Written by: Samira Fatehyar
Synopsis
You can listen to the podcast here:
As always, we will start with hard economic data and make sense of it all. We’ll then talk about the similarities between 9/11 and the current crisis we are facing with Dr. Clemens Kownatzki, currently the Department Chair of Accounting, Finance, and Real Estate at Pepperdine Graziadio Business school. Then, we’ll end with the European View, where we look into how Europeans are re-inventing office space.
Economic Update
Manufacturing PMI Data
We keep getting mixed signals from economic data, but honestly I don’t think it would be very interesting if everything signaled one way. Recently, the Institute of Supply Management released Manufacturing PMI data and it showed quite an improvement.
Graph 1
Manufacturing PMI Data for September 2019-August 2020
https://tradingeconomics.com/united-states/manufacturing-pmi
Looking at Graph 1, above, it’s hard not to see a V-shaped recovery. This is great news right? Manufacturing is up and purchase managers seems to be optimistic about the future, right? Like I’ve always said, take each data set with a grain of salt and understand what it all means. Before I get into the analysis, I think a refresher is needed:
The ISM is the Institute for Supply Management, which is the largest association for supply management in the world. They aim to provide education to professionals in the industry. So how is their manufacturing index calculated? The ISM sends a survey to purchasing managers in 300 manufacturing firms. It monitors any changes to production month over month.
The ISM broke down the data into Table 1, below.
Table 1
Manufacturing at a Glance
https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/august/
Now looking at the above table, we can see many areas are indeed expanding which is in fact great news. But one area that is quite concerning is Employment as it is listed as a contracting index. This is important to keep in mind especially when we go over the new unemployment data. The problem with this is that yes, many businesses seem to be improving but they are not bringing their workers back. In a way, this is great since companies are learning to be more efficient without a great need for labor, but this also has some major societal changes in store with it as well.
If this is the new normal, many workers will be forced to learn new skills. This would be considered fine in normal circumstances but with so many out of work and trying to find a way to survive this crisis, it’ll prove to be detrimental for many families. The time it takes to learn new skills is an investment itself and with so many trying to survive right now, it’s not the best time to be having this shift. Though companies are trying to find a way to survive themselves and labor does tend to cost more than most other operating costs. It’s a harsh reality but one that we need to be aware of.
Unemployment Data
The new unemployment numbers came out and made many positive headlines. The truth is that the unemployment rate did fall and there were many sectors that added jobs. But, always take data with a grain of salt and a bit of context. If we dive into the numbers we start to understand where the majority of these jobs are coming from.
According to the Bureau of Labor Statistics (BLS) report, total non-farm payroll employment increased by 1.4 million while the official unemployment rate decreased to 8.4%. The BLS reported that the Government increased employment by 344,000 jobs, which accounted for 1/4 of the monthly employment increase. If we dive a little further, we see that 238,000 of those jobs were from the Census 2020 temporary workers. That means that almost 70% of the increase is coming from temporary workers. This is a red flag. If we look at government employment in February compared to now, we see that it is still 831,000 below the February level.
The BLS report also noted that the retail sector saw 249,000 jobs added. The majority of jobs added were in the general merchandise store sub-sector. Though compared to February levels, employment in retail is down 655,000 jobs. Professional and business services also saw a big job increase of 197,000, though again, more than half, 107,000, were allocated to temporary jobs. Employment in this sector is down 1.5 million compared to its February levels.
Other notable sectors that saw job gains this month but is massively down from its February levels include: Leisure and Hospitality (down by 2.5 million), Education and Health Services (down by 1.5 million), Manufacturing (down by 720,000), Transportation and Warehousing (down by 381,000), and Wholesale Trade (down by 328,000).
A few other important measures that were talked about in the report included the fact that permanent job losers rose by 534,000 to 3.4 million, it has overall increased by 2.1 million since February. Some good news is that there has been an increase in both labor force participation as well as the employment to population ratio. But, those who have been unemployed for more than 27 weeks has continued to increase over the past few months to now 1.6 million. If we look at Table 1, below, we can see the trend.
Table 1
Duration of Unemployment
https://www.bls.gov/news.release/pdf/empsit.pdf
When you look at this data and also understand that close to 30 million Americans are receiving unemployment assistance it should signal to you that the labor market is not looking to be as strong as many say it is. I’ve always said that if the fundamentals are weak, there is no way things can progress in a healthy way. We’re not looking at the underlying problem here which is that so many Americans are still on unemployment benefits and the main cause of this is the pandemic.
I’ve always been a proponent of the U-6 measurement of unemployment as I believe it is a more accurate number. If we look at Table 2, below, we see that the U-6 unemployment rate is 14.2% instead of the official unemployment rate of 8.4%, or U-3. Why do I think the U-6 number is more accurate? U-3 only takes into account those who are unemployed and have been searching for work for the past 27 weeks. While U-6 takes into account everything in U-3 including those working part time even though they have expressed the desire to find full time work, those who have gone back to school, those underemployed, those who have become disabled, and those who have become discouraged. U-6 also includes those who have remained unemployed past 27 weeks. This is important to look at when trying to understand the underlying factors affecting the overall economy.
Table 2
Alternative measures of labor underutilization
https://www.bls.gov/news.release/pdf/empsit.pdf
Granted, the unemployment rate has decreased, even when we look at U-6, but it’s still significantly high and that should not be brushed aside. In Graph 2, below, we see the U-3 unemployment rate from September 2019-August 2020. I need to make a comment on just how linear the numbers look. By no means am I trying to insinuate that the numbers were altered but it is quite interesting to see the linearity of it.
Graph 2
U-3 Unemployment Rate from Sept 2019 to August 2020
https://tradingeconomics.com/united-states/unemployment-rate
The hope is that the unemployment rate continues to decrease and we start seeing a full economic recovery. But hope is different from reality in this case and unfortunately since so many Americans are on some kind of unemployment insurance, it’s going to take a lot to keep the unemployment rate to continue its decrease.
US Debt vs. GDP
In a report recently released by the Congressional Budget Office (CBO), it stated that by 2021, the US debt would exceed US GDP.
It would exceed 100 percent in 2021 and increase to 107 percent in 2023, the highest in the nation’s history. The previous peak occurred in 1946 following the large deficits incurred during World War II. By 2030, debt would equal 109 percent of GDP.
This is a fiscal crisis. Plain and simple. According to the US Debt clock, we are roughly in $26.74 trillion in debt. In addition to this, government revenue is estimated to decrease to $3.3 trillion from what it was last year at $3.5 trillion. We all know that the government is reckless when it comes to borrowing and spending but to have this much of a short fall and to have so much debt is just irresponsible. Graph 3, below, shows a visual representation of the debt to GDP crisis we’re about to face.
Graph 3
Debt to GDP Projections
https://www.cbo.gov/publication/56517
Granted, there are several countries that operate with a high debt to GDP ratio, the highest being Japan. They’re doing just fine, right? Not necessarily. Many people believe that since we will continue to have low interest rates, we can help manage the national debt. But this simply is not the case, because as the government deficit continues to grow, the deficit will have to be financed by net savings from other areas in the economy, which leads to reduced consumption and investments.
See, in Japan, the savings from the household and corporate sectors have exceeded the borrowing by the government and thus they’ve been able to actually keep things at bay even though their debt to GDP ratio remains substantially high. According to a report done by the Atlantic Council:
The US household sector has also been a net lender to the economy, with an annual surplus averaging $850 billion in the previous four years, rising to $1.3 trillion (annual rate) in quarter one 2020. However, the household sector financial surplus alone has not been sufficient to fund the deficits of the government sector (both federal and state/local governments) running at a four-year average annual rate of $1.2 trillion, rising to $1.7 trillion in quarter one 2020. Meanwhile the corporate sector borrows at a four-year annual average of $160 billion, declining to $35 billion in quarter one 2020. As a result, the United States has run a persistent current account deficit—borrowing from the foreign sector.
So we are indeed in a different boat than Japan. Unfortunately, I think we’re so far gone that it is going to take generations not only to pay down our debts but get us to a place where we would start seeing budget surpluses instead of deficits. On one hand, many Americans are in need of stimulus support from the government, and on the other hand, the government is going broke. There clearly is no way to win in this situation. If we don’t help Americans now, we are going to see prolonged negative economic and societal effects. If we do, we will have to face this massive borrowing problem we have somehow. This is the biggest fight Congress is having right now.
But in addition to all of this, I’d like to bring up another problem I see from all of this. Our credit-worthiness as a country. We haven’t been able to pay any of our debt back for quite some time now and yet we are still borrowing like crazy. At some point, the rest of the world is going to realize just how big of a mess we are in and when that happens, there will be a massive problem on our hands. See, when a country’s credit worthiness decreases, our bond ratings get downgraded. When this occurs, our yields will have to increase to reflect the lowered ratings. This then leads to increased interest rates. In addition to all of this, many countries will not want to back their debt with T-bills and the US dollar may in fact lose it’s status as the world’s reserve currency. Many economists believe this will eventually happen someday if things continue down on this path.
Similarities Between 9/11 and Now?
SIMILARITIES between 9/11 and Now?
A Conversation with Dr. Clemens Kownatzki
I should preface this with the fact that Dr. Clemens Kownatzki was one of my favorite professors during my MSRE program, though I might even go so far and say he is one of my favorite professors period. Recently, I invited him to talk on the podcast. We had quite an interesting discussion about how 9/11 is very similar yet dissimilar to the events we are currently facing. I thought this would be an interesting topic that would resonate with everyone in some way as well as help us gain some understanding of what our future might look like.
Before I begin, I’d first like to give him a brief introduction. Dr. Clemens Kownatzki has been an executive in the financial services industry for well over two decades. His experience ranges from management positions in brokerage and treasury operations to advising corporate as well as retail clients with a focus on managing their risk effectively. He has also been an active investor in options and derivatives markets. Having lived and worked in Europe, the Middle East, Asia and the U.S., his investments range from equity to international capital and currency markets. Dr. Kownatzki’s primary research interest focuses on the important question of how risk and market volatility affects investment returns. He is an Assistant Professor of Finance at the Pepperdine Graziadio Business School and has recently been promoted to Department Chair of Accounting, Finance, and Real Estate. To listen to the interview, please check out the podcast. The following is a transcript of our conversation.
Samira: First off, thank you for being here Dr. Clemens.
Dr. Clemens: Sure, anytime.
Samira: Alright, so the other day we had an interesting conversation regarding 9/11 and the similarities as well as some of the differences to what we’re seeing right now. 9/11 is definitely a traumatic experience to talk about, but if you don’t mind, can you share where you were and some of the reactions from both you and your colleagues, at that time?
Dr. Clemens: Sure, glad to. So I remember this very well just as if it was yesterday. I was at home and I woke up early, I can’t remember what time exactly, but I got a call from my office in Singapore and they said, “Hey, you’ve got to switch on the tv and watch what’s happening.” And sure enough, a few minutes later I saw the second plane hit the world tower. It was mind boggling, it’s something that you see in a movie and you never think this is actual reality, but that was the reality then. And then of course, you immediately think okay what is the impact of this? Are we at war? What’s happening? So you have all these things in your mind. And then you go and think next steps. Where are my kids? My kids are at the house, right, and they were still young then. And so my son was supposed to go to school and I said no, we’re staying home today. You think all these things, and although we were in the West Coast and this was happening in the East Coast, we thought is this war? Could we be attacked? LA is a huge city, could that be a target as well? So, very strange kind of feeling. And incidentally, if I look back now, it was a strange year because during that period, we actually made a lot of money in our business and it was ironic because of the volatility. Immediately then the stock markets were closed but the currency markets weren’t. So we were trading so there was a lot of hedging going on and a lot of speculation and it was actually a very sadly unprofitable time for us at the time.
Samira: Wow, quite an interesting observation, I guess I didn’t realize that. So I think both you and I find the lasting social implications from 9/11 pretty interesting. Would you share what you think were the most important ones that caused a more permanent presence in our daily lives now?
Dr. Clemens: Yeah, gladly. So, I recall at the time most of my friends were just refusing to ever go on a plane again and they thought the risk of being in an airplane is so great so I wouldnt want to step on a plane. And there is an interesting connection to the markets because investors are seemingly more afraid after a crash than before a crash. So in the bubble type markets, everybody seems fine and everybody seems happy. I personally thought after 9/11 travel was safer than it was ever before so I was happy to step on a plane because the security measures were so great then compared to what it was before that I thought, “Not a bad idea to travel now.” In terms of the impact, of course, there were lots of them. Starting with the creation of the Department of Homeland Security, airport security checks, taking off shoes, and X-Rays. It used to be glamours to travel and then since then it’s really just be an inconvenience at best, so that’s been a huge impact. As a side note here, I find it fascinating that nobody today seems as much enraged about the invasion of privacy that we have on our daily lives everyday. Nobody seems to mind taking off the shoes at the airport or even having an entire full body scan. At the same time, they are outraged by wearing a mask. I mean, to me, this is mind boggling. And perhaps another long lasting social effect from 9/11, that actually lasted for a number of years, was the feeling of being more patriotic. George W. Bush actually reminded us to buy American products to show our patriotism that way. And that actually had a few social effects that were positive. So kind of a commonality, common sense of shared suffering. The negative side effects of course, not domestically but internationally is kind of a sense of discrimination against anything Muslim. And so, I think as a society the thought was we can identify the common enemy and that common enemy is the religious affiliation with the Muslim religion. And that I thought was a very sad and obviously wrong consequence of that patriotic feeling at the time.
Samira: Right, Islamophobia really took over the country unfortunately and has had some really terrible effects on everything. But on that note, do you envision something of the same social implications occurring again from Covid-19? It’s not the same in that we have a visible enemy here like we did with the 9/11 attackers and what not.
Dr. Clemens: Yeah, true. So I find 2020 a lot more complex in many ways. For one there is a lot more political divisiveness, more so than I’ve ever experienced in my lifetime, no matter where I’ve lived, and I’ve lived in quite a few places. So the common enemy, as you said, is invisible and you can’t really pinpoint what that enemy is and it’s not a human enemy. It’s a lot harder to band together as a nation when we don’t identify what that common enemy is. I think as a society we also fail to recognize that we’re actually at war against that enemy. In fact, the whole world is at war against that enemy. And that is, to me, actually most reflected by monetary policy of the Central Banks, they actually act as if we are at war. Actually in terms of stimulus, in terms of money printing, we’re really back to the 1940’s, late 1930’s. And a lot more recognition by Central Banks than we see it from the actual administration and governmental policies. What’s also different today is both the administration, especially in the US, the media, and some of the social networks have really been putting more oil into the fire. That really adds to this rift between left and right, if you want to make these clear distinctions. But, I think it’s also more of an economic divide, more so than I’ve ever seen in my lifetime. I think the chances of reconciliation between these two groups, political affiliations are quite low at the moment. What’s missing here I think is a sense of leadership that can unite the American people. And I think a broader economic rebound will take a lot longer than it did in 2001.
Samira: Do you think that maybe the nationalistic or the patriotic unity that we had in 2001 kind of led to where we are right now with our nationalism and America first mentality? And also you see that in other countries around the world right now, is that hindering our response to the Covid-19 pandemic at all?
Dr. Clemens: Yeah, I think so, totally. You see it in the policies where more and more nations try to find ways of solving this crisis rather than what typically happens in academia where people band together across nations, across political divides and say okay here is an economic problem that we need to solve here, here’s a health problem, a physics problem, or a math problem we all need to solve this together as a nation because the planet is limited. We can’t really go to Mars yet or to other planets so we have these constraints and I think there is failure of recognition of many nations that this is not something we can do individually, we need to do it together.
Samira: I agree. Along the same lines as the social implications, what do you think were some of the more immediate economic implications resulting directly from 9/11?
Dr. Clemens: Good question. Well, economic implications were primarily focused on travel, airlines, hotels, leisure and so forth. Pretty much as it did initially here as well. Supply chains were disrupted, but we had a whole lot less back then. Initially there was a fear of higher oil prices, but they actually fell in September. And the impact of the Dotcom crash was a lot more devastating. So if you go back, the unemployment was actually on the rise already, so it was 4.2% in January and rose up to 5% in September and we started the recession in March of 2001 and ended in November 2001. The Nasdaq peaked around March of 2000 at 5100 and then it fell to 1500 by August, so it’s a 70% decline before 9/11 happened. So from a market perspective, 9/11 was actually quite minimal and the damage was done primarily in the tech sector. So Fed Funds rates were around 6% in December of 2000 and it fell over in that period to about 3% in September. And then we had the era of Greenspan and the Greenspan put. That kind of initiated an amazing rise in real estate prices. People were encouraged to show their patriotism, they bought American products and American property. Banks and mortgage brokers helped facilitate everything like that. The American Dream was really the thing to do and the possibility of achieving that dream was financed by extra low interest rates. I remember Greenspan actually hailed the expansion of that sub-prime mortgage market. He even suggested that Americans would be missing out if they failed to take advantage of these low cost adjustable rate mortgages. So everybody should have a house and everybody should have a mortgage, that was the slogan. And instead of investing in productive capacity, the entire country started living a much better life based on the appreciation of real estate prices. And I remember these words, using your home as an ATM was okay, buying granite countertops, furniture, cars, and other depreciating assets was all okay, because it was all financed by higher asset prices. The other thing that I found fascinating on September 11th, nearly 3,000 people lost their lives and that to me was like a dagger in the heart of the American psyche because that had never happened before. As of now, there’s about 200,000 people that died from Covid, granted it’s not all in the same day, it happened over a period of time, but I think there’s not the same sort of recognition or sense of loss or at least it’s not portrayed that way in the media. And I think those are some of the differences I see between back then in 2001 and today 2020.
Samira: Yeah, it’s sad and when you were mentioning about how Greenspan was telling everyone to buy these assets, do you think in part that lead to the Great Recession and the housing bubble we saw?
Dr. Clemens: Yeah, clearly. The response to crises and market reactions on the downside from the Federal government, from the Treasury, and from Central Banks is usually same playbook. Something happens, the economy isn’t doing as well, let’s put more money at risk, lets leverage ourselves out of the crisis. That can lead to much higher ups and downs in the economy, market cycles and economic cycles are actually exacerbated to me by Central Bank policy that stimulates too much.
Samira: I definitely agree with that take. So what are some of the economic implications that you are seeing that will happen based on the Covid-19 pandemic?
Dr. Clemens: Good question. Again, 2020 to me is a lot more devastating and a lot more longer lasting in terms of the economic effects. The economy this year came to a standstill, basically. And in 9/11 the labor markets were not really affected, not nearly as much as it were through the Dotcom crash. So longer socioeconomic effects this year might be the notion of a K shaped recovery and that really plays out in the market as well. So, we’ve seen mega cap tech stocks really appreciate dramatically versus the broader economy. Just as a reference point the Nasdaq 100 is up almost 28% YTD. The Russel is down 10% for the year. And this is not a new trend, it started over a decade ago. At the same time, we’ve seen the similarities in these trends socioeconomically. The rich really have participated and profited from the Fed’s monetary policy of asset price inflation. The low-wage traditional workers have not been able to participate, some might say partly through their own fault because they could actually put some money in the market instead of buying cheap assets or iPhones and other gadgets; true to some effect. But I think for a society, you have an increasing social divide and that has just accelerated this year, I mean, just look at market and tech versus the broader economy. And if I could criticize the Fed and central banks for a moment here, they actually have a very difficult job, if not an impossible job, given the constraints they have, and by the way they broke many of their traditional constraints this year. But I think they should have recognized that this is first and foremost a health crisis, not a financial crisis and I guess Chairman Powell did make notion to that effect. But to the effect that we needed stimulus which I agree, I just think there was way too much money in the pile to avoid any unintended consequences; there’s so much money there. And that creates opportunities for people that don’t always have the best of society in mind. So, as me being a financial conservative, I found it troubling that the Fed is buying junk bonds. Even though they’ve done it through ETFs but that’s just wrong, that’s just outright wrong. To me, one of the important functions of a market is to let companies fail when they take on too much debt or too much risk, they shouldn’t do that. We should not encourage them. And if failure is not possible, because the Fed clearly put a floor on there, and said we’ll support the economy, but the narrative is really, we’ll support the market. And if there is no failure possible, then we have a bunch of zombie companies that really aren't good at what they are doing but they’re just kept alive. I think it’s also troubling that there’s so much support for the market in contrast to the broader economy. And there’s this kind of playbook that says the market is up so the economy is doing well, but that’s not true. I find it troubling that we need to bailout companies like Carnival Cruises. I find it very troubling. By contrast, looking at the true heroes, the nurses, the doctors, the first responders, and all of these essential workers they don’t actually receive the proper financial rewards for risking their lives.
Samira: That’s fair. I think I saw a news report about how EMTs are being laid off and how that is just going to exacerbate the whole crisis that much more. So I know you do a lot of research with how risk and market volatility effects investment returns, could you compare the volatility level that you saw in 9/11, the credit crisis, and now Covid?
Dr. Clemens: Sure, glad to. So 9/11 was an interesting period because at the beginning of 2001 or towards the end of 2000, the volatility index (VIX) was around 27/26 or so and at the end of 2001 it was 23.8. So actually over a period of time, it actually dropped. Granted, it went up to about 40 levels at the worst point in 2001 but not nearly as bad as we saw it in 2008 and this year. And if you think about it the S&P actually dropped prior to 9/11, it dropped about 17% and it was still down about 13% for the entire year, but comparatively speaking, the effect from 9/11 was actually kind of mild. Volatility in 2008 was amazing, it was at the high point over 80, but again volatility beginning of the year was 22-ish level and it ended up about 40. For this year, something I’ve never seen before is how fast and how sharp volatility increased in a very short period of time. What took about 5 months in 2008, we’ve reached in about a 3 weeks or so, in terms of the increase in volatility from high teens into 80 level. So this market reaction this year was faster and more aggressive than I’ve ever seen it before.
Samira: And what does this really mean in terms of the market? I mean if it’s going to be able to have that catalyst going and making everything faster, what does that really tell us about this crisis?
Dr. Clemens: Gosh, how much time do we have? What I’ve noticed for the past few years is that more and more people are buying into passive funds. And at some point last year, I think, about 50% of the market was in ETFs. Now, that’s huge so everything is doing the same, everything is chasing the same sort of benchmark. And that leads to more risk. We’ve also noticed a huge concentration risk this year. If you go back to the early 2000s, we had really more of a diversified distribution of the S&P where there was not a single group of companies that had so much impact on the entire S&P. But as of August this year, the top 10 stocks in the S&P are over 30% of the weight of the index. And the top 10 in the Nasdaq 100 are over 50% of the weight of the index. So it’s really just a handful of companies that make or break the market. People don’t realize it because they buy into these index funds and at the same time all of these mega funds go up or down and that has a devastating effect on the entire index. That’s one of the things I’ve observed. Also, technology has made a change, it’s so easy now and so fast to go in and out of a market. The last thing that I’ve noticed is more and more of these tech funds use algorithmic systems and computer driven models to make changes in the investment and that can be done in a moments notice. All of that just exacerbates the speed of the movements, so I think volatility will be with us for a bit longer.
Samira: I can definitely see that happening as well. So we did speak a little bit about behavioral economics and finance and how many of these principles existed well before the field came to be. But for some of our listeners that are interested this field, what are some of the behaviors you see that become more prevalent during traumatic events like 9/11 or Covid?
Dr. Clemens: Good question. So the famous Prospect Theory from Kahneman and Tversky come to mind. Let me just point out a couple of these behaviors, one of them is really loss aversion, it’s just the idea that the losses are more feared than the gains are appreciated, so you have this asymmetric situation of how people assess the feeling towards gains and losses. I find something very interesting in that to avoid losses some of the investors really put their head in the sand. They look away because the pain of taking and accepting a loss would be too great. And there’s also a behavioral effect called the disposition effect and it’s played out when investors really tend to hold on to their losers much longer and they sell their winners too early. Another effect I see all the time is that fear persists longer than it should. In the Warren Buffet terms, he said something to the affect of, “I’m greedy when other people are fearful and I’m fearful when other people are greedy.” I find that also fascinating and to some extent it is manifesting itself in volatility indexes and implied volatility where people buy their insurance protection against market drops after the fact and it’s the same thing we see in the insurance industry. When there is an earthquake, all of a sudden, everybody starts buying earthquake insurance, after the fact. I find some of these behaviors very fascinating. And to be honest, I’m not immune against this, it’s human psyche. When I look at the losses and the mistakes I made over the years, it exhibits those same behaviors.
Samira: Yes, we are all human. And on that note of right after an event happens, the statistics it’s less likely that it’ll happen right after a traumatic event. That’s something I always try to keep in mind, but it’s hard not to have a fear towards something. So do you have any general advice you’d like to share with our listeners, about anything really?
Dr. Clemens: Let me focus it a bit on the markets and maybe some of these events that I’ve lived through. So I’ve experienced the 87 crash, the fall of the Berlin Wall very vividly, fall of communism, a number of financial crises starting with the early exchange rate mechanism crisis in 92, the Asian financial crisis 97-98, Dotcom crash, 9/11, 2008 crisis, and now Covid. And many of these crises have similarities, they’re not all the same and every time we try to prepare for the next crisis, we realize we prepare for it as if it were the same and it will replay itself again. If there is a lesson to be learned, I think crises always creates opportunities. If you’re opportunistic enough there are opportunities out there. I think that when things look the bleakest, we’re usually at a turning point. So this is interesting because when I look outside my window, I’m about 2 miles away from the Bobcat fire, and outside of my house the smoke and the air is so think that you can basically not breathe. In this bleak hour, I’m hoping that this is it, I’ve never seen thick smoke like this everywhere around the San Gabriel mountain area. We’ve been through a few fires, but this one is pretty bad. So I’m keeping that in mind thinking that, “Yeah, things are bad, hopefully they’ll get better.” But along similar lines, I think it’s more important to remember that all the possessions that you have, all the material things that you have, that sometimes we appreciate so much that, all the material things that surround us is meaningless. What really matters is your health, both mentally and physically, friends, family, relationships that is important, everything else can be replaced.
Samira: That’s some really great advice because we tend to forget about these things, but thank you so much Dr. Clemens for coming on and explaining all of this to our viewers and offering some really great advice.
Dr. Clemens: My pleasure. Anytime.
European View
This time for our European View segment, I thought it would be interesting to look at how some European countries are reopening their office spaces. We’ll dive into Romania, to be more specific. For those of you that are not familiar with where everything is located in Europe, Map 1, below, shows where Romania is located in Europe.
Map 1
Map of Europe with Romania Highlighted
http://romaniatourism.com/romania-maps/europe-map.html
What I have found to be true in the US when it comes to trying to reopen office space is the desire to get everyone back to working in an office ASAP. Aside from the use of Plexiglas, spreading desks out, and reminding people to wear masks and to remain socially distant, I haven’t seen any ingenuity in redesigning office space to keep people safe.
Liviu Tudor, who is president of the European Property Federation, has decided to take matters into his own hands by setting out to establish “immune” building certifications, similar to what we have seen with LEED certified green buildings. So what exactly does this entail? According to his plan this includes anti-microbial paint, air filtration systems that bring in air from the outside, higher ceilings to supplement the air filtration system, elimination of floor forced air heating systems that would enable aerosols, as well as incorporate the use of rounded corners in crowded spaces. He is also implementing floor to ceiling bathroom stalls, special quarantine rooms, and touch-less entries that take your temperature.
One of the companies that Tudor owns is Genesis Properties that owns roughly 1.6 million square feet of office space. He has started implementing many of these ideas in those office spaces with one building in Bucharest, Romania being the “guinea pig” of the whole idea. See, before Covid-19 Bucharest had some of the highest investment returns on office space in Eastern Europe. But ever since Covid-19, employees aren’t feeling as safe. Tudor hopes that by creating a new standard more people will feel safer to come back to the office.
This plan is not full-proof of course, since no matter how safe of an environment you create, we are still reliant upon people behaving in the right manner. But I still think it’s a step in the right direction. The costs are indeed large; an estimate of 2-4% of the total building investment is needed to implement these new standards. Is it worth it? Many believe that Covid-19 will be a thing of the past, but who says another pandemic won’t come around again? Though I hope we don’t have to deal with another one, anything is possible.
The point I’m trying to make here follows what I was discussing last time, which is to be able to look to long term strategies and to have ingenuity in that approach. Tudor’s idea may not be the right way, but it is a step in the right direction.
Compared to the US
I have seen an unwillingness by institutional landlords to implement safety measures in the US for reopening. Sure, there are some buildings that are implementing a temperature check for employees like Amazon. Many Americans would argue that this is a violation of our freedoms. It’s been interesting to me so see so many health precautions become so politicized in the US. Granted, Germany along with a few other European countries are starting to have anti-maskers come about, but I still don’t see it to the degree of what we are experiencing in the US.
It’s this belief that the virus doesn’t exist or does no harm, that is only making things worse. We’re in a pandemic. We’ve lost 190,000 Americans. Europe, and many other countries, won’t let us in to their country because of the risk we would pose. I’m against limiting our freedoms, but I am for the change of our individualistic mentality to a more collective one. Why is it so hard to care for other people? There is scientific evidence that states that wearing a mask helps limit the spread of the virus, yet so many are anti-maskers. It’s become this game and this weird conformity that if you agree with a certain politician you behave a certain way. I can’t wrap my mind around it. How did we get here America? I believe that weird conformity has limited our freedoms as well as limited our ability to critically think. It’s safe to say that this weird conformity exists on both sides.
If we would just step outside of that prism of me first, I think we could really grab ahold of this virus, help implement safe practices and infrastructure in the workplace, and get us back to a better normal. What do I mean by a better normal? A normal that doesn’t revolve around what’s best for me, but instead what’s best for us. If more institutional landlords were like Tudor, I think we’d be better off in general. Sure, he wants to make money, who doesn’t? But he is taking a problem and finding a solution that benefits everyone, including himself. By no means am I saying we should all be altruistic, because let’s be honest, that doesn’t exist. But just open that prism up to think about the benefits others could reap from our actions and investments.
Concluding Remarks
My hope is that one day we will broaden our focus on more than just ourselves. We’re in the midst of many unprecedented events, but through hard times, we tend to change. I hope positive change is the end result of the many messes we are in. I can tell you that, as a millennial, the silver lining is getting harder and harder to find, as many are comparing us to the Lost generation. But one thing that I have seen with my generation is a passion for a better tomorrow and I hope that passion continues.
My colleagues and I agree that we are in for a tough time after the elections, regardless of the results. Winter is coming and with that comes the temperature falling, it gets darker outside earlier, and flu season being coupled in with a pandemic. On top of this, there is a high likelihood of a contested election, with tempers running high on both sides, the economy is weak with GDP numbers showing a massive contraction, unemployment numbers remaining high, and the eviction moratorium most likely ending in January, meaning many will end up on the streets in the middle of winter. It’s a harsh reality to think of, but that’s the point. The point of my blog and podcast is to warn people of what’s to come. Of course, I hope for the best, always, but with much of the data pointing in one direction, I want to give a warning to everyone that not everything is going to be sunshine and rainbows. It’s time we wake up from this daze because the sooner we realize we are about to hit a wall, the faster we might be able to think of a plan to avoid it.
I hope you all continue to stay safe and healthy! I’ll write to you again in 2 weeks.