Q&A With Growth Group’s Steven Cinelli
Futurist and growth advisor discusses outlook for the national and global economies
Steven Cinelli is the founder of California-based Growth Group and the managing director of boutique advisory firm SLAMINA LLC. He also serves as an adviser for London-based fintech incubator and consulting firm FinTech4Good and has spent decades as a creative strategist, banker, adviser and fintech executive. Known for his uncanny ability to anticipate markets, Cinelli has been predicting the kind of global economic crisis catalyzed by COVID-19 for nearly two years now.
“[In late 2018] we were in the middle of an alleged robust economy with a buoyant stock market, and most people did not want to hear the words ‘global meltdown’ or ‘global depression,’” Cinelli said. “The fundamental strength of the economy was surface-level, largely propelled by inexpensive debt within both private and public sectors. COVID-19 was merely the pin that popped the bubbles.”
REI-INK sat down with Cinelli in mid-April—while most of the country was still in the middle of “shelter-in-place” and “safer-at-home” initiatives—to delve into his outlook for the national and global economies.
Cinelli’s take on the economic situation at home and abroad was, as he put it, “certainly not a pretty picture,” but it opened some intriguing avenues of discussion relevant to real estate investors and the other business people who will likely bear the burden of supporting, bolstering and recreating the economy.
What made you think the economy was in trouble so “early” compared to most analysts?
It has been clear for some time that the fundamental strength of the U.S. economy was surface level. It seemed healthy, but when you started looking at the nature of employment and unemployment, you observe that we have a gig economy. People do not have steady jobs as they enjoyed years ago. They have one job today and a different job tomorrow. The government’s employment figures are “net” figures, the difference between new and lost jobs. The lost job number has been considerable for years; it’s just that new jobs outweighed the losses.
Now, new jobs have come to a halt, and the unemployment figures will continue to increase. As mentioned, the economic performance is very surface-level, and—to further exacerbate the underlying instability—most people do not have very deep pockets (i.e., large savings). Just in the last four weeks, we have seen over 20 million individuals filing for unemployment benefits. Certain analysts claim the real unemployment rate is nearing 18%. That is unheard of. It matches the Great Depression. And when the economy reopens, whatever that means, how many of those who were laid off will be reabsorbed—and over what time period?
The employment narrative has been part of the veneer of a very fragile economy. Certain asset classes, like equities and housing, have been fed by borrowing. When that window closes, the music stops and prices will fall. You ask why my forecast predates others: The biggest telltale sign was the rapid increase in overall debt levels without a corresponding increase in economic production. This has been clear since the early years of the expansion coming off the Great Recession. Cheap money has led to profligate spending and creating debt-fed asset bubbles. Think about this: If interest rates rose only by 300 basis points, we would virtually double the level of debt service in the economy, sucking a considerable amount of economic oxygen out of the room.
Can the United States and real estate investors take any indicators or cues from what is happening globally to predict how things will look moving forward?
One definitely has to assess things on a global basis now, not merely [look at the situation] in a domestic sense. There are fundamental weaknesses within all existing socio-economic systems right now, be they capitalism-democracy, socialism-autocracy, etc. In fact, these systems are, in many ways, becoming mirrors of each other.
The capitalist U.S. has more safety-net programs and government regulation of industry than most and no longer ranks in the top capitalist countries in the world according to the Heritage Foundation. The recent CARES (Coronavirus Aid, Relief and Economic Security) Act and so-called stimulus programs, in my view, seem more socialist than capitalist, particularly those supporting big business. Why shouldn’t large corporations avail the capital markets for funding, rather than [take] a bailout from Uncle Sam?
Furthermore, society has changed with technology continuing to influence behavior. As we move into the fourth industrial revolution, with artificial intelligence, internet of things, genome editing and other cyber-physical protocols, we will further alter the ways we live, work, interact and spend money.
Our infrastructures must adapt to new realities, and one of the things that everyone must accept as soon as possible and be most concerned with is the level of debt the world’s challenged economies have taken on both before and during the COVID-19 outbreak.
In the U.S., with this current transition, we could see our GDP drop to $15 trillion (down from $21 trillion). In conjunction with the stimulus bills, the CARES Act and deficit spending, we are likely to see federal debt move up to at least the $30 trillion level.
Beyond that, we need to consider debt outside the federal level, like state and local municipalities, which carry almost $10 trillion, and household debt, like student loans, mortgages, auto loans and credit cards, which amounts to another $17 trillion. On top of that, consider the corporate debt in the marketplace today because many companies took on debt to buy back stock, which is probably another $9 trillion or $10 trillion and the unfunded pension and other statutory liabilities of nearly $150 trillion. Across the board, the level of debt in the U.S. is probably twice as much as it was in 2008. And with a shrinking economy, our debt to GDP ratio may approach Japan’s, at north of 200%.
In simple terms: I believe the U.S. has moved to economic euthanasia.
With such a financial situation, and with rates with no further room to drop, I fear that the debt overhang and the continued printing of money will ultimately require a devaluation of the dollar on the world stage. This will affect asset values considerably, including housing and equities.
Since the ’70s, the U.S. has subscribed to an attitude of “buy now-pay later” in both good times and bad. This is catching up with the U.S. in real time, and the outlook is less than sanguine. One can be schizophrenic about the outlook, particularly for interest rates. On one hand, the Fed will keep them low as a hopeful stimulus. On the other hand, rates may have to move north in support of the dollar.
What is the solution for investors and for the country?
So far, I think we have to look at the U.S. response to the coronavirus pandemic as an example of poor planning. The Chinese, on the other hand, are masters of planning—say what you will about how they handled the COVID 19 outbreak. When it comes to economic planning, China committed itself to becoming an economic power back in the 1980s and is reaping the rewards today.
About 40 years ago, the Chinese economy was roughly 5% of the size of the U.S. economy. Today, their economy is roughly the same size because they laid forth a plan and stuck to it for more than four decades. There is generally no “short-termism” in China, whereas in the U.S., planning runs concurrent with two-, four-, and six-year election cycles wherein a new administration spends a great deal of time overturning whatever the previous administration implemented.
If we want to really resolve our economic instabilities, we need to collectively define what America should look like 25 years from now, design a plan to get there and then really do a reset on the entire way we handle our economy.
That means taking a hard look at the industries we are supporting now with stimulus money and determining if those industries will support the economy in the future. If they will not, then it might be time to let those industries go it on their own. For real estate investors, they should be tracking which sectors are actually supported and whether such support will lead to long-term growth, strength and stability. Will such industries build up the U.S. economy over the long term, improving the fortunes of employers and society in general?
I would also pay close attention to different geographies, whose local economies may evolve differently and at different paces. This applies to the domestic U.S. and globally.
The important thing to recognize is that we had a fragile economic system in the U.S. even before the COVID-19 outbreak, no matter what anyone in the administration or in government says. The COVID-19 economic tsunami could be the start of a 20% or 30% correction in the housing market and an even greater magnitude correction in the commercial real estate space. Real estate investors have to be ready, long term, to figure out how to make investments work when your tenants can’t pay their rent and when the government can no longer step up (or opts not) to make lease payments to building owners.
That is a really bleak scenario. Is there any light at the end of the tunnel?
I believe this is a unique time, as Steve Jobs quipped, to “think differently.” We are seeing disruption in socioeconomic structures, exposing their inherent weaknesses. Given the debt levels, are we committing economic euthanasia? Now is a period to rethink and self-reflect on how society and the economy is structured and functions to deliver for the needs of the community at large, while still incentivizing for innovation and entrepreneurial endeavors. The huge question is whether the powers in Washington, D.C., are up to the task.
