People have been asking about the future of travel leisure and Vail in particular, so I thought it appropriate to comment having grown up in Los Angeles and living in the Vail Valley for the past 25 years. Despite our reputation as a playground and capital preservation harbor for the ultrawealthy, this miniscule demographic (.6%) is not representative of the Top 10% families who control 70% of all wealth in the US and for the most part drive demand for seven digit luxury good spending.  The question that I think people are really asking is “what will money do after the pandemic is under control?”.  Historically our customer base has been well paid professionals but not uber multi-million dollar families.  The enthusiast profile can be characterized as lawyers, doctors, corporate VP’s and small business owners all of which are paid well but are not necessarily $10m investible asset rich.  Over the past 25 years “the wealthy have been getting wealthier” driving luxury good spending to levels that few Americans can afford which is the Vail Valley’s blessing and bane.  As to vacation home ownership today you can’t just be a lawyer; you probably have to be a partner.  Doctors will have to own a piece of their practice or the clinic.  Being a corporate VP may not be enough unless they are the EVP which means the boss of bosses.  While in the past small business owners could have had 5 employees, today they will have to run a much larger company to buy world class ski proximate real estate.

My back of the napkin calc points to a 90% loss of our traditional customer base which if true should be reflected in a flattening of buyer demand if not outright reductions in pricing which have been going in the opposite direction.  Concentrated wealth is growing so maybe that trend is countering what should have been a softening market?  Is it our exponentially expanding international customer base?  Maybe it’s the very low cost of financing or growth of investible assets?  Did the longest running bull market run in history artificially inflate consumer confidence in their wealth and employment income?  Has the intergenerational transfer of family assets begun?  These are difficult questions to answer and are societal issues to contemplate as the rebuilding of America unfolds.

Any predictions based upon historical trends are now COVID-19 irrelevant.  It’s impossible to measure how much capital structure and/or employer destruction has or will occur.  Is fear so pervasive that people will want to live in less congested highly affluent areas such as Vail, Aspen, The Hamptons or Napa Valley knowing they can effectively work on-line?  Will a 30 trillion dollar budget deficit drive inflation to double digit numbers?  What will the credit markets look like as we continue to print money to counter the worldwide pandemic?

While I don’t see a systemic breakdown coming no one knows how badly consumer confidence will be affected.  Over the next couple of years demand for travel, leisure and resort home ownership will suffer as people wait for portfolio and employment income levels to recover which only makes sense in a time of fear and panic where anything can happen.  What I do know is that DURATION is the critical issue.  If the world comes out of COVID-19 by year end, normalcy could return relatively quickly.  If businesses remain shuttered into next year the damage could takes years to restore.  Bloomberg News talking heads are pontificating a V-shaped cyclical downturn pattern, which is a violent decline followed by a swift recovery, but in my opinion seems to be wishful thinking.  It takes months to build a house but only a couple of hours for it to burn down.  Could this a metaphor for the global economy?

Long range forecasting requires accurate and detailed information, so be wary of trusting what will be a barrage of predictions that should be taken with measured skepticism.  The pundits are only guessing so it makes sense to prepare for the worst while hoping for the best.  No matter how all of this ends it is going to be a turbulent and volatile ride, so fasten your seatbelt because I expect it is going to get worse before it gets better with timing and magnitude impossible to predict.

Donald Trump just signed a $2.2 trillion bailout package in an attempt to mitigate the coming recession as COVID-19 shuts down the US economy on a scale that has not been seen since the Great Depression.  Treasury will essentially print money that will be added to our current $22 Trillion national debt, which is predicted to grow by $10T over the next decade plus whatever bailouts and/or fiscal spending is required to defend our nation’s economy.  The US debt to GNP ratio is already approaching critical levels but this spending bill is the country’s only option unless you think 400 million guns in the hands of people living on the street with little to eat is a viable alternative.  Of course, the taxpayers will be ultimately responsible for this growing liability but there just isn’t any other politically expedient solution on the table with other western world countries expected to follow suit as reported by Bloomberg News this morning.

A back of the napkin calc indicates a need of at least another $2T or possibly twice that amount depending on how long the virus runs and how much pain 52% of paycheck to paycheck Americans can endure.  The current average US household income is $60,000 so with a one-time cash payment of $2400 that buys two weeks of living expenses which is far short of what will be needed to weather this cataclysmic storm.  If a follow up package of equal size is required, households and businesses would then have a month of governmental support which is probably a ‘hope for the best’ scenario.

If the virus peaks in 4-6 weeks, and that is a big if, then $4T is the number but with another $2T likely.  At these levels US dollar devaluations could reach epic proportions which is what I expected after the Treasury printed $4T to combat the global banking crisis but without any real lasting consequences. Over the next ten years $38 Trillion of debt ($32T + $6T) should produce two unsavory outcomes; inflation and increasing interest rates.  While property markets can respond to inflation with increasing prices it’s not that simple because along with that hedge comes higher interest rates and lower valuations which I clearly remember happening during the 1980’s and is an outcome to be avoided.

During the Great Recession stock indices fell by more than 50%, and while I am not predicting losses of that magnitude Vail Valley real estate dropped 17% during Q3 2010 which was only a third of the overall capital market reset.  While real estate has since fully recovered and is now setting all-time records, nothing is immune to volatility even in ‘best of the best’ safe harbors for capital.  Q1 2008 was the start of a two and half year long period of illiquid before wealthy ‘on the bubble’ owners started selling.  Depending on duration and the effects on employment, supply chain destruction, business credit defaults and the government’s balance sheet, the damage will only increase over time.

As an economist and real estate analyst for more than 40 years I am convinced that the longest bull market run in modern history was been driven by monetary policy which should have been inflationary but with an aftermath that yielded no real lasting effects.  Perhaps another $6T can be created out of thin air but given a projected US debt load of $38T in 2030, this trajectory will start raising eyebrows around the world as we approach the 100% of GDP “critical threshold” which hypothetically results in downgraded credit and higher borrowing costs with less money available for social and infrastructure programs.  It’s going to be a much different world with all of that debt floating around even if that world can find buyers for these to be issued credit risk bonds.  Cap rate compression, leverage and low cost financing produced the longest running bull market in history.  What do you think is going to happen as we do an about face and start going in the opposite direction?

In times of crisis bold measures are needed leaving me with no other choice but to endorse the current plan, but not without reservations that this level of monetary policy will be a game changer with scant evidence supporting much in the way of upside over the forseeable future.  How America and other affected economies will come out of this is completely unknown, but one thing is certain, it’s not going to be pretty.  The S&P rallied today closing at 2541 as Wall Street applauded the government’s intervention plan.  The facts however lead me to believe that this week’s rebound is likely to be a bull market rally trap which means on Monday you might want to go to cash.

As a real estate analyst and urban economist with a minor in monetary policy from University of Southern California, I have had a lifelong fascination with the Baby Boomer generation who changed the world after WWII and continue to dominate nearly every aspect of modern day living. Humanity has benefited and endured more advances in my lifetime than in the aggregated history of mankind. Human beings are having trouble keeping up which is why 40% of Americans yearn for the simpler days of yesteryear as evidenced by their political leanings which is in essence a mass protest against rapidly changing lives and technological dislocations.

We are Darwinian creatures which makes us self-interest driven yet empathetic during times of crisis when survival of the tribe is at stake, making for confusing and impossible to predict outcomes. Animals stampede and so do humans when threatened with frightening unknowns or issues they don’t understand; it’s in our DNA. As an avid follower of the economic community, one of whom happens to be our neighbor and without a doubt is one of the smartest humans I have ever met; not nerdy IQ smart but rather a real world economic forecasting savant. We had dinner Thursday night and as I left asked whether it would be better to overdose on OxyContin or razor blade my wrists given that his predictions were beyond scary as to what is going to happen as the Coronavirus spreads. This is a summary of what Julian Brigand had to say as a proven futurist.

You haven’t seen anything yet with panic accelerating on a massive scale over the next 2-3 months. More social isolation will be necessary if the health care system is not to be overwhelmed. With roughly 330 million US citizens at a 20% infection rate, 65 million people will need to see a doctor. If 5%-10% require hospitalization that means 3-6 million potential patients and should 20% of those cases require ICU admittance, then 600,000-1,200,000 people will need advanced care in a system that has about 50,000 beds. The CDC is trying to elongate the outbreak so as to prevent a systemic breakdown because if it does physicians will be forced to make triage decisions as to who lives and who dies which is going to make the public very unhappy.

The bad news here is the goal of longevity. As noted in in a prior email this is not a structural economic correction but rather a health epidemic that could burn out by year end. 2020 will be an economic disaster as global supply chain disruptions continue, employees furloughed, and business shuttered as evidenced by Vail Resorts closing all 37 ski resorts for a week while they reassess. The market opened Monday morning with another staggering sell off. The S&P is down 18% over the last 17 days and 30% from its 3300 index record high.

The only good news is that there will be opportunities to buy underpriced assets that will bounce back after the virus gets under control and it will. With the FED taking massive action it just announced a 100 bhps interest rate reduction while committing to increasing QE by $500m which includes mortgage backed securities that could ultimately drive rates to 2%. The question for places like Vail is that the rich typically don’t sell in downturns and if this a one or two year event that duration might not be long enough for real discounting to appear. During the GR it took two and half years for distress to set in because the wealthy don’t run out of money in months but rather years and are prone to riding out recessions rather than taking losses on long term hold assets they don’t have to sell.

While no one can predict magnitude and timing train wrecks can sometimes be seen coming if you are paying attention. The most reasonable plan is to wait for more information, try to predict a bottom, then buy distressed assets that are overly discounted. My hope is to come out of this mess whole, which is going to go down as nothing short of a historic black swan outlier event. The global economy would do well if it recovers by year end but depending on the carnage it might be 2021 before some semblance of normalcy returns.

While many of you are bound to disagree with these prognostications it only makes sense to wait until more information becomes available which is what I recommended during the summer of 2007. The hurricane is here, we’re all starting to hunker down, but waiting for the storm to pass as the hard part.