Trend Czar

Gas Prices: Higher not Lower

We're stuck -- $4 gas and steadily rising pump prices. So McCain and Hillary say let's lower or eliminate the modest 18 cents federal gas tax, which pays for road repairs and mass transit. That only would serve to discourage conservation behaviors and keep demand up, which ends up increasing prices anyway. But most people in this country depend on their cars to go anywhere and do anything -- work, school, shopping, recreation, kids play dates. That's how we developed our metropolitan areas over the last half century, building roads and more roads to farther flung subdivisions, separated from strip shopping centers and office parks. About 80% of us live totally car dependent lifestyles.  Cheap gas and low gas taxes (one-tenth of many Euro countries) made it all possible.  Now those days are over and it begins to hurt... bad.

We had ample warnings in 1974 and 1979 of oil dependency's consequences, including inflation, recession, and gas lines. But back then the U.S. still was a major oil producer and countries like India and China were not competing for fuel stocks. Although our supplies were tapping out, other countries, particularly in the Middle East had many decades worth of reserves. Back then, once Middle East tensions calmed, oil flows resumed.  But today oil exploration struggles to find new reserves. Odds are gas prices continue to rise rather than track down appreciably, especially given rising world demand. And what happens if terrorists or some conflagration shuts down a major oil supplier nation? We're in trouble.

Actually, we need to raise gas taxes more to maintain our aging roads so people can get around and pay for more mass transit. And as I have noted before, more tolls and other user fees will hit drivers' wallets in the future as we cope with paying for essential and costly infrastructure improvements.  Over time the economics will force changes to our lifestyles and encourage developers and planners to create communities, which reduce car dependency. It's going to be tough medicine. Car makers, meanwhile, will grudgingly accept higher fleet fuel efficiency standards and reduce car sizes. And maybe we will finally focus on alternative energy sources and technologies. We wasted 30 years, ignoring the warning signs. The idea of lowering gas taxes just perpetuates bad habits that got us into this fix and offers no remedy.  Let's face the reality -- driving costs will continue to increase.

Inflation Hedge

My next door neighbor who develops houses in Vermont has three unsold and unrented, and lamented to me yesterday the vagaries of the housing  market.  "You always know where  you stand with the stock market,"  he said. "With real estate it's so hard to tell, and all of a sudden it hits you."

At that point another neighbor drove up and got involved in the discussion: "Haven't seen inflation like this in quite a while," he said. "I bought a loaf of bread and a half gallon of grapefruit juice yesterday and I couldn't believe the cashier wanted $9.50 for just the two items."    

"Yeah I got some plums and peaches the other day, and it cost $11," said my next door neighbor. "It's amazing."

I joked with the other guy that he had "just burned up a couple of dollars worth of gas," idling his car while talking to us. But maybe it was no joke--I paid my first $60 gallon fill up yesterday.

"Hey, you're right," he said, before taking off.

You know it's really getting out of control when Costco limits the number of bags of rice you can buy. And we think we have it rough when people in many parts of the world have suddenly been priced out of survival staples--rice and grains.

Which brings me back to real estate. The commercial markets haven't taken their big hit yet, but you know it's coming. We're taking it on the chin from factors now extending well beyond the credit crunch fall out. The economy's swoon now embodies a powerful one-two punch of recession and inflation, which could lay out a lot of businesses, hitting shopping centers and hotels first as consumers cut back and summer vacationers stay close to home. Expect the unemployment rate to take a sudden jump by the end of the quarter, which will just fan the fire.

It reminds of the early 80s when our biggest selling point for real estate was that it's a great inflation hedge. Well, it's time to dust off that old slogan again.         

Oh well

Been shopping lately?

People are pacing themselves, buying what they really need, not getting trapped in impulse binging. It's tough in mall land. Every trip costs more thanks to gasoline pump prices where there has been no relief. And summer approaches -- gas always seems to cost most during those vacation months. Then necessity buying at the grocery store and pharmacy crashes into an inflation wave. Food prices have hit the accelerator -- energy costs have a big impact on eats -- producing it and transporting it, and now demand for bio fuels kicks in to the pricing equation. Insurance companies, meanwhile, are escalating costs on prescription drugs. My neighborhood pharmacist says a lot of customers are getting sticker shock, going without rather than paying.

So gas, food, and drugs eat through pocketbooks before anyone gets close the clothes aisle or the electronics store. And has it been easier to get a hold of your neighborhood contractor lately? That small bedroom makeover he gave you the brush off about last year -- sure he'll be over in 20 minutes to get started. Those big box hardware stores seem to have a lot shorter check out lines -- that's for sure.

The big coup de grace on the consumer front comes when unemployment ratchets up some more. That's when people really start to clamp down on their retail spending. And we haven't even mentioned the ongoing nosedive in house prices.

Mall owners had a great ten years or so after a lousy period in the early 1990s. Oh well.

      

Kiss of Death

Ever since George H.W. Bush reneged on his "read my lips" pledge, any politician has faced the kiss of death (a lost election) if suggesting even remotely that he/she might raise taxes. At last night's Democratic debate both candidates tightrope walked the issue, while John McCain has adopted the post Bush Sr. Republican battle cry of "no new taxes."

Everybody seems to forget that both Ronald Reagan and Bill Clinton raised taxes during their terms leading to periods of strong economic growth and in Clinton's case even a budget surplus. And of course, McCain was an early opponent of Bush Jr's tax cuts. Now despite our multi-trillion dollar national debt, candidate McCain even suggests suspending the gas tax over the summer, while the Highway Trust Fund, which the gas tax supports, tracks toward insolvency next year.

I have news for all the candidates. U.S. taxpayers will be paying more over the next decade -- whether in the form of income taxes, sales taxes, federal taxes, local taxes, property taxes or various forms of user fees. We all want the big-ticket expenses: health care, social security, defense, police and fire protection, border security, infrastructure, and good schools. We need to pay off all the debt we've built up on the Iraq War and we aren't turning back the stimulus checks we are about to get in tax rebates. The bills eventually come due. We can't have all the things we really want out of government and not pay for them. That just doesn't work.

So get ready to pay more for your government. The next President will have no choice, but to raise taxes. Governors and mayors will need to do the same. Or would you prefer fewer garbage collections, reduced police patrols, and less of  everything else you want or have come to expect?

 

A Bitter Reality

So small town America is bitter.

Well, people in many of these rural industrial outposts have every reason to be. Every four years politicians of all stripes come around, and tell the locals they are the backbone of the country. They promise hope, but after election day the locals don't see the pols again until the next campaign season. This year has been a little different -- McCain told Michigan jobs aren't coming back and Obama made his "bitter" comments, but now Hillary stirs the pot with more traditional feel good talk -- "we'll help you with job training."

No news, places like Wilkes Barre and Scranton in Pennsylvania have been slowly dying for 50 years or more, and despite the political pandering, there really is no hope for them on the horizon. How many small cities can be turned into theme towns of a bygone era? At least, Lancaster has Amish Country to attract tourists and State College has Penn State. 

America has been the world's high cost producer, and other countries can manufacture what we do at fractions of our cost, because of their low labor rates. As a result, the standard of living for many Americans (the middle class) is eroding, particularly for blue collar workers without college degrees who see high pay union jobs vanishing. The Rustland belt from Schenectady to Gary loses increasing numbers of young people who must look for jobs elsewhere. Populations stagnate and gray as many older people can't afford to move and just age in place. The region withers.

And how many readers on this site are making real estate investments in Stubenville or Buffalo? Can I sell you a brownfield on a value enhancement play?

Plenty of people have and will keep making beau-coup bucks in this country, but in brainpower industries -- high tech, bio tech, healthcare and finance. These companies headquarter in the prime global gateway markets along the coasts and in warmer hot growth Sunbelt suburban cities, whose more temperate climates trump the interior north's. But to do really well, workers need college degrees or better. Job training today means going to university and graduate school.

This all leaves small town American left out in the "bitter" cold.

Congested Thinking

Congestion pricing hits the ditch in New York, providing more evidence that lawmakers focused on their next election don't have the stomach to impose user fees to provide necessary, long-term infrastructure solutions. Most people don't get it yet -- congestion and resulting lack of productivity create huge economic costs in our global pathway cities, the country's primary growth engines and best real estate markets. The longer we take to fund necessary mass transit and road improvements in these places, the greater the ultimate costs, not to mention the increased potential for tragedies from greater hazards in aging transport networks. If left the choice we will pull out a credit card and go into debt to buy a flat screen TV rather than pay higher taxes or user fees for better systems to move people and goods more efficiently with less pollution. That greater efficiency ultimately translates into lower costs in fuel or less child care and greater opportunity to make more money -- getting to more jobs and appointments. Maybe we would end up being able to pay for the flat screen in cash. But who helps us connect the dots. Not our politicians.

The New York experience also points to the ludicrous lack of regional infrastructure planning in our country. New Jersey Governor Corzine helped torpedo the bill to "protect" his constituents from paying more to enter the city through Port Authority tolls. Corzine, meanwhile, has been trying and failing to raise tolls on Jersey roads, which are also overly congested, to raise money for his own infrastructure agenda. Considering the interconnected issues between New York and New Jersey road and transit systems you might think everyone might benefit from a regional plan, including congestion pricing. Suburban legislators pander to their voters, saying Manhattan gets all the benefits. Well, the city lost $350 million in annual federal aid, because of the thumbs down. Neither New Jersey nor New York can balance their budgets, and systems are literally crumbling. If people from the burbs can't get in and out of New York will that be good for the regional economy?  (Oh by the way, did you know that flat screen TVs consume five times the energy of older models? See how that impacts your electric bill). 

Prediction: Within five years, New York will have congestion pricing out of pure necessity. We'll see it in other U.S. cities too. So far London, Stockholm, Oslo, and Milan have imposed congestion pricing in Europe, joining Singapore in Asia.   

Hey sportswatchers, did you see the NCAA Finals? If you've been noting trends, coaches' salaries have been skyrocketing. The scuttlebutt is Coach Self from winning Kansas has been offered $6 million to move to Oklahoma State, which just paid off fired Sean Sutton with $2.7 million in walking away money. And while NCAA teams average somewhere around 40% in graduation rates with their student athletes majoring in courses like Coaching in Nursery School what may we ask is Oklahoma State paying its science, engineering and math faculty?

Congestion isn't a problem in Oklahoma or Kansas. Hmmm. But congested thinking of one sort or another seems to be pretty universal.

© Miller Ryan LLC 2008

 

 

Shallow or Deep

Well, what do know--we have consensus. Everyone from the Fed Chairman to Reaganomics-shill Larry Kudlow seem to accept we're in a recession. Now the discussion shifts to how long and how deep. The Wall Street establishment and Republican "no new taxes" crowd look for any bright signs and suggest we'll be on the upswing by the time of the political conventions in the late summer. The stock market rally from late January depths suggests such a rebound could be coming just as the unemployment rate starts tracking up and jobs formation goes negative.

The shallow downturn cheerleaders are the same people who pooh-poohed the housing downturn a year ago and waved away signs of the downturn we're now in. Can we give them any credence now. I wouldn't.

First, the people I talk to think the mortgage mess is just the first leg down in the credit crisis which impacts all sorts of loose lending practices including on commercial real estate. "We'll start to see notable blow ups among some real estate owners in the next six months." But what many financial types conveniently miss in the wake of the Bear Stearns bailout is consumer travail has really just begun. The first hit was rising energy and gas prices. Next was lost home values. Now the jobs picture turns bleak. People are going to use their tax rebate checks to pay off debt, not to buy new cars or flat screen TVs. And in the end we all need to be saving, including the government, so the dollar doesn't go the way of Zimbabwe's dollar.  But like the government too many people are up to their eyeballs in hock. Inflation is rising, wages aren't. The rest of the year doesn't look good. Shallow recession? Doesn't look like it.

© Miller Ryan LLC 2008

Ending the Free Ride

The times they are changing.

One near-sighted group not getting the drift is truck drivers. Another category missing the looming reality comprises folks still moving to edge suburbs for economical lifestyles. High oil prices and large bills for maintaining and improving U.S. roads and transit systems mean vehicle miles will become increasingly costly; in fact, costly enough to change behaviors.    

High gassed truckers: For decades truck drivers have had nearly a free pass, operating on cheap gas and using freeways (all those non-tolled interstates). Their heavy rigs, meanwhile, pound roads into disrepair at many multiples the impact of cars.  Now that fuel costs have spiraled, truck drivers are all upset -- their profit margins shrink -- so they hold mini tantrums, slowing traffic on major roads like the New Jersey Turnpike on Tuesday. They want the Feds and state governments to lower gas taxes (which by the way are only 10% of countries in Western Europe) and give them a break. Okay, smart guys -- what happens when state and local governments have no funds to repair potholes and fix all those aging bridges and overpasses? Without a gas tax increase, the Federal Highway Trust Fund will go into the red next year.   And how do they think all those roads, which are now deteriorating, were built in the first place? Hint: taxes, including gas taxes!  High polluting trucks also don't fit into aspirations for greener carbon footprints. For Americans shipping goods and produce will become more expensive unless we find energy alternatives fast. One retro alternative -- railroads will take a greater share of freight transport in the future, eating into trucker shares.

Congestion Pricing Gains: And more bad news for truck drivers -- New York City moves closer to instituting congestion pricing --Truckers will pay $21 every time they enter the Manhattan congestion zone. Regular drivers will get charged $8. Other cities like San Francisco may follow suit.  Next, watch those HOV car pooling lanes turn into HOT congestion toll lanes in many metros. Like the truckers, many ordinary drivers grow outraged over paying to use roads or drive into certain districts. Well, do they want to pay higher income or sales taxes or enact bond issues which mean higher future income or sales taxes? It would be nice if the tooth fairy pays for roads, but alas the tooth fairy is not the road fairy.

Fringe living's not so cheap: Living at the suburban edge gets costlier thanks to high fuel costs and lost time driving on congested suburban roads. People will start to figure out that infill lifestyles have increasing dollar and cents advantages, especially when governments start imposing all those user fees (tolls, congestion pricing). Big homes on acre and a half lots also cost a ton to heat and cool. And just wait to see what happens when local governments raise taxes to maintain roads and sewer lines at the suburban edge. Federal subsidies for those systems went the way of "no new taxes." Well, no new federal taxes never meant no new local taxes. It only meant shifting the burden as we are all finding out.

Infill homes may be smaller and more expensive, but convenience benefits and reduced driving costs start balance the pricier real estate. Especially in markets with decent mass transit, metro area cores start to look more attractive when people pencil out their budgets.

The suburban free ride is over. Truckers know your pain.

© Miller Ryan LLC 2008