Conspiracy theories, drugs, and computer games.

The usual.

‘It’s a beautiful thing, the destruction of words." - George Orwell

Worst Bond Bear Market In The History Of The Universe

If you want to search for something in my posts, this is the best method I have found.

Using Google, enter: keyword(s) site:rudy.substack.com

e.g., “harley bassman” site:rudy.substack.com

Some more color on searches from friend of the show Jim (thank you):

I look at this chart once in a while: The Value Line Geometric Composite Index is an "equally weighted index using a geometric average. Because it is based on a geometric average the daily change is closest to the median stock price change."

It’s about 22% below its all-time high, so half of stocks are more than 22% below their highs and half are less than 22% lower. The S&P 500 equal-weight index also looks to be down almost 12% from its peak.

For what it’s worth, here’s the ratio of the $SPX to the $SPX equal-weight:

I heard Joe Terranova say today, “The market is the most efficient discounting mechanism.”

For some reason I thought of this chart:

So the math model known as the “CPI” came in at 3.2%, lower than the 3.3% expected (and 3.2% higher than the Fed’s legal mandate.)

Everyone got very excited.

Our Softer CPI:

As several people pointed out, this is the kind of absurdity that goes into the CPI:

Did your health insurance go down 34% over the past year? Mine didn’t. Also check out that weighting! It’s my #1 expense.

To make matters worse, the BLS doesn’t even measure health insurance premiums!

Even though insurance premiums are an important part of consumers’ medical spending, the BLS does not directly price health insurance policies. In a direct approach, we would track the movement of insurance premiums, holding constant the quality of insurance, and use these price relatives to build the Health Insurance index. However, the BLS has been unable to consistently control for changes in quality such as policy benefits and risk factors. Price change between health plans of varying quality cannot be compared, and any quality adjustment methods to facilitate price comparison would be difficult and subjective. As a result, we developed an indirect approach called the retained earnings method.

Meanwhile, in the UK, their CPI has been over 4% for two years:

Calculated Risk (a very good blog) asks the age-old question:

‘When will the Fed cut rates?’

Who knows. The Fed began cutting rates in September 2007.

United States NFIB Business Optimism Index

Don’t they realize this is the best economy ever?

For what it’s worth, A multi-family post I saw on Twitter:

I have analyzed over 250 multifamily deals, spoke with dozens of brokers, lenders, and other operators across the country this year. The last 6 weeks is materially different.

Multifamily pricing this year is already +25% of peak values. Now, nearly every marketed deal is missing pricing expectations by +20%. This month alone represents 5-10%.

That means what was a $40m deal in 2022 is now asking $30m and receiving bids at $24m - IF they catch a bid. There is an entire class of deals throughout the sunbelt that can’t even get equity interest until the lender takes over. We are talking deals worth $.50 on the debt for an appropriate risk-adjusted return. This covers core urban towers to class C suburban garden-style deals. Equity expectations has shifted to year-1 positive leverage at minimum for a well located class B deal.

6 months groups were ok taking 100bps of negative leverage. So what was a 5% cap is now a 6% cap. From a pricing standpoint, that 1% of cap rate movement (the difference between positive and negative leverage in this instance) would represent about a decrease of $10m on a $40m (now $30m) deal. Brokers are no longer trying to save face about this issue. They are well aware of pricing expectations.

Furthermore, since volume is down 50-70%, they have no time to waste. The focus is now finding willing market sellers. They don’t want to process deals that sellers will pull if pricing misses what they think - because it inevitably will miss. The issue is most of these “willing”, now forced, sellers aren’t actually in the driver seat. The equity on their deals is worthless. Zeroed. It’s now up to the lenders on how to process. But most haven’t foreclosed yet.

Lenders have kept it cool up until about 4 weeks ago. They refused to acknowledge the elephant in the room. Now news is breaking on restructurings, foreclosures, fraud, and missed pricing expectations. Up to this point, lenders have been current on loans. Now they are not. Lenders are waking up. They realize if they do not move right now then the issues only multiply.

We are just starting to receive loan sales. But this is just the beginning because fundamentals in the market have remained relatively strong. But things are changing. Operators are in full asset management mode. Rents are slipping, expenses are up, and loans are maturing.

The goal today is maintain quality occupancy and fight against delinquency. Most operators have stopped high-end renovation plans as the premiums are commanding the same rents pops as the past. What was a $10,000 interior renovation for $200 rent pop is now a $13,000 renovation for a $100 pop. It just isn’t worth it. Once (if) we start processing the bubbling issues in the broader economy, and the glut of supply releases at the same time as fundamental softening, there will be massive issues near term in the multifamily space. Get ready because it is about to get spicy

L.A. Mansion Owners Having Problems

“A lot of owners took on homes and mortgages and extra vacation homes when lending criteria was easier,” Patrick Michael, founder and chief executive officer of LA Estate Rentals, said in an interview. “I feel like everybody’s in panic mode now. Even wealthy owners are asking if I have anybody for their house.”

Michael said he currently represents about 250 short- and long-term rentals and added 10 properties in the last week of October. He estimates about $3 billion of luxury homes are available on the rental market in the LA area, a volume he compared to 2008 when he started managing rentals after the last housing bubble burst.

Owners are worrying about paying taxes, insurance and maintenance bills for houses they no longer need but can’t easily sell, Michael said. A plastic surgeon has been hounding him to find clients to lease a Hollywood Hills home that often goes for $25,000 a day, mostly for corporate events. Finding renters who can afford to pay those prices isn’t easy.

“We have to get away from this PhD standard, the improvisation of our monetary masters who, having earned a doctorate in economics, they think they know things they cannot possibly know.”

Jim Grant

James Lavish on last week’s (not failed!) 30-year bond auction:

Good interview: "I'm sorry, but you cannot call this anything but quasi-yield curve control."

Another new podcast with James Lavish and Michael Farris is here.

• Nice discussion of price-insensitive (passive) investing with Mike Green and Jeff Snider

• Kevin Muir and Harley Bassman on bond math Bassman: “The market's not saying we're going down by 1% or 1.1% [in a year] - what it's saying is there's a 90% chance rates will be unchanged, and a 10% chance rates will be down by, you know, 400 basis points.”

• Via Grant’s: “Bank of America’s latest Global Fund Manager survey, conducted over the six days through Nov. 9, showed the largest overweight fixed income positioning since 2009, with a net 80% of respondents anticipating lower short-term rates.” Wow.

• MacroVoices #401 Leigh Goehring “One of the interesting things about gold is it started the 1930’s at $35 an ounce. It peaked on January of 1980. It hit $850, so that was an increase of 24 times. You can make the case that we are almost as radically undervalued with Gold today at 2000, than we were when gold was $35 back then.” Goehring also mentions this Forbes article from July 2000, when gold was $280 an ounce.

• “Could it be...that so much central bank liquidity was created during and before the pandemic that financial conditions cannot meaningfully tighten, despite the Fed’s tightening, until this liquidity gets burned up?”

• 2023 Commercial Real Estate (CRE) Industry Reports

• Private Equity- How It’s Changing the American Economy with Gretchen Morgenson "At least 40% of the nation's emergency departments are run by private equity. We know that at least 11% of the nation's nursing homes are owned by private equity." (Starts 14 minutes in. Another unneccessary 2-parter.)

• "Mezzanine lending became big business for companies such as Blackstone, KKR and Starwood Capital, which collectively lent billions...That debt allowed investors to bid up prices...Now, real-estate prices are falling and many of these loans are in default." I am reminded of a Sara Eisen/Barry Sternlicht interview from December 2022.

• Only Newsom Can Go To China “If Newsom pulls it off, we may soon see rapprochement between the farthest culturally left party in the world (the ultra-woke American Democrats) and the farthest culturally right party in the world (the ultra-nationalist Chinese Communists).”

  

JFK and Conspiracy Theorists

The shift within U.S. social science to mid-range theory and behavioralism was propelled not only by demographics and Popper’s influence in political philosophy but also by McCarthyism and associated hostility toward what were referred to at the time as “political economy” and “comprehensive political theory,” both of which compared capitalist and communist systems and suggested that each had important strengths and weaknesses.

Not surprisingly, the agenda for social scientific theory and research during the Cold War, especially during the 1940s, 1950s, and 1960s, raised very few questions about the rectitude of public officials and the democratic character of U.S. political institutions. Social scientists assumed that, to repeat an often-used phrase from the period, political leaders in the United States “obeyed the rules of the game.”

By 1964, when the Warren Commission presented its dubious account of the assassination of President Kennedy to a stunned nation, U.S. mainstream social science, with its Popperian devotion to mid-range theory and behavioral research, lacked conceptual resources to recognize a possible coup or purge. Hence American scholars, unlike their European counterparts, voiced no criticisms of the Warren Commission’s report.

This left American public opinion subject to the influence of a lopsided competition of ideas, as the pejorative conspiracy-theory label was deployed by the CIA to cast doubt on the Warren Commission’s critics.

- Lance deHaven-Smith, Conspiracy Theory in America

The above passage reminded of a couple others:

“Robert Kennedy’s death, like the President’s, was mourned as an extension of the evils of senseless violence; events moved on, and the profound alterations that these deaths...brought in the equation of power in America was perceived as random...What is odd is not that some people thought it was all random, but that so many intelligent people refused to believe that it might be anything else. Nothing can measure more graphically how limited was the general understanding of what is possible in America.”

- Allard K. Lowenstein, The Assassinations: Probe Magazine on JFK, MLK, RFK, and Malcolm X

At the first meeting of the newly constituted Warren Commission, Allen Dulles handed out copies of a book to help define the ideological parameters he proposed for the Commission's forthcoming work. American assassinations were different from European ones, he told the Commission. European assassinations were the work of conspiracies, whereas American assassins acted alone.

Someone was alert enough to remind Dulles of the Lincoln assassination, when Lincoln and two members of his cabinet were shot simultaneously in different parts of Washington. But Dulles was not stopped for a second: years of dissembling in the name of "intelligence" were not to fail him in this challenge. He simply retorted that the killers in the Lincoln case were so completely under the control of one man (John Wilkes Booth), that the three killings were virtually the work of one man

- Peter Dale Scott, Deep Politics and the Death of JFK

Dulles would serve John F. Kennedy for less than a year, but their briefly entwined stories would have monumental consequences. Clearly outmatched in the beginning by the savvy spymaster, who beguiled Kennedy into the Bay of Pigs disaster, JFK proved a quick learner in the Washington power games. He became the first and only president who dared to strip Dulles of his formidable authority.

But Dulles’s forced retirement did not last long after Kennedy jettisoned him from the CIA in November 1961. Instead of easing into his twilight years, Dulles continued to operate as if he were still America’s intelligence chief, targeting the president who had ended his illustrious career. The underground struggle between these two icons of power is nothing less than the story of the battle for American democracy.

- David Talbot, The Devil’s Chessboard: Allen Dulles, the CIA, and the Rise of America's Secret Government

"We came to the conclusion that this [JFK] assassination had been prepared. There was a conspiracy. But we weren't able to identify which organization sponsored it."

- Valéry Giscard d'Estaing, President of France from 1974 to 1981, on what Warren Commission member Gerald Ford told him in 1976

Remarkable TED Talk from 2015 by World Economic Forum darling and psychopath Yuval Harari:

In the industrial revolution, we saw the creation of a new class of the urban proletariat. And much of the political and social history of the last 200 years involved what to do with this class, and the new problems and opportunities. Now, we see the creation of a new massive class of useless people. (Laughter)

As computers become better and better in more and more fields, there is a distinct possibility that computers will out-perform us in most tasks and will make humans redundant. And then the big political and economic question of the 21st century will be, "What do we need humans for?", or at least, "What do we need so many humans for?"

BG: Do you have an answer in the book?

YNH: At present, the best guess we have is to keep them happy with drugs and computer games...(Laughter)

But this doesn't sound like a very appealing future.

BG: Ok, so you're basically saying in the book and now, that for all the discussion about the growing evidence of significant economic inequality, we are just kind of at the beginning of the process?

YNH: Again, it's not a prophecy; it's seeing all kinds of possibilities before us. One possibility is this creation of a new massive class of useless people. Another possibility is the division of humankind into different biological castes, with the rich being upgraded into virtual gods, and the poor being degraded to this level of useless people.

Guys like Harari are quite clear about what they think of us riff-raff. In case you missed Club of Rome and WEF stalwart Dennis Meadows even more disturbing comments, there’s a clip of him here in this post from last month.

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“Studies of 'asymmetry' by Professor Hendrik Bessembinder – which looked at global stock market returns between 1990 and 2018 – established that just 1.3 per cent of stocks contributed all of the net gain when compared to the performance of US Treasury bills.”