One in Twenty

CPI may go down. The cost of living will go up.

Those who would seek to promote “full employment” by creeping inflation, induced by credit policy, are trying to correct structural maladjustments, which are inevitable in a highly dynamic economy, by debasing the savings of the people. If their advocacy of this course is motivated by concern for the “little fellow,” they should explain to the holders of savings bonds, savings deposits, building and loan shares, life insurance policies and pension rights, just how and why a rise in prices of, say, 3% a year is a small price to pay for achieving “full employment.”

- Former Fed chair William McChesney Martin put it this way in a fall 1955 address, quoting from Allan Sproul, then president of the New York Fed (via Grant’s)

I talked about this most recently in my chat with Michael Farris. Inflation is a form of default (and the most regressive tax.)

“And you, rush on the road and unsheathe your sword!”

Virgil

My interview with Mike Farris

December 2006:

"Federal Reserve Chairman Ben Bernanke appears to be guiding the economy to a soft landing..."

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We knew this was coming:

As usual, the comments are better than the article.

Thanks, Jason

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Ever notice that guys worth $4.7 Billion don't worry much about the cost of living?

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I heard a market guru on a new podcast say, quote, "We haven't had any inflation in 40 years." (He’s in his upper-40’s)

He casually threw out that we need "10% inflation for 10 years," as if that wouldn't destroy what's left of the middle-class. He mentioned GINI ratio without referencing Fed's Cantillon Effect.

I've been hearing more & more podcast guys talking like this lately. It's disgusting.

Any day now…

Ron Paul asking Citadel-intern Ben Bernanke in 2008 how big the Fed balance sheet should be.

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The Scourge of Corporate Financialization: Income Inequity, Employment Instability, Productive Fragility Good article

I’ve written on this topic a lot, for example in threads here and here:

I think that in many cases share repurchases have been very bad for corporations’ long-term health (but great for the top execs).

Here’s Warren Buffett discussing the issue in 1999.

There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated...

If a company’s stock is selling well below intrinsic value, repurchases usually make the most sense. In the mid-1970s, the wisdom of making these was virtually screaming at managements, but few responded. In most cases, those that did made their owners much wealthier than if alternative courses of action had been pursued. Indeed, during the 1970s (and, spasmodically, for some years thereafter) we searched for companies that were large repurchasers of their shares. This often was a tipoff that the company was both undervalued and run by a shareholder-oriented management. That day is past.

Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price…

Buying dollar bills for $1.10 is not good business for those who stick around…

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The perfect gift for your favorite economist.

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In the early years of this century, Bernard Shaw asked the explorer Henry Stanley how many of his men could take over leadership of the party if he, Stanley, were ill. 'One in twenty,' said Stanley. 'Is that figure exact or approximate?' 'Exact.'

The matter of the dominant 5 per cent was rediscovered during the Korean War by the Chinese. Wishing to economise on man-power, they decided to divide their American prisoners into two groups: the enterprising ones and the passive ones. They soon discovered that the enterprising soldiers were exactly one in twenty: 5 per cent. When this dominant 5 per cent was removed from the rest of the group, the others could be left with almost no guard at all.

- Colin Wilson

2020 was the year literally everyone dropped their mask.

It was amazing. And really, really sad. I won't dwell on this one with examples, but there are hundreds. Indeed, literally everyone did it. Prior to 2020 I thought half the people in the world were reliable mutuals, if just needing the right encouragement. Now I think maybe 14% of the people in the world are capable of thinking for themselves, and 2-5% of standing up against petty tyranny.

- PdxSag

Zillow Home Loans offers a 1% down payment option

Getting people into homes they cannot afford is not a good thing, especially since everything the government and Fed have done this century has been to try make house prices higher than they would otherwise be.

On a related note: China “has proposed a number of measures to stimulate housing demand, including reducing required down payments for first-time homebuyers and easing purchase restrictions for buyers of second homes.”

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“People just aren't interchangeable the way he and most of the global elite imagine.”

I liked that quote, via CatGirlKulak. I’m also not a big Zeihan fan (and that’s OK.)

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The amount of people who levered up from a 1 rental portfolio (or just owning their own home) into 10+ rentals in a few short years without experience or capital to survive lean years and are one job loss, bad tenant, or blown pipe away from portfolio default…scary. - okcill

“I have 8 units”

“Lippmann had introduced them to the people inside Deutsche Bank peddling CDOs to investors, and these helpful Deutsche Bank people had arranged for Eisman and his partners to meet the bond market's financial intermediaries: the mortgage lenders, the banks that packaged the mortgage loans into mortgage bonds, the bankers who repackaged the bonds into CDOs, and the rating agencies that blessed the process at each stage.

The only interested parties missing from the conference were the ultimate borrowers, the American home buyers, but even they, in a way, were on hand, serving drinks, spinning wheels, and rolling dice. "Vegas was booming," said Danny. "The homeowners were at the fucking tables." A friend of Danny's returned from a night on the town to report he'd met a stripper with five separate home equity loans.”

Michael Lewis, The Big Short

Apparently the condo is in Alberta.

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I am a novice landlord/investor and I have absolutely no clue what I am doing

I should start by saying I am a novice landlord/investor and I have absolutely no clue what I am doing.

I purchased a 1 bed/1 bath condo in Dec 2022. Mtg+Hoa= $1400. Had to do quite a bit of unexpecred work on the unit to make it ready for rent (re piping the unit and appliances). Unit was finally ready in January. Got it rented out in March after 1 price reduction. Finally settled to rent it out for $1300 (was hoping for $1500 initially).

As you can see, I'm already in the negative every month. Okay, i think. I can swing an additional $100 of personal money each month for the greater goal. But it seems like something needs fixing in that place EVERY MONTH. The AC, a blocked drain, a bad light fixture.

I am trying to be a good landlord. I've always had good landlords. I always address issues in a timely fashion and with quality materials because I do take pride in the unit. The tenants pay in full and on time. They treat the unit extremely well. And so I am even more motivated to do right by them. But I am just so overwhelmed with the constant need for fixes and always being in the red. Everytime a new issue comes up, I just want to sell. I honestly don't know what to do and I feel so overwhelmed by this whole thing. It feels like drowning, which may be dramatic, but it's the closest comparison I have. Everytime I get an email regarding the property a knot forms in my stomach. I don't know if these feelings/situation is normal or if I'm just not cut out for this investment strategy. I don't even know if I CAN sell- it hasn't even been 1 year since I closed.

Some comments:

• Don't forget each monthly payment you make increases your equity by MORE than your $100 loss. You are already creating a profit, you just suffering from negative cash flow.

• I would sell immediately. You lost money the moment you bought this place. You’re not GOING to lose money if you sell. It’s already gone…Prior to purchase, the 50% rule would have been useful in determining whether this place would be a good investment. The rule of thumb states that operating expenses (not counting the mortgage) will be approximately 50% of gross rent) It’s not perfect, but it useful to see if a prospective property is even in the ballpark.

• I'm floored to see people, even with big money, forgetting about the 50% rule and treating their profit as whatever rent minus PITI is. I don't think I've seen anything sold in the last 2 years in the Baltimore market taking that into account. Makes you wonder how much of it is mania and how much of it is too much money sloshing around with not enough investments to chase

• You are not losing $100 a month. Most people focus on cash flow with RE for good reason, it is the number that drives your sustainability. But in reality there are at least two other significant ways you make more in real estate that is not very obvious - Taxes and Depreciation, not to forget appreciation.

• Tenants should be paying for blocked drains and any toilets/plumbing issues aside from broken pipes. Just raise the rent and in your lease specify “rent will increase up to 10% annually to keep up with market rates at owner’s discretion.” Set that expectation from day one and when it doesn’t happen or you only raise 5% they are happy. I just purchased my first duplex too. Bout replace the roof on it in 2 weeks. I have no idea what I’m doing

Reading the comments is interesting. There are many posts like this. Everyone and their mother got into real estate in the last decade, in a desperate reach for yield, thanks to ZIRP (and, as many have noted below, QE had a massive effect on asset appreciation too.) Note how continued appreciation and rent growth is assumed in the comments. Maybe that assumption is correct, maybe not.

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Two companies own over 10,000 single-family homes in Tampa

• “Invitation Homes - Q2’2023 As of July 26th owned 7,989 homes in Tampa and increased their average rents by 9.3% YoY, bringing their quarterly revenue from Tampa rentals to $52.7 million, up $4 million from the same quarter last year.

• American Homes 4 Rent - Q2’2023 Owned 2,806 homes in Tampa, increasing their average rental rate by 9.1% YoY from Q2 2022

• they added another 61 homes in Q2'2023

• they have an additional 164 Tampa homes in their pipeline planned to be purchased and converted to rentals by the end of this year.”

There's a reason historically massive apartments and multifamily is where the investment money went. Economies of scale. What's easier to maintain? 8 1000 unit apartment complexes with standardized everything, with shared walls, roof systems, plumbing? Or 2000 individual homes with their own roof of differing quality, expenses, and having to maintain each and every individual systems PLUS travel and logistics complexity that just doesn't exist in multifamily. Investment wise, houses SUCK for maintenance expenses compared to multifamily.

My feeling is that when these start to underperform, either through rent not keeping pace or maintenance costs rising, and the investment money currently flowing into these businesses will look for much greener pastures with better returns.

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I’ve mentioned multifamily “syndications” a few times…to grab a quick definition:

Multifamily syndication is a real estate deal in which several investors combine their funds to buy a property. A sponsor is responsible for locating the deal, coordinating the transaction and funding, and managing the investment once the transaction has been completed.

I came across this post: Do RE syndications seem to behaving more pyramid scheme like?

I’m sure the people running the syndications would disagree.

Oh, speaking of BREIT - friend of the show Phil Bak was on with Meb Faber recently:

Meb: If you look at this last year alone Blackstone’s fund did almost 9%, VNQ as a benchmark did -26%, so there is a 34-percentage point gap last year in performance - and maybe it’s all alpha.

Phil: It’s literally unbelievable

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I also came across this fascinating piece about Brookfield (h/t SM):

Brookfield Real Estate: Narrative Disconnect

Brookfield is requesting that tax assessment valuations be taken down 50%-70% [in San Francisco].

Is the performance of these assets included in the fine core real estate performance cited in BN’s 2Q23 letter?  I doubt it, but who knows?  San Francisco is no longer mentioned in BPY filings.

San Francisco is not alone in being ignored.  London’s still core Canary Wharf has not been a topic of conversation recently, despite making headlines worldwide.  Canary Wharf is likely Brookfield’s single largest real estate asset with a carrying value of $3.2B as of 4Q22. 

I have a feeling that people are not marking CRE assets to market. :)

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30-year Mortgage Rate

I will repeat my very unpopular opinion: the main problem is the price, not the rate.

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This was good: Government Debt Crisis Has Hit U.S. Banks | Bill Isaac, Former FDIC Chair

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Commercial Bank Interest Rate on Credit Card Plans, All Accounts

Credit Card Delinquency Rates still very low

“We experienced an increased rate of delinquencies within the credit card portfolio across all stages of age balances. While we had expected delinquencies to rise as part of our normalizing credit environment, the speed at which the increase occurred for us and the broader credit card industry since our first-quarter earnings call was faster than planned.” - Macy’s CFO

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All Sectors; Total Capital Expenditures, Transactions, YOY % Change

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I did not appreciate as a young man, and I’ll straightforwardly admit that, I did have this arrogance of youth, “Oh, I know everything, and I’ve just gotten this fancy PhD, and I’m so smart.” And we would have board members who were community bankers on there, and I remember like Susan Bies, when she came on the board, and all of us at lunch in the Fed cafeteria, “do you remember what Governor Bies question was this morning? My goodness, she knows nothing.” It’s crazy. We were making fun of these people.

Flash forward, look at the release transcripts of the meetings 2005, 2006 period. While Tim Geithner, and Alan Greenspan, and Ben Bernanke, and everybody are patting each other on the back saying, “Oh yeah, we’re so smart. We’re just doing such a great job running this economy.” Who’s the only person saying, you know what? I’m hearing a lot of disturbing stories from my colleagues in community banks about what’s going on with lending standards around home mortgages, and I’m really concerned about what’s going on. It’s all there in the transcript. She was the only one piping up about this stuff. All those brainiacs who we thought were so smart…

- Marvin Barth with Grant Williams

“Civilization, in fact, grows more and more maudlin and hysterical; especially under democracy it tends to degenerate into a mere combat of crazes; the whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.

Wars are no longer waged by the will of superior men, capable of judging dispassionately and intelligently the causes behind them and the effects flowing out of them. They are now begun by first throwing a mob into a panic; they are ended only when it has spent its ferine fury.”

H.L. Mencken, In Defense of Women