
The U.S. economy is poised to grow and waiting for our politicians to put us on the glide path to a balanced budget and sustained growth.
Federal Reserve increased monthly security purchases to $85 bn in December.
December retail sales rose 0.5% from November and 4.7% year-over-year.
U.S. banks continue to show signs of improvement: Goldman Sachs reports earnings tripled for record profits of $2.83 bn in 4Q12, and JPMorgan Chase posted record 2012 net income of $21.3 bn.
Weekly jobless claims dropped to 351,750, the lowest since 2008.
World’s third-largest economy, Japan, is sinking – debt-to-GDP ratio an outrageous 240%, and outstanding debt to shortly reach 1 quadrillion yen ($11 trillion US).
Despite unprecedented stimulus, the EU is in recession with a jobless rate of 11.7% and could reach 13% before stabilizing. Additionally, European Central Bank spent $1.38 trillion in loans to commercial banks to stem 2012 crisis
Germany’s economy shrank by about 0.5% in 4Q12, providing a total year increase of 0.7% compared to over 3.0% GDP the past 2 years.
CAPITAL MARKETS
2012 is best characterized as the year when money managers, hedge funds, individual investors and universities all scrambled for yield as central banks continued handing out free money. This insatiable hunt for yield is likely to intensify in 2013. Investors are clamoring for anything with extra yield and Wall Street is complying with new offerings of junk bonds, CMBS, business development corporations (essentially publicly-traded venture capital funds that pay out most of their income), master limited partnerships, high-yield real estate investment trusts and other higher yielding investments. Even collateralized loan obligations (pools of risky loans to corporations) made a comeback in 2012 after being virtually shut down after the near world financial meltdown.
10-year Treasuries are at approximately 1.87%.
Morningstar corporate bond spreads for high-grade corporate bonds around 150 bps, leaving investors with virtually no real return after taxes and inflation.
Investors chasing yield have given junk bonds a record-breaking year for new issuance in 2012, hitting $350 bn. Junk bonds are already off to a record start in 2013.
The average yield on junk bonds broke through 6.0% barrier for the first time ever, falling to 5.9%, down from an average of 8.1% 12 months earlier.
CMBS closed $16.1 bn in 4Q12, more than 300% increase from 1Q12.
2012 saw $44.14 bn of private-label U.S. CMBS, a 47% increase.
CMBS saw another $21.2 bn of deals issued by Freddie Mac, raising the 2012 total to nearly $65.5 bn.
Projections are that lower rates enabled by these tighter spreads will lead to $75 bn in CMBS issuance in 2013.
2013 REAL ESTATE FORECAST
CRE continues to provide an attractive return to both institutional and non-institutional investors.
CRE fundamentals, occupancy and rents have shown some real signs of improvement, although some evidence of improvement stalling in select areas such as Manhattan office.
Trend of buying and selling partial interests of large core assets continues.
More than 822 funds actively seeking to raise more than $250 bn and estimated active allocations of just $37 bn looking for a home.
$19 bn of private-label CMBS already in the queue for 1Q13.
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