Dear Janet (Yellen) letter From Daniel Calano

Daniel Calano, Prospectus, LLC

Dear Janet,

As the Fed chief, I know you have the people’s interest at heart in your quest to keep interest rates low. It’s to simulate the economy, just like in the past with TARP, TALF and three rounds of U.S. bond purchasing, (quantitative easing), etc. But, here’s the problem. Since the Fed started this all about seven years ago, the recession ended and we reached and beat the benchmark goal of 6% unemployment. The economy is doing pretty well, and we’re certainly far better off than the rest of the world. But the effective short term note is close to zero. You have .25% to use before we go negative.

Here’s one problem. Baby boomers are retiring and they have almost no source of fixed income, because there is no interest rate of return on their savings. Sure, the millionaires and billionaires can make some money at those paltry rates. They just take one billion and invest it at the bank’s 1/10 of 1%, and they get a million dollars a year. I think they are O.K. But, if you take the regular boomer with, let’s say a half a million in a savings account, they get $500 per year. I am not sure where you stand in these metrics, but you should check your bank statement to see how your savings are doing.

So what can the boomers do? They are pushing that $500,000 into the stock market, as are many others including institutions, in hopes of a better return. So in that sense, you have gotten what you want, a vastly improved stock market. Most of the financial news says it’s an overinflated stock market, in large part because there are no alternatives. But, boomers as equity investors are taking on a lot more risk than they would with deposit accounts. And by the way, when you do consider moving rates ¼ point, the market collapses some 10-15% in a week. Remember that $500,000; a loss like that can be $75,000, but that’s another problem.

This isn’t just about us boomers. Have you noticed insurance premiums are going up because their projected investments have not panned out, and thus revenues are too low to pay off claims? Have you noticed 401K plans are suffering?

But what about real estate? The good news is that as we look across the city, construction is burgeoning. Everybody is getting in, just like the good old days of the mid 1980’s and just like the build-up to the real estate crash of 2006-2007. We’re building more than we ever have before. Surely you’ve heard the bubble-talk.

I can’t say that I long for the old Jimmy Carter days, when Certificates of Deposit paid 10-15%, but that income would satisfy a large population needing to keep their money safe. And what happens when you do try to take us off the juice? We are certainly, at the least, on a sugar high, and there are a whole lot of us that just want you to keep it coming. It apparently has been so good that the rest of the world is following your lead by keeping interest rates low, even into negative rates. Just when you were thinking about raising rates, those copycats pushed theirs lower, giving us more reason to keep ours low.

What are our real estate readers going to do when you actually do raise rates a few points. Values will eventually go down…consider something called cap rates…and borrowing costs will go up. That is kind of a double whammy, when refinancing efforts of all these new projects, some 7-10 years out, are required. Let’s hope our demand/supply curves are correct so we can soften the blow. I’m just saying…

P.S., just two days ago, you made a speech again saying it will be a longer time before rates go up, and the stock market is up 180 points!!

Daniel Calano, CRE, is the managing partner and principal of Prospectus, LLC, Cambridge, Mass.