Posted on Monday, 23rd December 2013 by Robert Domini

Fed Begins Tapering

Wall Street Journal, December 19, 2013. Despite the worldwide slowdown in the rate of inflation, the Federal Reserve has announced a tapering of $10 billion per month in their bond buying program which began in 2008. The move was met with a surging stock market and an increase in the 10-year Treasury bill rate of interest which is the basis of mortgage rates. Reasons given for the move include a strong economic reports for October and November and reduced political uncertainty. The budget accord was an important factor. The bond-buying will now be divided with $35 billion of mortgage securities and $40 billion of treasury securities. The Fed intends to gradually reduce bond buying in 2014 if inflation doesn’t fall further, and if the rate of unemployment continues to improve.

PNC Economist , Mekael Teshome, Speaks to the Ohio Chapter of the Appraisal Institute December 9

The primary message about the U.S. economy continues to be slow, steady growth with consumer spending holding up surprisingly well despite what appeared to be a sluggish Thanksgiving. In fact, with the government shutdown, most were looking for a weak fourth quarter. Manufacturing is also doing well, although auto manufacturers had gotten ahead of themselves and had to absorb excess inventory towards the end of the year. Stocks, overall, have continued to surge with support from the $85 billion monthly Fed stimulus. Most importantly, stocks have continued their strong performance primarily because corporate profits continue to turn in double-digit increases. Housing has also turned in double-digit increases in both prices and sales. Overall construction is up and the price of gas is down about 10 to 15 cents from last year. This puts money in the pockets of consumers.

Ohio has had a volatile year in 2013. Job growth has been up while manufacturing has cooled. Utica shale has slowed its torrid pace of 2012 while steel production is down. The bright light is ok auto sales in Ohio. Health care has continued its slow growth pattern despite Medicare and Medicaid cutting back. In the end, Ohio has had slow and steady growth, although it’s been volatile. Ohio’s labor market has stabilized giving confidence to consumers in the economic recovery.

For 2014, Teshome expects persistent and moderate growth despite the threat of a reduction in Fed stimulus. He believes that the Fed will reduce the stimulus gradually while most investors believe that the market has already priced the Fed tightening into the pricing of stocks and future market performance of corporations. For 2012 real GDP growth was 2.8% while 2013 is expected to come in at 1.7% due to budget cuts and the shutdown. For 2014 he is looking for 2.5% growth. Again, home sales are definitely on the upswing. More people are now saving money and paying off debt. Low interest rates and an improving residential sales market have resulted in fewer foreclosures and delinquencies. Business profits have been advancing with a US after-tax margin of close to 20%. In recent years corporate profits have been advancing at closer to 10%. Businesses have invested heavily in equipment and software and have paid off debt. Why is growth only 2.5% during this 4-year economic recovery?

Teshome pointed out that income growth has been weak and unemployment has been high with little or no increases in pay this year. I believe that only Government workers get a cost of living adjustment each year. 70% of the economy comes from private consumption. We’ve experienced slow wage growth and low entrepreneurial activity. Why? Startups are down. Why? The average startup results in about 10 new jobs. Large firms add little to employment. We are not creating new startups. Reasons given are the aging population. Startups are usually generated by the young and the young in this country are under financial pressure due to overhanging student debt. They are delaying marriage and they are less likely to buy a home. Today, 35% of all housing is rented, and the average renter is spending 30% of their income on housing. Overall, home equity for everyone has been severely reduced for at least the last five or six years. These are traditional sources for seed capital for business startups. Typically, empty nesters pursue entrepreneurial opportunities, especially those who can take early retirement from government jobs. Today, many are under pressure from having co-signed for college tuition. Add this to dwindling home equity and this segment is not in the game.

As to the global economy, the U.S. is expected to grow at 2.5% while Europe has stopped the bleeding and is expected to grow moderately. Japan is finally growing after decades of stagnation. China is experiencing a soft landing with growth moderating to about 7.5%. U.S. monetary policy has been on an expansionary tear for the last five years without igniting inflation. Instead we have almost no inflation, high unemployment and moderate commodity prices. In fact, the worldwide economy is coming perilously close to slipping into a deflationary period. There’s only one thing worse than inflation and that’s deflation. The Fed’s target is 2% inflation for a healthy economy and right now inflation is below that level. This is yet another consideration the Fed is facing in its decision to taper its bond buying program.

Teshome, at the time, was predicting correctly that the Fed would begin tapering soon, and that by the end of 2014, the stimulus would be phased out completely. He believes that short-term rates will hold steady during 2014 with long-term rates and mortgage interest rates rising, although he does not expect rate increases to be steep enough to seriously affect the housing market. He was predicting correctly that Sequestration would be tapered and the debt ceiling would be resolved peacefully. The Debt-to-GDP ratio is typically 60% while now it is 70%. This is not good.

He sees big problems in 2020 with the aging population, but for now there will be higher taxes and spending cuts. The balance will be 60% spending cuts and 40% tax increases. There will be no immediate crisis. 2014 will be a better year with 1.6% growth rate in payrolls. Ohio will have a better year due to exports. All in all corporate profits are very high and as long as earnings and corporate profits are doing better the economy should be strong. Some firms are re-shoring, that is, bringing jobs back home. America is becoming much more competitive. Our product quality is improving due primarily to cutting-edge technology. The labor force participation rate will continue to decline. Younger people are dropping out of the labor force, but older people are still working. That is, the 55 and over crowd is still working because of their dwindling home equity and the student loan load of their children. The U.S. will continue to be the reserve currency of the world, although China is beginning to challenge on that front. The primary advantage of being the reserve currency is that the U.S. has been able to print money with impunity. Thanks to shale oil, however, America is becoming less dependent on foreign oil and hopes to become a major exporter of natural gas


  • U.S. industrial output in November surpassed its prerecession peak
  • Industrial output surged 1.1% from October to November
  • Industrial output 21% above June 2009 low
  • Manufacturing expanded 0.6% in November
  • Rising auto output led the increase
  • Manufacturers added 27,000 jobs during November
  • Fed officials will meet later this week
  • Utility output increased 3.9% in November
  • Mining output rose 1.7% for the month

Farmers Hoard Corn as Prices Drop

This is the headline of a recent news story in the Wall Street Journal. Farmers think they can beat a decline in corn prices by hoarding their crops and, hopefully, reducing overall supply and forcing prices higher. Can it work? In school we learned that corn and other agricultural products were on an inelastic demand curve. That is, the individual farmer can’t raise his prices above market because if he does, he will sell nothing. If prices are reduced below market, the amount sold will not increase. However, when an entire nation of growers decides in unison to salt away the majority of corn crops, this can have a major effect. The big problem for growers who have invested much of their recent windfall on building ever larger silos (at great expense) is whether this move will pay off in the next year or two.

The WSJ story lays it out for us in black and white. Thus far this year corn futures have dropped 39% bringing a bushel of corn to $4.28 from a high of over $7.00. Why have prices plummeted 39% in a single year? The answer has to be gross overproduction. Despite the outsized demand for corn and other grains, the supply simply exceeded the demand.

The stockpiling has succeeded in pushing prices up 4% from a 38-month low set November 18. U.S. farmers have boosted their storage capacity by 10% this past year. Essentially, they’ve salted away most of this year’s harvest. There are a few problems with storing grain, according to the article. Brazil and Argentina are having a bumper crop year adding to the downward pressure on prices. Grain in storage does have a shelf life. It can deteriorate over time. Also if the grain in storage continues to pile up it will overhang the market.

The intent is to put a squeeze on ethanol producers and livestock feeders which have an immediate need for grain. In the short term there will be some panic buying on the spot market which will be at higher prices than those on the futures market.

Ethanol Can Be Harmful to Your Environment

Let me start out by saying that we all want clean air and water, but we also want to do what makes overall economic sense. In a story by Dina Cappiello and Matt Apuzzo distributed by AP on November 12, 2013, the harmful effects of ethanol are presented. The greatest unintended consequence is that farmers have been acquiring land at a torrid pace. “Five million acres of land set aside for conservation—more than Yellowstone, Everglades and Yosemite National Park, combined,–have vanished.” All of this has occurred during the last five or six years while the Government action was on the side of continuing the ethanol requirements in the formulation of gasoline.

Reportedly 15 million more acres of corn was planted last year than before the ethanol boom. The story goes on to say that the EPA is expected to reduce the amount of ethanol required to be added to the gasoline supply. If they do this the demand for corn could be seriously affected. The article says that historically most of the corn crop went to livestock feed. This past year 43% of corn went to ethanol production and 45% went to livestock feed. The remaining 12% went to food production.

Here’s a scary quote, “using government satellite data, the best tool available, the AP identified a conservative estimate of 1.2 million acres of grassland in Nebraska and the Dakotas alone that have been converted to fields of corn and soybeans since 2006, the last year before the ethanol mandate was passed.” The really scary stuff I will leave to you to find and read yourself. The intent of this newsletter is to analyze and evaluate the real estate markets.


I am anxious to see sales figures for agricultural land in the coming months. During the last few years we’ve seen soaring agricultural land prices. I can remember not that many years ago when land was holding steady at about $2,200 per acre. Now, it’s not uncommon to see land at $8,500 per acre. If corn prices hold relatively firm in spite of the hoarding, farmers could be forced to dump their crops on to an oversupplied market. Remember, futures prices dropped from over $7.00 a bushel of corn to nearly $4.00 a bushel in just a few months. That’s a drop which occurred with ethanol requirements at full force. Clearly, there has been a glut of corn on the market.

As to the future of agricultural land, it will be interesting to see if prices begin to fall in the coming months. Unless supply and demand can somehow be brought into balance, agricultural land prices can’t help but fall.


According to the Blade story from the December 11, 2013, edition, just in case you didn’t see it, the story is about Toledo rising 49 spots on the index to become ranked 131st among the country’s 200 largest metro areas. That makes Toledo the most improved city in America as far as economic performance. The primary reason given is the automotive sector. Remember the old adage, when Detroit catches a cold, Toledo catches pneumonia. It’s still true. There has reportedly been a big improvement in auto parts manufacturing as well as the manufacturing industry in general. Don’t forget, we still have the Jeep plant with all of their suppliers on site. The Toledo Transmission plant has been going great guns now for some time and even the Chrysler machining plant in Perrysburg Township is reportedly running strong.

In a related news story from the radio on December 11, GM is planning to invest $1.2 billion in at least two of its plants. Most of the money, about $700 billion is going to Flint, Michigan. It would be a great time to run up to Flint and snap up a few of those foreclosure properties. The other was in Romulus, Michigan, near Metro Airport.


This is a mixed-bag story. The number of sales in Wood and Lucas Counties has fallen from 368 last November to 353 this year. However, the average price for Lucas and Wood has risen 5% to $114,785 from last year. For the entire MLS the average home price has risen 6%. Homes are also selling faster. The average days on the market have fallen from 131 to 125. According to local realtors there simply wasn’t enough inventory during the spring and summer. John Mangas of the Toledo Board of Realtors is quoted as saying that 2013 was a great year and he would be happy if 2014 would be that good and would be very happy if it would be a little better. He said that at a national seminar economists were predicting a strong 2014 for Cleveland and Detroit. Our being right between should be a strong indication that we are in for another good year next selling season. Get your houses all spruced up for the spring sales market.


Mekael Teshome left behind the PNC Economic Outlook for Toledo and mostly it isn’t pretty. As to the job situation, it says we hit a speed bump during the first quarter of 2013, but soon picked up steam as a result of a boost from the service industry including leisure, hospitality and business services. It states that manufacturing isn’t as strong as 2012, but is still a major contributor. On the bright side, exports have been strong in the area of transportation equipment. The jobless rate has risen to 8% which is very contradictory. The reason we have much higher unemployment at 8% is that we have 16,000 more people who have re-entered the job market because they think they might now have a chance to get a job. This is good news despite the punch in the nose you feel when you hear 8% unemployment. It’s really good news.

Overall the job growth has been in lower-paying jobs. Higher-paying jobs have gone by the wayside during the downturn and have not yet significantly recovered. Housing has been good according to the Blade, but this report doesn’t agree. It says that we had a brief improvement in 2012, but will lag the nation this year and the next couple of years. It reports that we are still suffering from the foreclosure glut of houses on the market. This is a far cry from what John Mangas, of the Toledo Board of Realtors, was saying and from what I am hearing. I think they are wrong here. I hope so.

The report also says that we do not have an educated workforce. Yet, we have the University of Toledo, Owens Community College, Lourdes College and BGSU pumping out graduates on an annual basis. Plus we have Penta County schools providing vocational training. In addition, there are several private colleges such as Davis and Stautzenberger. If the jobs materialize in Toledo, I have no doubt that we have the educated workforce to do those jobs.


A Message From the Editor

We wish you a very happy holiday season whatever your customs and faith may be. From all of us at Continental Valuations, Inc., we wish you a very Merry Christmas and a Happy New Year. Let’s hope that 2014 brings peace on earth and let us all pray to bring home our troops safely in the coming year. I would like to take this opportunity to thank our amazing and wonderful staff here at Continental Valuations for all their hard work in making this a very good year. We have just completed our 25th year in business. The late John Savage told me, “the key to success in business is being too damned dumb to quit”. I think John was a very wise man.

Next year promises to be a pretty good year according to the prognosticators. Please keep us in mind for all of your appraisal needs, be it a purchase or sale of real estate, estate planning or tax appeals.


Best regards,

Continental Valuations, Inc.    

Robert D. Domini, MBA, MAI


Certified in OH, MI & FL

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