I loved "The Big Short"

Being 'early' is not necessarily the worst thing.

“People who bought in 2021 and beginning of 2022 that are carrying those apartments at the price they paid for them - they’re down at least 20% or more. If they use 60% leverage they’ve lost half their equity, but they haven’t written them down. If they have short-term debt, floating-rate debt, they’ll have a problem.”

- Ron Zeff, the CEO of Carmel Partners, describing apartment owners, specifically in the ‘SunBelt.’ The entire interview with him and Shlomi Ronen of Dekel Capital on CRE is interesting. Barry Sternlicht and Stephen Schwarzman have to be concerned here.

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It’s possible that Steve Eisman is on Reddit using the name ItsNotAboutThePasta:

I like to nickname quantitative easing “monetary policy for rich people.”
You could quote me on that.

Steve Eisman, 2018

Again, Melody Wright has been doing some great writing on the current real estate bubble, having survived the last one. Boots on the ground versus whatever is on some CNBC teleprompter.

Her latest post gets into - among other things - AirBnb investors:

A really interesting stat above is the % of multi-listings per city. This metric represents the % of owners that list multiple properties, not just one. So, in other words, this will give you a flavor to how many investors operate in that market. The average for the cities above for multi-listings is 58.74%. So, despite what Airbnb said on that doozy of an earnings call when no one asked them about their miss in listings projections, their typical client is not someone who is trying to make just a little bit of extra cash. These are investors with multiple properties who are looking for passive income and likely bought these properties with DSCR loans or cash from loans on equity and crypto assets. And, with so many listings the imputed occupancy in these cities is very low and is likely no longer covering debt service cost.

From Bloomberg last year:

Chelsey Jones, a 29-year-old former grocery store manager in Columbus, Ohio, bought four rentals in the Smokies, three with Carles’s help. In all, Jones has borrowed $1.1 million over the past year for properties such as Big Bear Lookout, a four-bedroom cabin in Gatlinburg, Tenn., with shuffleboard, a hot tub, and an arcade.

At first it’s hard to imagine how Jones could afford Big Bear. The monthly mortgage payment is $2,600; rent from a steady, long-term tenant would barely cover it, let alone repairs and maintenance. But Jones can rent out the property for an average of $350 a night on Airbnb. That way, she can earn about $6,000 a month, more than twice her loan payment.

Jones expects to make a $150,000 profit this year from her rental properties: her Smokies homes, along with one in Ohio and two more under construction in Florida. That’s almost four times more than she earned in her grocery job, which she quit in 2019. “What a dream come true to be able to work from home, be my own boss, and make that kind of money,” says Jones, who now also works as a real estate agent.

We’ll see how that works out. Back in March I mentioned this:

As an aside, last night I was with some people for the first time, I guessed they’d be called Yuppies, 40’s. Anyway, I didn’t pry, because I’d just met them, but several of them talked about their “Airbnbs”, plural, problems with squatters, and the apparently multiple issues when changing your Wifi password at Airbnbs you manage remotely in other states. Very The Big Short vibe.

Speaking of The Big Short, I came across this the other day from Peter Tchir:

I HATED the Big Short. I like Michael Lewis a lot. Liar’s Poker is still my first recommendation for anyone thinking about working on Wall Street (with the number of veterans reaching out to Academy Securities, we’ve likely bumped up sales). This has nothing to do with Michael Lewis, but everything to do with how the story was told.

I have nothing against Peter Tchir, but I loved The Big Short. It’s the first book I suggest to novices who want to learn about our financial system.

As I wrote years ago, replacing every instance of "Steve Eisman" in The Big Short with "Rudy Havenstein" wouldn't be far off. By that I didn’t mean our professional experience - I was never a ‘Wall Street” guy - but rather the growing realization of how insane things were (though I think I’m much more cheerful than Eisman.)

Tchir describes the apparent source of his hatred:

The book made it sound like only a couple of people figured out the “problem”. For the record, I still cannot bring myself to watch the movie despite being told it is really good.

Very few identified the problem, found the best way to execute the bet (AAA ABX), had the staying power to be in the trade when it started to crack, AND had the conviction to stay in the trade throughout various powerful rallies.

The story took years to play out. Investors had been bearish on this segment of the market as early as 2005 and there was no better example of “early equals wrong” in financial markets than those trades.

I agree with the middle part - I certainly wasn’t financially sophisticated (or wealthy) enough to make the kind of trades Burry and Eisman’s team and some others did. Few were.

I do think that - had I those resources - I would have had the conviction to stay in the trade. I’m small fry but I don’t panic, and if a position I believe in moves against me, I will add to it. Then again, I don’t manage Wall Street money so I don’t get phone calls screaming at me about how stupid I am. (If I wanted people to tell me how stupid I am I’d just set up another Twitter account.)

I knew we were going to have a big problem by the mid-2000’s at the latest (i.e., I was early. I’m always early, because I pay attention.)

The BEST commentary at the time was on small blogs. Most of the financial press back in the mid-2000’s - like now - was total cheerleading crap. People like Melody Wright now, or Tanta back then, citizen journalists, on the ground reporting what their eyes were seeing (and not what, say, Ben Stein was telling us).

The best reporters were people who were NOT reporters, who didn’t blindly accept the official narrative, who drove around developments, talked to investors, renters, homeowners - you know, non-billionaires - and ignored the pronouncements of Greenspan and Bernanke, who were both completely clueless (or evil - take your pick. Could be both.)

My two big shorts of this era (and my last since) were Indymac and Downey Savings, and my biggest mistake was not being bearish enough. (I also never imagined that the Federal Reserve would go completely insane for the next 14 or so years.)

As for the “early equals wrong” thing - here’s how I look at that. If you’re playing Russian Roulette, and I warn you that’s dangerous, and after several rounds you’re still alive - am I wrong?

For me, risk is a permanent loss of capital, not volatility. If being early saves you from a 90% downdraft (which I personally saw people who were long go through in the DotCom era,) then being early is hardly bad. (Note: Shorting is for crazy people and normal people should not attempt it. For me, being in money market funds is my short.)

So you won’t make the additional paper profits others might - you’ll survive. Everyone thinks they’ll sell at the top. Survivor bias in the stock market is ridiculous. Everyone forgets all the people and companies which are no longer in the game at all. They all looked really smart until they didn’t.

99.9% of everyone who blows up - governments, corporations, individuals - it's always because of leverage. The rest are due to asteroids and stuff.

I suppose my philosophy is to not borrow money to buy something I can’t afford that might go down in price. Very weird I know.

Being “early” has saved me a lot over the years, but I’m not an asset-gatherer making a % off other people’s money.

Live by leverage, die by leverage (unless the Fed bails you out.)

"Successful investing is about having people agree with you...later."

Jim Grant

Jim Grant saw the issues at Lucent when it was a Wall Street darling, but he was early. I don’t find early to be such a horrible thing, if you’re proven right (though if you’re levered up this can be a problem. I’m never levered up.)

The book is not perfect, and not comprehensive - it covers a narrow (but extremely heavy, like a black hole) slice of the pie, although it briefly does identify the main cause of our problems then and now:

Greenspan he viewed as almost beneath his contempt, which was saying something. "I think Alan Greenspan will go down as the worst chairman of the Federal Reserve in history," he'd say, when given the slightest chance. "That he kept interest rates too low for too long is the least of it. I'm convinced that he knew what was happening in subprime, and he ignored it, because the consumer getting screwed was not his problem. I sort of feel sorry for him because he's a guy who is really smart who was basically wrong about everything."

So many great quotes and insights in The Big Short, which I did several long threads of on Twitter (now lost due to the insanity there)…

I also loved the movie. I was surprised how ‘accurate’ it was allowed to be.

In the end, the bad guys won. (As in 2020.)

We were presented with the self-serving lie that we had to make Lloyd Blankfein and John Mack billionaires or else our credit cards wouldn’t work.

A lot of Americans were radicalized by the bailouts - something the MSM still doesn’t understand.

“When was I radicalized?”

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