In the past three or four months, you may have noticed a plethora of headlines proclaiming the “death” of big U.S. cities such as New York, Chicago and Seattle. To paraphrase Mark Twain, these reports may be greatly exaggerated. However, there’s no denying that many urban city-dwellers—a great number of them high-income—are either relocating into the suburbs or strongly considering it, due to the double-whammy of the coronavirus and historic social unrest. This latent “exodus,” as some are already calling it, may end up being among the biggest in U.S. history, or at least the biggest since the “white flight” of the 1950s and 60s. According to real estate brokerage firm Redfin, a record 27.4 percent of homebuyers sought to move out of their metro areas in the second quarter, with New York
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In the past three or four months, you may have noticed a plethora of headlines proclaiming the “death” of big U.S. cities such as New York, Chicago and Seattle. To paraphrase Mark Twain, these reports may be greatly exaggerated. However, there’s no denying that many urban city-dwellers—a great number of them high-income—are either relocating into the suburbs or strongly considering it, due to the double-whammy of the coronavirus and historic social unrest.
This latent “exodus,” as some are already calling it, may end up being among the biggest in U.S. history, or at least the biggest since the “white flight” of the 1950s and 60s. According to real estate brokerage firm Redfin, a record 27.4 percent of homebuyers sought to move out of their metro areas in the second quarter, with New York City, San Francisco, Los Angeles and Washington, D.C., seeing the highest net outflows.
The implications of this exodus will be felt not just by apartment tenants and city managers but also, potentially, municipal bond investors. The COVID-19 pandemic has led to an enormous loss of tax revenue for cities and states, and combined with the monumental cost of repairing damages sustained during summer-month riots, municipalities could be facing a $1 trillion budget shortfall. (I’ll have more to say on muni bonds later.)
Costliest Demonstrations in U.S. History
It’s now being estimated that the nationwide protests and riots that were sparked by the May 25 death of George Floyd in Minneapolis, Minnesota, may collectively be the costliest in U.S. history. According to Axios’ reporting of data compiled by Property Claim Services (PCS), the demonstrations across 20 states will cost the insurance industry between $1 billion and $2 billion. Adjusted for inflation, that may be an even greater cost than the demonstrations that took place in Los Angeles following the 1992 acquittal of police officers involved in the Rodney King case.
|May 26 – June 8, 2020||20 States Across U.S.||$1-2B||$1-2B|
|Apr. 29 – May 4, 1992||Los Angeles, CA||$775m||$1.42B|
|Aug. 11-17, 1965||Los Angeles, CA||$44M||$357M|
|Jul. 23, 1967||Detroit, MI||$42M||$322M|
|May 17-19, 1980||Miami, Fl||$65M||$204M|
|Apr. 4-9, 1968||Washington, DC||$24M||$179M|
|Jul. 13-14, 1977||New York, NY||$28M||$118M|
|Jul. 12. 1967||Newark, NJ||$15M||$115M|
|Apr. 6-9, 1968||Baltimore, MD||$14M||$104M|
|Apr. 4-11, 1968||Chicago, IL||$13M||$97M|
|Source: Axios, Property Claim Services (PCS), U.S. Global Investors|
In Minneapolis and St. Paul, where this year’s riots began, as many as 1,500 businesses were heavily damaged, and demolition costs have skyrocketed so incredibly high that large sections of the Twin Cities are left with “scorched buildings and piles of rubble that will linger for months,” according to Minnesota’s Star Tribune.
Violence and crime are top of mind among many people looking to move out of cities. The free-market think tank Manhattan Institute found that nearly half of high-income New Yorkers who were seeking to relocate cited crime as a contributing factor. At 47 percent, that was the number two reason for moving, number one being cost of living (69 percent).
The number of empty Manhattan apartments rose to a record 15,025 in August, up more than 166 percent from the same month in 2019, according to the Elliman Report. This brought the borough’s vacancy rate up to 5.1 percent, the highest in the report’s 14-year history. Movers in New York City are reportedly so busy right now, they’re having to turn people away.
Respondents to the Manhattan Institute’s survey aren’t overreacting over crime. Gun-related homicides across the U.S. are on track to be the worst since 1999. This past July was Chicago’s deadliest month in 28 years.
Money Flows Where It’s Respected Most
They aren’t overreacting over the rising cost of living either. Legislatures in certain cities and states have lately approved tax policies that are near guaranteed to drive many of the highest earners and businesses away.
This week, New Jersey lawmakers agreed on a budget deal that will raise incomes taxes from 8.97 percent to 10.75 percent for tens of thousands of residents earning over $1 million.
Meanwhile, Seattle businesses, including Amazon, continue to urge the city council to repeal a payroll tax that is set to levy payrolls of those making at least $150,000 a year. The “Amazon tax,” as it’s called, is just one of many reasons why the retail giant is rumored to be considering moving operations elsewhere.
As I’ve often said, money flows where it’s respected most, and the survey above is proof positive of that.
Housing Market White Hot After Labor Day
So where is the money flowing instead? Again, homes in the nation’s suburbs are seeing incredible demand right now, which is leading to an inventory shortage and pushing up home values. It doesn’t hurt that 30-year mortgage rates remain near record lows and, the past few months notwithstanding, prices have been rising relatively in line with consumer prices.
Median home sale prices climbed to $319,261 in the four weeks ended September 13, a 13 percent increase from the same period a year earlier. That’s the biggest such increase since October 2013, according to Redfin. Nearly half of all homes that went on the market had an accepted offer within the first two weeks, the highest level since 2012.
In the Hamptons, traditionally a weekend or summer destination for New Yorkers, new signed contracts for single-family homes more than doubled in August from a year ago.
We Practice Caution as Muni Investors
Back to municipal bonds. August was a challenging month for fixed-income markets, including the $3.9 trillion muni market. Although the Municipal Bond Index fell 0.47 percent in August, munis still outpaced both corporate bonds and Treasuries for the month.
It’s key that muni investors practice caution at this time. According to RBC Wealth Management, the pandemic “is beginning to pressure the ratings of many municipal issuers, and we expect this trend to continue through the remainder of” September.
So far, none of the major cities that have seen the most negative news coverage at this time—Seattle, Portland, Chicago, New York City—have seen their credit downgraded, but that could change.
For what it’s worth, we have no exposure to Seattle’s or Portland, Oregon’s debt, and given the current risks, I don’t see that changing in the near future.
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This week spot gold closed at $1,950.86, up $10.31 per ounce, or 0.53 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 0.76 percent. The S&P/TSX Venture Index came in up 1.64 percent. The U.S. Trade-Weighted Dollar fell 0.37 percent.
|Sep-14||China Retail Sales YoY||0.0%||0.5%||-1.1%|
|Sep-15||Germany ZEW Survey Expectations||69.5||77.4||71.5|
|Sep-15||Germany ZEW Survey Current Situation||-72.0||-66.2||-81.3|
|Sep-16||FOMC Rate Decision (Upper Bound)||0.25%||0.25%||0.25%|
|Sep-17||Eurozone CPI Core YoY||0.4%||0.4%||0.4%|
|Sep-17||Initial Jobless Claims||850k||860k||893k|
|Sep-24||Hong Kong Exports YoY||-3.0%||—||-3.0%|
|Sep-24||Initial Jobless Claims||845k||—||860k|
|Sep-24||New Home Sales||891k||—||901k|
|Sep-25||Durable Goods Orders||1.4%||—||11.4%|
- The best performing precious metal for the week was palladium, up 1.57 percent as hedge funds boosted their net-long position to the highest in six-months. Gold had a second weekly gain after the U.S. dollar steadied and investors weighed a growing number of coronavirus cases.
- Platinum exports from Switzerland remained at elevated levels in August. According to data from the Swiss Federal Customs Administration, supplies of platinum hit 6.7 tons last month, up 40 percent from the previous month. Gold shipments from Switzerland resumed last month to China after a five-month break. China’s gold demand is showing signs of recovery after importing 10 tons in August.
- As the Turkish lira remains weak, Turks are piling into gold despite record high local prices. The average daily volume of gold sold at the Grand Bazaar was 4,500 pounds, up from 450 pounds. Ozgur Anik, general manager of Ozak Precious Metals AS, says “when gold prices are at record high, people normally sell their gold. This time, they kept buying more.”
- The worst performing precious metal for the week was platinum, still up by just 0.04 percent, but posted its biggest drop this month on Thursday with weaker auto sales in Europe where diesel is a bigger percentage of the market. Gold slipped after investors weighed the Fed’s outlook for a shallower contraction of 3.7 percent, up from June estimates of a 6.5 contraction. The FOMC expects to maintain an accommodative stance of money policy until it achieves inflation averaging 2 percent.
- The world’s biggest gold ETF, the $79 billion SPDR Gold Shares, saw a third straight week of outflows after eight consecutive months of inflows. This is a sign of profit-taking. On the other hand, the iShares Gold Trust continued its inflow streak of 25 weeks.
- Former Deutsche Bank AG analyst David Liew told a Chicago jury that he learned how to manipulate precious metal prices, of the practice of spoofing, from two senior traders, writes Bloomberg News. Spoofing is when traders place buy and sell orders they never intended to execute in a strategy to influence prices for illegal profits. Liew, who is pleading guilty and aiding the prosecution, said he knew manipulation was wrong, but the spoofing trades were “so commonplace” among co-workers that he thought it was okay to do.
- Kinross Gold, a Canadian miner, is paying its first dividend in seven years after boosting output and seeing record high gold prices. Shareholders will receive 3 cents a common share and resume quarterly dividends of the same amount. The company said production is expected to increase 20 percent by 2023. Newmont CEO Tom Palmer said he expects gold prices to remain elevated and boasted the company’s high dividend. “As we now look at the strength of our balance sheet, the discipline we have in running our business and our sustainable portfolio, we are actively debating and assessing opportunities for further shareholder returns.” Newmont increased its dividend by 79 percent earlier this year to $1 per share.
- Petra Diamonds found five blue diamonds, considered the most valuable in the world, at its flagship Cullinan mine in South Africa. The gems range in size from 9.6 carats to 25.8 carats. Bloomberg notes Petra sold a 20-carat blue diamond for almost $15 million last year. This is rare positive news for the struggling producer.
- Lundin Gold received an exploration permit for its Barbasco project in Ecuador. Kore Mining announcement a positive preliminary economic assessment for its Long Valle Gold Deposit in California. SSR Mining said it expects to see at least a 60 percent increase in gold production this year after its acquisition of Alacer Gold Corp.
- Russia is considering raising mineral-extraction taxes on mining companies to narrow a budget deficit of 4 percent of GDP, reports Bloomberg. The Finance Ministry proposed more than tripling taxes for extracting most metal and fertilizers for next year. This is a threat to Russian mining companies and would increase costs.
- B2Gold Corp is expanding its gold mining operations in Mali, even as the West African nation ousted its president last month – the second coup in less than 10 years. Mali’s gold mines have not been affected by the political turmoil, but it is still a threat to operation in the region. CEO Clive Johnson said in a phone interview with Bloomberg that “the current situation doesn’t deter us.”
- Equities and gold have benefitted from the trillions of dollars in fiscal spending and money printing, but those efforts are debasing the dollar and raising the possibility that the U.S. will go too far in testing the limits of government stimulus, says Ray Dalio in a Bloomberg TV interview. “There is so much debt production and debt monetization.” Again, this is positive for gold and Dalio recommends the metal, but it is a threat in the dollar losing its status as the world’s reserve currency.
- The major market indices finished mixed this week. The Dow Jones Industrial Average gained 0.45 percent. The S&P 500 Stock Index fell 0.59 percent, while the Nasdaq Composite fell 1.16 percent. The Russell 2000 small capitalization index gained 1.93 percent this week.
- The Hang Seng Composite gained 2.25 percent this week; while Taiwan was up 1.45 and the KOSPI rose 0.66 percent.
- The 10-year Treasury bond yield rose 1 basis point to 0.695 percent.
September 18, 2020
By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors