And a Little Real Estate

The report from Washington is that the real estate market there is cooling off, code for "The market is not as hot as a pulsar in the Sriracha Galaxy."  Inventories are actually accumulating.  Thurston County, where they keep Olympia and the capitol, is as hot as ever, though.  How can anyone afford to work in the state government?

Free Capitalist No Longer Free

OMG, they finally nailed Rick Koerber to the wall.  It ought to be amazing it took so long, but given Utah's track record in such cases, I guess the miracle is that the case was prosecuted at all (Note that it required bringing in an outside judge to finally make this fly.).  Now I hope the Tenth Circuit doesn't bollocks the inevitable appeal.

Another HR How-Not-To Lesson

I've been focusing largely on real estate lately, so it's time to do a business management entry.  I was called in to provide some advice on this mess just last week.  The company in question has a pool of employees it brings in as needed for a certain type of work.  One employee hadn't been called in for awhile, so he called the company and was told he needed to come in to meet with them.  It then took the two bosses two weeks to get around to meeting with this guy.  At this meeting they took issue with his having missed one of the training days.  They took issue with his level of communication with them.  And they took issue with his actual work product.  Turns out, though, there were some issues with these issues.  I'll lay them out below as lessons.

Lesson One: If you are going to accuse someone of not communicating, you had better have looked at their communications.  The employee had emailed the bosses he would not be available for that training day.  The company's response was that he had responded to the wrong email, so they did not know what he meant by "I am not available the following days."

Lesson Two: If you are going to accuse someone of not asking questions to get clarification, you had better have asked some questions yourself.  The email in Lesson One was actually pretty clear.  The company never followed up on it to ask what the employee meant.  The employee was apparently supposed to figure out on his own that the company was confused.

Lesson Three: Do not treat informal communications away from the office as if they were formal communications made in the office.  The employee and one of the bosses ran into each other at the grocery store.  The employee mentioned in passing that he was going to miss one of the training days.  The boss claimed he told the employee to call the other boss about it.  The employee claimed he never heard any such thing.  The boss never followed up with an email to this effect, either to the employee or to the other boss.

Lesson Four: If you are going to accuse someone of violating a policy, there had better be a policy.  The company claimed the employee had not followed policy concerning communication.  There was no evidence such a policy existed.

Lesson Five: If you are going to accuse someone of shoddy work, you had better not have already signed off on it.  The company claimed some portion of his work was unsatisfactory.  There were in fact some items that had been returned to him for revision (I won't go into the inadequacies of the bosses' notes seeking revisions, but trust me, they weren't good.).  Those revisions had been made, and the company had accepted them.  Now the company wanted to renege on the acceptance as part of disciplining the employee.

So to recap: 1) The company was told the employee would miss the training day, but the company's communications are so pigeonholed that a clear statement sent to the RIGHT PEOPLE will be ignored and not considered to be communication; 2) the company tried to cover its lack of communication by having a boss tell the employee in a grocery store aisle that the employee needed to call, a communication the employee denies receiving and the company has no follow-up verification of having made; 3) there was no policy violation because there is no policy; and 4) work that had been acceptable was retroactively deemed unacceptable to support the current discipline.

And now the killer.

Lesson Six: If you have a problem with an employee's performance, do NOT wait for the employee to contact you to straighten it out (and do not stall for an additional two weeks after that).  Even if everything the company said were true (which it obviously was not), the employee should not have had to sit around wondering what was going on and finally call in on his own.  That is called Passive-Aggressive Management.  If it's your management style, you shouldn't be a manager, and you probably won't be for long.  If you're an owner and pulling these stunts, I guarantee you're driving away all the best people.  Soon your competition will have all the good ones (Maybe that's why Passive-Aggressive Managers congregate in government: no competitors.), and you'll be left with what's left.  And I shouldn't need to tell you where that leads.

Q2 GDP

And then there is the latest GDP report, showing growth of over 4%.  Trump of course crowed about how fantastic the figures are and how they will keep going up.  I can only hope that on some level he realizes that simply isn't true.  The markets reacted with a predictable "Meh" and slid some, probably for the wrong reasons, including that this wasn't as high as projected.  Personally, I think it's bilge.

"Why?" you ask.  Well, first, GDP really isn't a terribly good measure of economic health, especially in times like these where wealth is accumulating at the extreme top end of the scale.  99% of the population could be living like Bronze Age goatherders, but so long as the top 1% is making it and spending it, GDP says the economy is great.  Let's put it this way: If the economy is doing so well, where is the job growth, where is the wage growth.  They simply aren't happening.

Second, Q2 figures are probably gamed, even more than usual.  The "tax reform" refunds arrived, and while the overwhelming majority of people didn't receive enough extra to matter (My taxes actually went up, thank you very much.), the folks on top received piles, which they spent, thus increasing GDP.  Also, everyone knew tariff wars were coming with Q3, so they packed as much buying and selling as possible in Q2 to avoid them.  Finally, everyone knew the Fed would continue to hike interest rates in Q3, so everyone got their financing and cut their deal in Q2.

In other words, expect Q3 GDP to drop, probably be quite a bit.

Housing Market Slowdown

As I wrote in my previous post, rental housing is tight because people can't afford to buy.  The pundits are finally waking up to the fact that the housing market is slowing down and so the merry-go-round is about to stop again.  As a preliminary note, the only reason the housing market has been increasing is because a lot of hot, commercial money has been jumping in to snap up tons of houses for potential rentals or tear-down redevelopment; owner-occupied housing, which creates the community stability and social benefits we traditionally look for from this market, has not been making the difference.

The pundits talk about rising prices and rising interest rates forcing people out of the market, but they are ignoring, perhaps deliberately, the elephant in the room.  Too many people lack the economic stability to make such a long-term purchase.  Their income hasn't been steady for the last several years (if ever), they don't know how steady it will be over the next five years (It probably won't be.), and they don't even know if they'll be here for the next five years (probably not).  People can't buy, and even if they can, they don't have a good reason to.

Vacancy Rates

Recently saw the Q2 commercial vacancy rates for Salt Lake County, broken down as residential, office, retail, manufacturing, and warehouse.  It looked like a very rosy picture, with low vacancy rates all around.  Personally, I think they smell.  Like mackerel in the moonlight, they shine and stink.  Manufacturing and warehouse are low because they're being converted into the other areas and aren't being replaced.  Multifamily residential is low because people can't afford to buy.  As for office, there are thousands of square feet that are leased but are currently unoccupied (ostensibly because the lessee needs room for expansion, but we'll see how much of that happens) or are being used for on-site storage.  As for the retail numbers, someone is lying.  They pass neither the eyeball test nor the smell test.  Drive around the valley and look at the empty space.  Doesn't matter what kind of retail it is, the vacancy rates are high.  Anybody who thinks otherwise is living in a cave.  It's like just about every other bit of news about our "booming" economy: It only works by being highly selective with the data and then not examining the analysis very much.

31 October 1941

Want to do something constructive for Halloween and study something really scary?  Look into the sinking of the US destroyer Reuben James, sunk while escorting a merchant convoy to the UK.  And also remember that the merchant and Navy sailors who faced all this before the US finally got into the war weren't getting combat benefits (and to this day aren't eligible for membership in the American Legion).  So listen to the song (Guthrie, Weavers, Kingston Trio, Chad Mitchell Trio, whatever), read up, and learn.

Sears Drops the Other Shoe

Didn't have to wait long for this.  As I predicted, Sears is shutting down the Ivy place K-Mart.  Another big dead space in the middle of things.  Retail is truly a mess, and that means that, in spite of all the Class A office space being slapped up to house the 1%'s service industries (law firms, CPAs, investment houses, etc.), the economy is hollowing out.  What to do?  Good question given that we are marching in the exact opposite direction from anything that could solve any of this.  If I were a bright boy at Goldman Sachs, though, I would be creating funding vehicles for redeveloping these parcels.  Into what?  I have no idea.  Caviar shops and Rolls Royce dealerships.  You have to shift the properties to the people who are still buying.  Because what's obvious is that the people these properties were targeting aren't buying anymore.

But Retail's Fine, Just Read Forbes

So in spite of the original notice that indicated it would stay open, the Radio Shack at 700 South and State here in SLC is closing (i.e. it's worse than they originally announced).  2017 retail bankruptcies already outnumber 2016.  The distressed retailer list is growing rapidly.  But Forbes thinks things are fine.  There are good reasons for this.  First, Paula Rosenblum is the sort of member of my age group that gives my age group a bad name.  The way she poo-poos the effect of on-line shopping is both condescending and absurd.  A nonscientific sampling consisting of my four kids finds a unanimous preference for shopping online, and one of them is in retail.  Nonscientific, but they're also among the least tech-oriented of their peers.  That's Trouble with a capital T, and Forbes gets a capital F for ignoring it.  Then Rosenblum doubles down with all the glorious things retailers are doing to bring shoppers back, including the mall redesigns.  Earth to Paula: First tell me how this fits the financing models for these enterprises (It doesn't.), then tell me how it gets past the fact that it is aimed at a clientele that is dying (It doesn't.).

There is an even bigger reason Forbes is taking this position: Steve Forbes is taking this position.  Why?  Well, he's part of that dying off generation that thinks mall shopping is cool (or in his case that sending a servant to do mall shopping for you is cool).  But also, he can't see any of it.  As fewer people are able to consume, retail becomes increasingly dominated by custom-made products sold in controlled-access locations or even privately.  This is the world Steve Forbes knows, it's working just fine for him, and so no problem.  But if you consider dead real estate and vanishing jobs a problem, then you might have to differ with him.  I do.

So How Fragile IS the Economy?

Macy's in Holladay is finally closing.  Congratulations, Holladay, you've finished the job of turning a regional mall into a cow pasture.  For those of you keeping score, Macy's is also closing the Layton Hills store and the stores at the Three Rivers Mall in Kelso and the Everett Mall.  Sixty-eight stores, over 10,000 jobs.  Lowe's is chopping 2,400 full-time employees in effort to cut costs by using more part-time workers, in the further Walmartification of the US job market.  The Limited has filed Chapter 11, but it isn't reorganizing, it's liquidating.  American Apparel is gone, along with its 110 stores.  Albertsons is shutting down stores all over the territory.  Sears is closing the Vernal, Layton, and Tacoma K-Marts and the Alderwood Mall Sears (I'm waiting for the K-Mart next to Ivy Place to go.).  And in local tech news, Endurance International Group, which went public in 2013 and is still trading below the IPO price, is closing its Bluehost business in Orem (I wonder if Governor Available is going to mention that while bragging about all the jobs he's brought in.).

These aren't just lost jobs.  They're a sign that people aren't buying because they can't buy.  And as more people lose their jobs, more people can't buy.  That's called "spinning in."

If Small Business is the Backbone of the Economy...

...the economy is an invertebrate.  I know, I know, small business owners are the scrappy folks who keep it all going.  And most of my clients are small businesses.  And I'm a small business.  But....

Too many small businesses have no clue how things work (as I've noted several times, such as here and here).  And they also tend to be clueless on just how badly the deck is stacked against them (such as our glorious, bad check statute, which I discussed here).  But I am now witnessing Transatlantic delusion.

First, the UK is in the throes of Brexit.  A recent study of small businesses indicates that a plurality exporters and a majority of importers believe Brexit will have no effect on them.  Wow.  Just wow.  Pulling out of a free trade zone and putting a large hole in your financial industry isn't going to leave a dent.  That isn't optimism, that's insanity.  Meanwhile on this side of the pond, small businesses are expecting Trump to stabilize things for them.  Yeah.  Uh, no.  Trump is stirring the pot into a hurricane, and he's doing it for the greater glory of the big boys.  That includes ACA repeal, which frankly was a big win for small businesses.  If that goes, good look offering your employees a benefit package of any kind, let alone one that can match the bigs.  And if you can't attract talent, where are you?  Going dark, that's where.

So keep ignoring reality, small business owners.  It is sort of a requirement for club membership.  Just don't be shocked and whiny if reality doesn't ignore you and bites you in the backside.

A Word to Landlords

In case you simply aren't paying attention to your own business, which I submit a number of you aren't, let me break this to you: Everything is overbuilt.  Office space class A through Z, retail, office-retail, warehouse, light industrial, manufacturing, name it, there is more of it than there are folks who can afford to lease it.  So if you think your little strip mall is some special snowflake, think again.  Retail is really bad.  Anchors are going dark everywhere, and the little guys who depend on the anchors for traffic are following them into the ground.  This is not the time to jerk tenants around.

But some of you haven't gotten the memo.  There is a strip mall near where I live that has a visibility problem.  Most of the spaces in the mall can not be seen from the street.  That includes the restaurant space.  All retail depends to some extent on passing eyeballs, and restaurants die without them.  The prior restaurant in this space avoided dying by moving to the west side with lower rent, higher traffic, and much better visibility.  I don't know if the current one will make it that long.  One thing is certain: The landlord is not helping.  No extra signage or anything.  It's a recipe for high turnover, and that can't be good business.

Then there is the Reams plaza in the neighborhood (Reams doesn't own it, it just anchors it along with Rite-Aid, with Walgreen's on its own pad.).  For those keeping score, the west end has to be 60% vacant.  The east end has at least two vacancies and will soon get more.  Reason?  Lease hikes.  In this market.  At least two of the former west end tenants relocated to more reasonable space, because there is plenty of it.  At least one of the east end tenants is about to do the same.  Nonanchor space will be at 50% for the new year.  I hope they have sweet deals from the anchors, because that's all the revenue there is, but knowing Reams and the pharmacies, I doubt it.  Makes you wonder what sort of business planning goes on at the landlord's headquarters. 

All the News...

Well, let's take a look at a few things that have been happening out there in the freak show called reality.

First, the Florida Supreme Court dealt mortgage borrowers an expected blow in  Bartram et al. v. U.S. Bank NA.  Florida is a judicial foreclosure state, so it does not have a lot of effect in Utah and Washington, but it is a good view of how things are going.  The court held that a prior case dismissed for a reason other than the merits of the issues has no issue preclusion effect on a later case.  Put another way, if the lender's first foreclosure claim was dismissed for procedural defect and not because the lender failed to state a claim, the lender can re-accelerate the note for later nonpayments and sue again.  Yet another blow to the "I can get you a free house" hucksters.

Second, the Supremes are reviewing the latest example of US courts trying to get jurisdiction over other countries (See here, here, and here.).  A US oil drilling company owned a subsidiary that was a Venezuelan corporation that it used for drilling there.  Venezuela got behind on payments, the company stopped drilling, and Venezuela seized the rigs to keep them operating.  The drilling company sued Venezuela in US court.  Ordinarily you can't sue a foreign sovereign in a US court, but both the DC District Court and the DC Circuit Court decided the "violation of international law" exception applies, and that's the issue before the Supremes.  The problem I see, and that Venezuela has raised all along, is that this isn't a matter of international law.  The rigs were seized from a Venezuelan corporation, not the US parent.  As far as I'm concerned, that ought to be the end of it.  But the courts are playing around with the political ramifications.  And that's the real problem.  Because every time our courts decide to reach out and touch someone overseas, it increases the justification for anyone who wants to do the same to us.  And that ought to scare you.

In a rare instance of bad news for banks, Bank of America, while not actually having to face the music for all the messes it has created, might at least have to hum a few bars.  The 1st Circuit in Boston has ruled that a fraud case against BOA can proceed.  In 2007 BOA was pushing auction-rate securities hard, marketing them as extremely liquid, practically cash substitutes.  The problem with that liquidity was that it depended on the dealers continuing to trade those securities.  In February 2008 they stopped, and all that lovely liquidity turned into solid lead.  BOA said, "Hey, we warned them in the prospectus what could happen if the market froze up."  The court, in a wonderful moment of lucidity rare in banking litigation, responded, "Yeah, but you just kept selling after it looks like you saw the market was headed south, and you changed your sales pitch not one bit."  Expect BOA to settle this dog soon and put a big gag clause on the settlement.

Finally, in the latest maneuver in the farce that is the prosecution of our last two AGs, John Swallow is trying to get a big chunk of the case thrown out.  He's making certain legal arguments, but in reality I think he figures that since Shurtleff skated, and since he was just doing what Shurtleff did, he should skate too.  Poor John.  He never learned the first rule of poker: When you sit down at the table, look around for the mark; if you don't see him, he's you.  You're the only one left they can turn into a sacrificial lamb, John.