Record Bearishness!!
The "Fed Put" is at whatever market level causes the future jobs at Citadel, Pimco and Blackrock to dry up.
I remember well being much younger and dumber, sitting in the ballroom of an unremarkable Sheraton with a clicker in my hand listening to the latest Cerberus-installed CEO talking about how he just knew the housing market was on the rebound. It was 2009. He asked us to vote, using our clicker, for which year we saw the market coming back - 9, 10, 11 were the choices. My vote was 11 because I was in Finance…
If you use the Case-Shiller national numbers, home prices topped out around July 2006 and bottomed near February 2012.
Speaking of Cerebus…
…the secret unit responsible for Mr. Khashoggi’s killing was beginning an extensive campaign of kidnapping, detention and torture of Saudi citizens ordered by Crown Prince Mohammed bin Salman, Saudi Arabia’s de facto ruler, to crush dissent inside the kingdom.
The training was provided by the Arkansas-based security company Tier 1 Group, which is owned by the private equity firm Cerberus Capital Management.
Mega Landlords Are Snapping Up Zillow Homes Before the Public Can See Them
(May 2021) Cerberus, which manages $53 billion in assets, operates more than 24,000 rentals through a portfolio company called FirstKey Homes. The firm recently borrowed $2.5 billion against a portion of the property portfolio at a fixed rate of 1.99%
For what it's worth, former VP Dan Quayle and former Treasury Secretary John Snow are co-Chairmen of private-equity firm Cerberus, and some of its founders hail from Drexel (remember them?) It's a big club.
“The pandemic was one of the best things that ever happened to Cerberus and the members of its consortium.”
Here comes the FT!
Pension fund Calstrs braces for writedowns in $50bn property portfolio
OK, super. What’s the spin?
Warning from $306bn fund is latest sign that higher interest rates have upended US commercial real estate market
My alternate spin:
Warning from $306bn fund is latest sign that the low interest rates which led to ridiculous US commercial real estate market appreciation are a thing of the past
Some good news from Redfin:
Some bad news from the BLS:
“Rents are falling, but it feels more like they’re just returning to normal, which is healthy to some degree,” said Dan Close, a Redfin real estate agent in Chicago. “It’s similar to the cost of eggs. You can say egg prices are plummeting, but what’s really happening is they’re finally making their way back to the $3 norm instead of $5 or $6. Rents ballooned during the pandemic, and are now returning to earth.”
I can’t wait to get back to normal CPI.
One of my favorite financial writers (going back to the bubble before this bubble) is Charles Hugh Smith. Check him out.
“The Fed has succeeded in inflating a housing bubble that makes the already-wealthy feel even wealthier, but only by throwing the younger generations of potential homeowners under the bus.”
We all know what happened to housing valuations as mortgage rates plummeted and post-pandemic panic-buying swept through the market: valuations skyrocketed, pushing housing affordability to near-record lows. (See chart below of the Case-Shiller Index which shot up from below 100 to 174 in the 2020-2022 bubble mania.)
This was not "market forces"--this was outright intervention by the Federal Reserve and federal housing agencies. As the chart below of mortgage-backed securities (MBS) held by Federal Reserve banks shows, the Fed went from owning zero MBS prior to the bursting of the first housing bubble in 2007-08 to owning roughly 20% ($2.6 trillion) of the entire US mortgage market for conventional single-family homes: ($13 trillion).
Federal agencies such as the Federal Housing Administration (FHA) and Veterans Administration (VA) offer low-down payment mortgages and other incentives. The mortgage-backed securities are guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae, quasi-governmental agencies. The entire state-central-bank financial machinery has worked together to inflate a housing bubble that makes those who bought long ago feel wealthy while making housing unaffordable to younger buyers who don't have the luxury of getting help from wealthy parents.
So the Fed has succeeded in inflating a housing bubble that makes the already-wealthy feel even wealthier, but only by throwing the younger generations of potential homeowners under the bus.
Let’s check out the “Record Bearish Sentiment”:
Hang on a sec! CNBS interviewed 1,002 adults and came up with this:
I figured out which 1,002 adults they surveyed:
Jim Grant interview with Eric Cinnamond, co-founder of Palm Valley Capital Management.
Summing up the Fed’s concern, the Bloomberg article “Defiant Bulls Stand Up to Fed With Trillion-Dollar Stock Rally” noted the sharp increase in asset prices was “fueling an unwarranted easing in financial conditions” that complicated the Fed’s fight against inflation.
Frankly, we’re surprised the Fed is surprised. The Chairman of the Federal Reserve made it very clear that the Fed would backstop financial markets in the case the Fed overtightens and asset prices and the economy experience a hard landing. By reminding investors of the Fed’s “powerful tools,” Chairman Powell was reassuring investors that the “Fed put” hasn’t gone away and it was safe to take risk—the Fed has your back! And for investors concerned about expensive valuations and an oncoming profit recession, get in line or risk being paddled and humiliated in front of your peers!
Fed members also appear confused by the relationship between the Fed’s powerful tools and concerning macroeconomic trends, such as inflation, wealth inequality, and the declining labor participation rate. Chairman Powell recently commented on the labor participation rate, noting rising retirements were contributing the decline. Based on his comments, it appears Powell is unable to connect the dots between the Fed’s powerful tools and retirement-enabling portfolio and home values. Instead, he blames COVID and doesn’t consider the linkage between the Federal Reserve’s bloated balance sheet, asset prices, and labor availability.
I see some hysteria about the money pouring into money market funds, which hold about $5.28 trillion as of April 12. Using Fed data, at the end of Q4 2017 money funds held around $3.12 trillion. If you look at M2, it was $13.962 trillion at the end of 2017 vs. $21.123 trillion or so today.
So, M2 went up 51% and money market assets went up 69%.
Yes, people are moving money into money market funds from banks, and who can blame them? From 2009 through 2016 a 3-month T-bill was yielding basically 0%. Today a 3-month T-bill pays 5.17%!
Banks and the Fed have intentionally screwed savers for most of this century - and for many retail investors, they still do.
I understand that JPMorgan is now an arm of the Fed, but come on. This is on the Chase website today.
I know, the smart Fintwit crowd has moved some into I-bonds or higher paying accounts, but there are many millions of unsophisticated Americans still keeping their investment funds (for investing in food and rent that is) sitting in 0.01% accounts. I refer here for more color.
According to the Green Street Commercial Property Price Index prices are now down by 15%. That’s the largest decline we’ve seen since the GFC.
Total commercial real estate mortgage borrowing and lending equaled $816 billion in 2022, an 8% decrease from the record $891 billion in 2021 and a 33% increase from $614 billion in 2020.
Like many headlines lately, yes, we are a bit off utterly insane recent highs.
They Can’t Even: A Generation Avoids Facing Its Finances
Some tune out bank and credit-card balances, lose track of their spending and rack up debt. Average credit-card debt rose 29% to $5,800 in March from a year earlier for millennials and increased 40% to $2,800 for Gen Z, Credit Karma said. Younger people were also more likely to have paid late fees or taken advances from their credit cards, a survey from NerdWallet found.
Look, I have constantly defended millennials when the media tries to blame them for something. The people I go after 90% of the time are old, white, wealthy men. Bernanke’s 69, Summers’ 68, Biden’s 80, Trump’s 76, Dick Cheney’s 82 etc.
Yes, it IS harder for young people to buy a house than it was 20 years ago.
But come on on. This is embarrassing.
‘James Gay began collecting Crocs during the pandemic at the expense of his other bills.’
If you want to just lie down and let the Blackstone’s and Starwood’s and absurd consumer culture of the world roll over you, if you want to get into $250k debt to get a gender-studies degree, if you want to pay the minimum on your credit card and pay 24% interest to buy shit you don’t need - like fifteen pairs of crocs - that’s your choice, but then don’t complain.
You have to help yourself first by growing up a bit. You don’t need to buy something just because you’d like to have it. If you’re in a hole, at least stop digging.
Opendoor Plans to Accelerate Selling in Recovering Home Market
Opendoor, pioneer of a business model called iBuying, has sold or entered into contract on two-thirds of homes that it acquired during the second quarter of last year, right before a rapid correction in home prices left many of those properties worth less than the company paid to acquire them.
Oh yeah, a pioneer of thousands of transactions that not only screw up society a little bit more than before, but lose money - making it up in volume!
OpenDoor is a poster child for the easy money, reach for yield idiocy Greenspan, Bernanke, Yellen (and Powell, before he woke up) gave us this century.
I can’t wait for all these iBuyers to just shrivel up and blow away.
Proxy adviser ISS has said shareholders should use Barclays’ upcoming annual meeting to question the board over its support of Jes Staley, its former chief executive that directors continued to back despite revelations about his close friendship with deceased sex offender Jeffrey Epstein.
You know who else had a “close friendship” with Jeffrey Epstein for many years but has somehow never been questioned by anyone in the media about it?
Larry Summers.
Anyway - hey, Mohamed El-Erian is on Barclays Board!
And of course former Dallas Fed President Dick Fisher is also rewarded there.
An anecdote from the 1931 book The Moral History of the Inflation by Hans Ostwald. Sounds very familiar.
In 1921, a total of about three hundred million marks had been invested in speculative companies. Assuming that the average deposit was 5,000 marks, there were 150,000 grown adults who had abandoned simple reasoning and basic caution in their desire for quick and effortless riches. The advertisements that the speculative companies put out in droves only spoke. of guaranteed high returns, and certainly did not mention the possibility of a loss. They promised that whoever deposited 5,000 marks would be paid 5,000 marks in two months’ time. Was this a return of capital? No, only the interest. And after two months there would be another 5,000 marks, and then another 5,000 marks, over and over, so that after a year this modest investment would generate a tremendous 30,000 marks in interest. Someone who increased his initial investment to 20,000 marks could count on a guaranteed annual income of 120,000. Who would be stupid enough to keep working if he could get this kind of money! Humanity’s Golden Age had arrived! Some companies were so prudent that they only promised a 300 per cent dividend, and like respectable middle class business men - they warned prospects against 600 per cent returns, since that was far too high an amount to expect...
One of my favorite passages from the excellent book, Dying of Money: Lessons of the Great German and American Inflations. Good investment advice (just not from me).
Industrial stocks, the darling of the inflationary speculation, had a peculiar history. At the height of the boom, stock prices had been bid up to astronomical price-earnings ratios while dividends went out of style. Stock prices increased more than fourfold during the great boom from February 1920 to November 1921. Then, however, shortly after the first upturn of price inflation and long before the inflationary engine faltered and business began to weaken, a stock market crash occurred. This was the Black Thursday of December 1,1921. Stock prices fell by about 25% in a short time and hovered for six months while all other prices were soaring.
The real value of stocks declined steadily because their prices lagged far behind the prices of tangible goods, until for example the entire stock ownership of the great Mercedes-Benz automobile manufacturer was valued by the market at no more than 327 cars. Investors were extremely slow to grasp that stocks were poles apart from fixed obligations like bonds, quite wrongly thinking that if bonds were worthless stocks must be too.
Nearer the end in 1923, relative prices of stocks skyrocketed again as investors returned to them for their underlying real value. Stocks in general were no very effective hedge against inflation at any given moment while inflation continued; but when it was all over, stocks of sound businesses turned out to have kept all but their peak boom values notably well. Stocks of inflation-born businesses, of course, were as worthless as bonds were.
Past inflations should be viewed as episodes of debt default. At the turn of the 4th century BC, Dionysius of Syracuse became the first ruler to debase the coinage in order to reduce his debts. In the modern age, over-indebted governments usually turn to the printing press. After World War One, hyperinflation broke out in several European countries with impossibly large debts whose ability to raise taxes was impaired by civil unrest. The root cause of Germany’s monetary disaster was not the actions of the Reichsbank, says Cochrane, but the insolvency of the Weimar government.
Fiscal theory states that central banks alone cannot stop inflation. Politicians must credibly commit to balance the books. The German hyperinflation only ended after monetary and fiscal reforms put the government’s finances on a sound footing. Not only are high interest rates incapable of arresting inflation, fiscal theory suggests they actually make the problem worse. This conclusion flies in the face of conventional wisdom. Here’s how Cochrane explains it: an increase in the real interest rate – the cost of borrowing adjusted for inflation – means the government must spend more on servicing its debt. This extra fiscal burden is inflationary. Conversely, lower real rates reduce debt-servicing costs and are seen as disinflationary.
On a related note, here’s Chris Cole talking to Mike Green back in April 2021:
They talk about the CARES Act and what the Fed did with the idea of it’s supposed to benefit the individual person on the street. No, it was really benefiting the massive hedge funds in repo markets from forced deleveraging…
They backstopped the liquidity problem, and a lot of people think that's the only problem, but in doing so, they've actually once again kicked the can down the road to a much bigger corporate solvency problem.
The above ties in with what I and Chris Leonard were saying in my posts of the last couple days.
Again, Chris Cole with Grant Williams in November 2020
If they keep doing what they're doing, which is just trying to inject liquidity to solve the solvency problem, further exacerbating the income disparity, we run this 10-standard, 20-standard deviation risk of a breakdown in democracy.
What the has done, in an attempt to grease the gears, they have thrown so much money to solve the liquidity issue that they've made the solvency problem the worst it's ever been in history...and that's not hyperbole…
What they have done is injected so much liquidity, it's created a Frankenstein monster out of the options market that is causing distortions that I don't think we've ever seen before in the interplay between how the options market & the stock market are working together…
If they keep doing what they're doing, which is just trying to inject liquidity to solve the solvency problem, further exacerbating the income disparity, we run this 10-standard, 20-standard deviation risk of a breakdown in democracy.
It’s interesting that the phrase “adjusted for inflation” was (almost) never found in books until the U.S. dollar went off gold entirely…
No brakes ever since. We’ve financialized everything.
(Note that this chart only goes to 2019.)
So I quoted this Patrick Carroll CRE CEO guy the other day, who I hadn’t heard of before, then yesterday I see this:
The Carroll Organization, with a nearly 100-property portfolio worth roughly $7.4B, could be sold in its entirety this year, CEO Patrick Carroll told Bisnow in an interview Thursday.
…and then today I see this:
Things are getting tense in CRE. To be clear, I do not endorse spitting in anyone’s face.
I had to put this on Twitter years ago:
Remember, when I quote someone, I am endorsing every single thing they have ever said, written or done.
Well....nice to see Mr. Potato made out bigly in spite of his mental defect in spelling. His name generally pops up among the unwashed at Trivia Game night.
I have a boomer question on formatting, and a boomer comment. The boomer “question” is actually confusion on your formatting; How can I tell when you’re quoting an article or person, and when you’re writing your own words? I can tell the difference most of the time, but the different formats on the left of your pieces confuse the old man.
The boomer’s comment is that two of the best rock docs (NOT the two best) are on The Rolling Stones, “Gimme Shelter,” arguably the best rock documentary ever, and, “Stones in Exile,” just excellent in general.