"People hate inflation. Hate it." - Jerome Powell
If you're having collateral problems I feel bad for you, son.
"Price stability is the responsibility of the Federal Reserve."
- Jerome Powell, September 20, 2023
People “hate” inflation, and yet we got this:
"I guess the inflation rates for next year and 2023 were also marked up...You’re looking at 2.2% and 2.1%...I don’t think that households are going to, you know, notice a couple of tenths of an overshoot."
- Jerome Powell, September 22, 2001 (just a little low)
Hey, maybe all my work over the past decade is starting to bear fruit:
After the Fed announcement Wednesday (unchanged), Jeff Gundlach came on and said the 10-year had “double-topped,” but it looks like maybe there’s more to it than that:
Note that rates now - including mortgage rates - are basically back to mid-2000’s levels. In effect, we’re finally normalizing 15 years after ‘the GFC’ (Great Depression II).
Note that option-adjusted high-yield spreads are still showing no fear.
Demetri Kofinas explains the root causes of where we are today:
I was also someone that saw dark clouds over the horizon in the way in which the Bush administration was prosecuting the case for the invasion of Iraq. It always seemed to me so obviously not relevant to the war on terror. The war on terror itself also felt like a construct for the concentration of power in the executive. I was terrified in fact, I remember at that time, of the country becoming dictatorial under the Bush administration, and in fact, that was the beginning, I think, of a lot of moves to a much less free world since in this country.
But what I feel like happened in 2003 to speak about populism and the sources of the discontent today is I think in 2003, we broke the international contract. We had an understanding of what America's role was in the world, and as the provider of security for this rules-based international liberal order, we did not legally invade Iraq that satisfied those conditions…
2008 is where we broke the social contract, in my view, and the way in which the 2008, the bailouts were handled, and the inequities that stemmed from the handling of that crisis. And I feel like those two events were seismic in terms of leading to the conditions that have gathered today and that have facilitated the election of Donald Trump and that have led to discontent in the country. And unfortunately, it seems that by and large, the establishment in this country has chosen not to deal with the underlying problem, and instead demonize Trump's supporters.
I'll be honest with you, man, look, I don't want to minimize what happened on January 6th…I just want to point out that my initial reaction when I saw Joe Biden take the podium to talk about this is the greatest assault on our democracy, I was like, excuse me? Excuse me. I don't think so. I actually don't think so. I think 2008 was a bigger assault on it. I think 2003 was a bigger assault on it, and I think that those things were more substantively damaging to this country than anything that happened on January 6th. And not to minimize that, all right? It's just a reflection of where power is and who has power in this country.
“Just switching gears to Ukraine. What’s the opportunity?”
“Just switching gears to Ukraine,” said Morgan Stanley analyst Kristine Liwag, during an investor town hall with the firm. “What’s the opportunity?”
Jay Malave, the chief financial officer for Lockheed Martin, noted that his company is supplying Javelin anti-tank missiles, HIMARS mobile artillery rockets, and PAC-3 air defense missiles, among other missiles and munitions for the war.
Lockheed Martin has “visibility” of orders that include “$10 billion of opportunity,” Malave said. The surging growth, including orders to replenish U.S. military stockpiles depleted by weapons transfers to Ukraine, he continued, means "demand is enduring between, frankly, now to the end of the decade.”
I don't see "Ukraine" - or any other foreign country - listed here among Americans' top concerns:
My chat with Michael Gayed (9/18/23)
VC Bigwig Bill Gurley on Regulatory Capture Good, short, funny overview. Via Dutch Rojas.
“Regulation is the friend of the incumbent.”
“A net loss for society.”
Favorability of Political Figures
“Almost a third of Americans earning $150,000 a year or more say they're living paycheck to paycheck.” According to the SSA, that’d put you in the top 5% of wage earners.
Property taxes for some properties in Cook County have doubled, with around 20,000 properties seeing a hike of 100% or more year-over-year.
Year-over-year % change in insurance premiums, by metro
Collateral Problems: “If you’re sub-40-years old, and have an auto loan, the delinquency rate - 90 days or more - is about 8%, and that’s at full employment. That number is insane.” - Mike Taylor
Mike talks a lot about businesses that are gaining or losing pricing power, and under-40 mega-discretionary consumption going down. I saw this comment which I think is a sign of that:
I have been tattooing full time for 10 years. For the first 5 I worked in a street shop building clientele and working walk ins. Then I had an opportunity and opened a small studio. I stayed steady. Covid hit and it went nuts for two years. Then it pulled back but I stayed booked about 5 weeks out at any given time. It has been perfect for the last year or so. Not too crazy, steady reliable work.
I hadnt had a "work day" that wasnt pre-booked in almost 4 years, outside of last minute reschedules or the occassional no show. The rest of september is booked, but in october, I have one app. This time last year october was booked. I feel like I am going crazy or something.
After years of being a steady working artist, I am back to dragging out the walk in sign? Is anyone else having issues like this? My work is better then when I was booked out 10-12 weeks, yet I have big gaps in my book now.
Idk I am very disconcerted and considering selling my studio and working for someone else again. Idk, I havent been this stressed in years about this work. What is happening?
An Anonymous Bankruptcy Attorney Weighs In
I'm a bankruptcy attorney. I deal with real estate on a pretty regular basis. Foreclosures, refinancing, loss mitigation, buying, selling, etc. I probably do at least 20 consults a month with people dealing with foreclosure.
There's two areas where I'm already seeing the bubble pop. First, my office is seeing a MASSIVE spike in foreclosures. Covid relief programs had a weirdly long impact; we're still well under 2019 numbers for both foreclosures and bankruptcy filings. If the last few months are any indication, we're on a path to quickly get back to pre-covid numbers, if not exceed them.
The other area where I'm seeing a spike is the number of people who simply can't afford their homes anymore. The ARM'S from 2018/2019 are kicking in and people can't float their mortgage payment doubling. I can't speak for every bankruptcy attorney in every district, but there's very little that I can do to fix a mortgage payment that's way outsude of budget. I'm getting more and more cases where I have to say "we can file a case to pause the foreclosure and give you time to sell this house to get some equity out, thats about it."
Now I know there are MANY factors that impact the market, and im not an expert on this area. I do know, however, that inventory has been a big factor in keeping prices high, and a big increase in foreclosure rates and people selling out of desperation would tend to increase inventory.
Edit: I'm getting some pretty aggressive comments so maybe I oversold my position with the title. Let me clarify. I don't think the bubble has already popped; it obviously hasn't. I'm saying I'm seeing strong on-the-ground indications of it heading in that direction. Maybe foreclosure rates will level off at pre-pandemic levels, but the affordability issue (between ARM'S and simple escrow increases on a house that's doubled in value) gives me no reason to believe the foreclosure rate will level off at the historical mean.
Another edit: I'm getting a lot of the same response of "they could just sell the home and never get close to foreclosure. They're dumb if they didn't do that!" Some simple math: Jane buys a house in 2019 for $200k. That house is now worth $400k. Problem is, her monthly escrow is nearly doubled too, so she can't afford the payment anymore with how much other monthly expenses have risen. She could sell her house for $400k and have $200k in cash. Problem is, every suitable replacement home in her area is now also $400k. So if she sells her home and uses that $200k as a down payment, she'll still have $200k in principal in her mortgage, just now with a much higher interest rate.
Hmmm.
”Bill Pulte, the grandson of one of the homebuilding industry's most successful founders, has built a Twitter following of 3.2 million. His cause, he says, is "Twitter philanthropy," or giving money to followers who post about eviction notices, medical or credit-card debt, or their inability to feed their family.”
I saw this posted: How many of you can't afford your own home town where you grew up?, and was reminded of a great 2021 post by PdxSag: What I've Learned the Past Decade
“It seems no matter where you are, the one thing every place in the country has in common is your kids can't afford to buy a house there after they move out, and you can't afford to continue to live there after you retire.”
At the time, I attached this pic to his quote. Seemed appropriate.
I saw this chart posted (from May 2023), and had to check it out. It’s an amazing chart:
Here’s an updated version:
I have to think this has a lot to do with the financialization of everything, offshoring, ZIRP, QE, and an activist Fed.
Interesting that the total wealth of the top 1% relative to the 50th-90th percentile - my simple proxy for ‘middle-class’ - was always lower until 2014.
In 2018 and 2020, when the red line dipped down, QE was ramped up. The top 1% really took off during the Fed's insane post-2019 policies. Maybe this was intentional.
The Dollar
Every time I hear about "the strong dollar" I think to myself, "I'm a great basketball player when I play against 8-year-olds."
"So lower rates forever and not for longer."
- Sara Eisen, September 17, 2019
Today:
The pendulum has swung quite quickly.
Great CRE quote:
”Do real estate the right way. Buy responsibly. Don’t buy because you’re in a 1031, and are a forced buyer. Everyone says 'never be a forced seller’ - well, what’s a buyer in an exchange? You’re a forced buyer. I love those buyers. They have to close, and they pay top dollar, and oftentimes pay more than what their taxes would’ve been.”
“Extend to the End”
During the Great Recession from 2007 to 2012, many CRE lenders were in financial turmoil and to minimize additional loan defaults began a program of “extend and pretend.” Today, it is “extend to the end” and the end refers to when the Federal Reserve will end its interest rate raising program. I believe the Fed will make one more .25% raise in the federal funds rate this year to 5.50% and then it will stand firm for the next few months and begin reducing rates in the first half of 2024. This will create a big boom in CRE investment in 2024 and beyond.
When the Fed begins lowering interest rates in 2024, the CRE industry will boom, and this will be an excellent opportunity to acquire CRE assets including those that have been in distress including office buildings, retail centers and senior housing assets. There will also be an opportunity to acquire defaulted notes on CRE properties. Also, the job market will still remain robust, which will support a growing CRE market.
We shall see. #Bookmark
"The big landlords’ computers are still poring over listings, scanning for houses they can buy and turn into rentals...financing has become expensive even for them, and competition is fierce...for the few homes hitting the market."
AirBnb
“On average, about 75% to 80% of homes, in aggregate - some much higher - are actually whole homes…so when you go search something on AirBnb’s site, for instance, they’re going to say ‘1000+ listings in this area,’ so when you go to search Austin, it’ll say 1,000 plus - it won’t tell you how many. It won’t tell you that there’s 14,387 in Austin, nor do they tell you explicitly that when you search in Austin, you’re only gonna get 300 shown at any time. This is a big kept secret of how many of these short-term rentals are in these locations…people underestimate how much of this is out there.”
Some highlights from Mike Green’s latest:
The growing use of net asset value (NAV) loans, which optically reduce portfolio company leverage by borrowing at the fund level are the latest trick to hide an inevitable repricing of underlying asset values. LPs are being abused…
Meanwhile…
"If it's such a great trade, why are you offering it to me?"
- 𝘛𝘩𝘦 𝘉𝘪𝘨 𝘚𝘩𝘰𝘳𝘵
Nightingale Properties CEO Elie Schwartz took more than $10M of the cash he raised on CrowdStreet that he told investors would be used to buy a massive Atlanta office complex and instead bet it on the recovery of First Republic Bank before it failed…
That Schwartz personally gambled on First Republic with investor funds was the most shocking revelation disclosed on Friday in the ongoing fiasco of the CrowdStreet missing millions, but it wasn't the only new information investors learned on the webinar, hosted by Anna Phillips, the independent manager appointed to take over the two entities Nightingale created to raise cash on the platform.
On the webinar, Lee, a forensic accountant and financial fraud expert, told investors Schwartz used $5.5M of the more than $50M in misappropriated funds on personal and business expenses, including on credit card payments and watches.
Schwartz took $23M of CrowdStreet investor funds to pay dozens of separate third parties, Lee told the investors. Those payments range from small amounts to a $9.4M transaction. The entities weren't identified on the call, and Lee said it was unknown how much of these funds could be clawed back, especially given the expense of litigation.
“You don’t want to spend a lot of money in litigation to get these little funds,” he said.
$9.4 million used to be a lot of money. More on CrowdStreet here, from back in July.
Extend and Pretend
Remember Tides Equities? I’ve mentioned them several times, including here.
After a summer of threatened capital calls, promised investments yanked and watchlisted loans, multifamily firm Tides Equities finally reported some good news.
The Los Angeles-based company headed by Ryan Andrade and Sean Kia said it had secured workouts on several dozen loans, extending maturity dates and cutting interest rates on floating-rate debt.
“It’s the bulk of our portfolio,” Kia said Friday, though he declined to specify the number of workouts or which properties they involved. “Of the ones that need help, effectively all of them have received some sort of loan modification, which is awesome,” Kia added. Tides desperately needed the workouts because its debt payments soared as the Federal Reserve jacked up interest rates, and the firm couldn’t raise rent revenue as fast as it had hoped to on properties across the Sun Belt and Southwest.
As of late August, nearly $1 billion in mortgages backed by 27 Tides rental complexes had been watchlisted, many because cash flow couldn’t cover debt service, according to data from commercial real estate analytics firms Trepp and Morningstar.
The Real Deal was unable to independently confirm Tides’ claims. None of the lenders on the watchlisted loans — Starwood Commercial Mortgage, Ready Capital, MF1 Capital, FS Rialto and Colony Commercial Mortgage — returned requests for comment.
Arbor Realty Trust, which is a lender on a number of Tides loans marked performing in Morningstar, declined to comment on whether it had modified any or was in talks to.
Because Tides debt is securitized, any workouts will eventually be made public in servicer commentary. As of Friday afternoon, none had been reported by Morningstar or Trepp. Kia and Andrade said the loan extensions would push maturity dates back by two to four years.
Their hope is that interest rates will fall, allowing Tides to refinance its loans at more favorable rates. In any event, the workouts push back potential foreclosure actions and give Tides time to complete planned renovations and raise rents — its game plan all along.
Of Tides’ loans packaged into collateralized loan obligations, two-thirds were issued in 2021 and 2022, according to Morningstar data. Most had initial terms of two or three years, meaning they were to mature this year, next year or in 2025.
In the meantime, Tides said it had secured “rate cap relief” on a number of deals. Sponsors with floating-rate loans are required to buy a rate cap — protection against higher interest payments if rates rise above that cap. The catch is that caps expire when the loan does and buying a new one becomes more expensive as rates rise.
Andrade said Tides had locked in six-month rate caps as opposed to 12-month terms on a number of deals. A shorter term would give Tides the option to buy a new cap for cheaper if rates come down in the interim.
There’s a lot of hope in the above article that rates will drop in the next year.
"There isn't anything in the world now that isn't dependent on low rates forever."
- Grant Williams, June 2021
Year to date, about $5.65 billion in commercial real estate loans have been modified with an extension, according to Trepp. Although the term increase varies from loan to loan, the largest share of these extensions, 37%, was for term increases of 1-12 months. That said, more than 20% of modified CRE loans have gone for extensions of 37 months or more, Trepp reported.
Remember Peloton?
Book Review: Tomorrow's People by Paul Morland Stumbled across this and found it fascinating.
On the entire Eurasian landmass, from northwest Europe to southeast Asia, birthrates are either below replacement or rapidly converging to below replacement. India will reach below-replacement birth rates sometime in the next 10 years.
The global exceptions to this trend are sub-Saharan Africa, rural religious whites in Western countries, both urban and rural Mormons, and predominantly urban ultra-Orthodox Jews. The latter has helped the nation of Israel achieve birth rates well above what would be predicted based on its economic and educational development. At over 3 children per woman, Israel is the only quasi-Western-type country that achieves above-replacement birth rates. Notably, its birthrate now significantly exceeds that of all of its Islamic neighbors, which are approaching European levels of fertility…
Small differentials in birth rates can have a disproportionate impact on the future. Morland conducts a thought experiment starting with the world population at the time of Christ, approximately 250 million. Starting with such a population, if every woman had four children at an average age of 25, and all of those children had reached adulthood to become mothers and fathers themselves, then by 500 AD or so the total world population would be over 100 billion. Obviously, this did not happen and certainly could not happen given the famines, pestilence, and violence of the ancient world.
But today, a small founder population could have a disproportionate impact on the future given low infant mortality. We are entering a demographic era of choice, where only those who actually want children are having them. Political scientist Eric Kaufmann, an associate of Morland’s, says the Amish could become a majority of Americans by the 2200. This is perhaps unlikely, though one estimate calculated that the Amish might already constitute something like 1% of white American births. Combine the Amish with other highly pro-natal groups and the future looks very different from the past.
One way to think of the future, in a world of declining population, is as a reopening of the frontier. God has so arranged things that a fully developed economic cornucopia relative to ancient poverty is waiting to be claimed by those who will simply show up for the future by welcoming their own children into the world. The Culture of Death centered on hedonism, self-sterilization, and abortion is erasing secular populations. The Culture of Life will triumph of simple necessity. All of the above-replacement populations are highly religious; none are secular. It seems that only transcendent religious convictions enable mankind to fulfill our most basic duties and escape hedonism when given the choice.
"For 99.99% of the people in this world, your one and only legacy will be your children. When the time is right embrace creating your family fully, joyfully, and with all your and your spouse's energy."
"Compounding" - as marketed by Wall St - is mostly a scam. Too many businesses go out of business or at least fall on hard times from lousy management (examples: 1, 2, 3, 4, 5). Wall St uses survivorship bias to gloss over that inconvenient fact so you'll let them hold onto your money for effectively forever.
However, compound interest is real. You can and should leverage it by investing in yourself with the life and career choices you make from 18 to 28 years old. Not appreciating the power of compound interest in themselves is why people will over-estimate what they can accomplish in 1-2 years and vastly under-estimate what they can accomplish in 10-12 years.
I think that msm reporting on the war could be even worse than reporting on the Fed. I subscribed to Seymour Hersh’s Substack yesterday and it is clear why his work can no longer be allowed in the msm despite his decades-long record in journalism.
“I'll be honest with you, man, look, I don't want to minimize what happened on January 6th…I just want to point out that my initial reaction when I saw Joe Biden take the podium to talk about this is the greatest assault on our democracy, I was like, excuse me? Excuse me. I don't think so. I actually don't think so. I think 2008 was a bigger assault on it. I think 2003 was a bigger assault on it, and I think that those things were more substantively damaging to this country than anything that happened on January 6th. And not to minimize that, all right? It's just a reflection of where power is and who has power in this country.”
Can I get an Amen?