Stay Alive 'til '25
The courage to abandon your valuation bias...
Toby Keith’s I Love This Bar was released in 2014 right before we all went bat-sh*t crazy. And, if you haven’t heard it, I recommend you listen all the way through it because it’s about inclusion in places where you wouldn’t expect it. It’s about being able to hang at the local watering spot with people who are not like you and enjoy those differences. And, that’s exactly how I felt sitting in Wytheville, VA - included.
No one was talking about politics or social construct issues….no one was shouting….everyone was just being together in their favorite bar after a hard day of work, and they were welcoming. After the song ended I felt comfortable enough to let my guard down and had a wonderful time chatting with everyone.
No, I do not know why the above song has the wrong artist & album cover. It’s Ramsay Midwood.
"Whenever something bad happens, they cave in and they print."
The 2022 Federal Reserve apparatchik salaries have been released to the serfs!
Note that this table EXCLUDES the thousands of inbred monkeys at the D.C. Eccles Building. Bloomberg had to sue to get those numbers a decade ago. Anyone have those figures?
The New York Fed alone had 594 "other officers" averaging about $300k in base salary, plus fat bonuses and juicy benefits. All you need there is someone to push the [Enter] key to buy spoos and bail out their future employers, and foreigners, someone to massage Larry Fink, and a few Twitter virtue-signalers.
Classic June 1999 “value-investor” capitulation quote:
Reading Graham and Dodd "helped give me the courage to abandon my valuation bias."
At first Buyer was bewildered. She still wanted to be able "to make the math work," the way she always had at T. Rowe Price. But she couldn't. By any normal measure, the valuations of these Internet companies were preposterous. So she turned to a surprising source: "I went back to Graham and Dodd," she says. She began rereading her copy of Security Analysis, the classic text written in 1934 by the great value investor, Benjamin Graham, and his partner, David Dodd. After much searching, this is what Buyer found:
"Unseasoned companies in new fields of activity...provide no sound basis for the determination of intrinsic value.... Analysts serve their discipline best by identifying such companies as highly speculative and not attempting to value them.... The buyer of such securities is not making an investment, but a bet on a new technology, a new market, a new service.... Winning bets on such situations can produce very rich rewards, but they are in an odds-setting rather than a valuation process."
Today Lise Buyer covers 13 Internet companies. She has a "buy" rating on 11 of them. Yet she concedes, "I still can't make the math correlate with the stock prices." No matter. She points to the Graham and Dodd quote, which is posted on the wall behind her desk. "Reading that," she says wryly, "helped give me the courage to abandon my valuation bias."
"Who are the largest holders of negative yielding German bonds?
U.S. retirees through their Vanguard 401ks."
Mike Green, 2019
"A 45-degree angle in finance means one thing - fraud."
- Harry Markopolos
Timeline of Harry Markopolos' Investigation of Madoff. Markopolos first reported Madoff to the SEC in May 2000:
How a Financial Pro Lost His House From 2011. Worth reading.
There are many stories these days of people who lost their financial bearings during the housing boom and the crisis that followed, but my story is a bit different from most. I’m a financial adviser. I get paid to help people make smart financial choices…
I felt we could afford around $350,000. We called a real estate agent named Mitch, who had signs on all the bus stops: Talk to Mitch! He picked us up in a gold Jaguar, and suddenly we were looking at houses that listed at $500,000 or more.
It felt a little crazy to be shopping for houses that cost half a million dollars, but my income was growing rapidly. Everywhere I looked, people were being rewarded for buying as much house as they could possibly afford, and then some. There was this excitement in the air, almost like static. I started to think that if I didn’t buy a house right then, I would never be able to afford one.
At moments during our house hunt, I felt in my gut that something wasn’t right. We’d go to open houses for $400,000 homes and see lines of couples in their late 20s — younger than we were — waiting to get inside. I kept wondering where all the money was coming from. How did all these people make so much?
But prices just kept rising, and when people kept buying, that made it seem safer. I knew from my work as a financial adviser that following the crowd could be costly.
But like everyone else, I felt safer in a crowd…
Jeremy Grantham talks about this:
The central truth of the investment business is that investment behavior is driven by career risk. In the professional investment business, we are all agents managing other peoples’ money. The prime directive, as Keynes knew so well, is first and last to keep your job. To do this, he explained that you must never, ever be wrong on your own. To prevent this calamity, professional investors pay ruthless attention to what other investors in general are doing. The great majority “go with the flow”; either completely or partially. This creates herding, or momentum, which drives prices far above or far below fair price. There are many other inefficiencies in market pricing, but this is by far the largest. It is this career risk phenomenon, the fear of not keeping up with your peers or the benchmark within the short time frames that professional investors are inevitably measured, that ultimately can lead to asset bubbles.
Grantham said the above in 2012. Since then - as Mike Green and others have pointed out - the rise of passive index investing has grown seemingly exponentially, which greatly worsens the situation Jeremy describes. Mindless price-insensitive flows now drive the market. I think we may find that works both ways, although their are no circuit breakers on the way up.
"Wall Street is not really about investing. It's about asset gathering... Indexes don't just come about because they're good investments, they come about because it's an opportunity for a management company to gather assets..."
- Steve Bregman, 2020
June 2007: Housing hits plateau “There are categories of homes that are depreciating and there are categories of homes are doing just fine,” said DataQuick analyst John Karevoll. “Right now things are in a state of transition.”"
The national office vacancy rate in Canada climbed in the second quarter to its highest level since 1994, according to a report by commercial real estate firm CBRE. The firm said Tuesday that the national office vacancy rate rose to 18.1% in the second quarter, up from 17.8% in the first quarter. It was the highest level since the first quarter of 1994 when it was 18.6%…
Canadians spent more than $46,000 on average to buy a new vehicle in May, up from $35,000 in 2019…For used cars and trucks, average prices are hovering a little above $35,000, down only slightly from a pandemic high of nearly $40,000…While the average price of a used passenger vehicle has come down from pandemic records, prices remain 20 to 25 per cent above pre-COVID levels…
Auto loans on new cars had an average interest rate of 6.6 per cent in the first three months of 2023, more than double the 3-per-cent low in the third quarter of 2020…The average loan rate for used vehicles climbed to 10 per cent at the beginning of 2023, up from a low of 7.5 per cent in the second quarter of 2021..
The average term length for a loan on a pre-owned car was 73 months in early 2023, up from 69 months before the pandemic.
Canadians are getting six year 10% loans on used cars.
By the count of outplacement company Challenger, Gray and Christmas, about one-third of layoffs announced by companies this year have come from tech firms such as Facebook parent Meta Platforms, where the median employee made $296,320 in 2022.
This is just incredible to me. Half of Facebook’s 80k+ employees make more than $300k??
New York state reported that the average bonus paid to New York City securities-industry employees in 2022 was $176,700
In the USA, according to the Social Security Administration, the “median net compensation” in 2021 was $37,586.03, and 87% of wage earners make less than $100k.
For most Americans, the Facebook and NYC people might as well be David Tepper.
"The final elimination of extra SNAP benefits nationwide in March reduced food and beverage aid by $23B annually."
We've thrown roughly $75 billion so far at Ukraine (officially).
"Ukraine is a mild concern in Scranton...locals say something about the nation doesn’t work any more — inflation is soaring, wages aren’t keeping up, labor shortages appear everywhere, government is dysfunctional & the American dream seems out of reach."
Illinois’ biggest consumer bankruptcy firm DebtStoppers files for Chapter 11 bankruptcy
Records show the law firm received a financial lifeline during the pandemic, obtaining more than $3.8 million in loans through the federal Paycheck Protection Program that Congress launched early in the economic crisis.
The PPP loans were aimed at small businesses that needed help keeping employees on the payroll and later was expanded to also cover some other essential costs. But court filings show Semrad Law was using paralegals and call center workers in Bulgaria while ultimately cutting its U.S. workforce in half. Its Bulgarian vendor, ZenTeli OOD, is partly owned by the two brothers behind Semrad Law.
Debt "pulls forward consumption and pushes back the evidence or the recognition of business failure" - Jim Grant, 2015
More Americans Are Getting Turned Down for Loans, Fed Data Shows
The rejection rate for loan applicants jumped to 21.8% in the 12 months through June, the highest level in five years, according to the latest edition of the Fed survey, which is published every four months. Overall credit applications declined to the lowest level since October 2020.
In the previous survey, published in February before the collapse of Silicon Valley Bank and other US lenders, the rejection rate was 17.3%. The increase since then has been broad-based across age groups, and highest among those with credit scores below 680.
I believe there has also been credit score “inflation” since the last housing bust. As I noted the other day:
“If you look in the U.S., at that particular credit - call it Alt-A in the U.S. - they performed very similar to Prime loans during normal economic times, and then they have the loss characteristics very similar to sub-prime when the economy’s very heavily distressed, and what I would suggest is we’ve taken a substantial bucket of borrowers that have the risk profile of an Alt-A, and we’ve moved them into Prime, and they’re hiding in the bank balance sheets as Prime loans, but they’re not at all. They’re going to have the loss characteristics of sub-Prime if we get into a truly distressed environment.”
Since rich people are the only ones who have sufficient collateral to borrow massive amounts of cheap money, their first access to the money printer allows them to buy and bid up assets in a virtuous cycle. Borrowing begets bidding which begets price appreciation which begets more collateral for borrowing.
Many Americans, including people in my family, use their credit cards for basic necessities. They try to pay off the balance each month, but it is increasingly hard to do so. Those “tiny” credit crunches matter when it comes to paying the big bills, and it is starting to show. Due to all the credit quality gospel singing, 99% of the people in my industry think this is no big deal. This is because they have just been listening to the same hype you have without really looking under the hood.
Crowdfunded Real Estate Deals Unravel as Investor Funds Vanish
Hundreds of regular investors who together put up $63 million to buy pieces of Atlanta and Miami commercial real estate have allegedly seen their funds disappear.
Two deals orchestrated by CrowdStreet Inc., a real estate investment company that crowd-sources funds from relatively wealthy individuals, have fallen apart as investors’ money vanished from bank accounts earmarked to buy equity in buildings, according to bankruptcy court papers.
I think the most amazing thing to me about this latest housing bubble is how expensive almost every area of the country got. I expect ridiculous in California, but Tampa? Then again, I’ve never been to Tampa, so what do I know.
Attention City Officials:
“If you’ve ignored things for far too long, and you haven’t fixed your potholes and your transportation systems, and you tax, tax and tax and now you’ve got crime and all the rest, that is not very conducive to businesses, is it?”
We shall see.
2022 Housing Permits per 1,000 Residents
Homeownership Rate By County
Banks are showing a growing willingness to rework the terms of U.S. commercial real estate loans to prevent defaults, mitigating near-term losses but also masking growing stress in some parts of the market.
How Valuation and Materiality Become Catalysts for CRE Litigation “reduced valuations will likely become the flashpoint for CRE litigation.”
Value Slashed By Almost 90% At Vacant Brooklyn Retail Property The value of the 102K SF retail building at 94-110 Court St. in Brooklyn Heights has dropped from $48.7M in 2013 to just $5.7M in a recent appraisal
Eight years after its sale fetched more than $66 million, the office tower at One South Street in downtown Baltimore sold last month for $24 million, a markdown that could be a barometer for the city’s commercial real estate industry.
Not one major federal agency has in-office attendance above 50%.
At least 40% of registered short-term rentals in Dallas will be banned
“There are these young guys, kind of in that whole Ben Ashkenazy group, spending the big bucks, flying around. They’ve never had to deal with this, they’ve never seen rates go up. So they’re shell-shocked; they don’t know what to do. Nobody wants to buy their properties. I think you’re going to see a lot of really desperate real estate people pretty soon.”
Jeff Greene, 68-year-old real estate billionaire
Assessing the State of the CRE Reset
CRE transaction volumes, which surged to record heights during the pandemic, have fallen dramatically. In May, deal activity fell by 71 percent compared with the prior year. However, some perspective is helpful, as deal volume in May 2022 reached $74 billion, a record amount for the month of May. Still, transaction volume in May 2023 was 55 percent below the cumulative average monthly transaction volume for the five years preceding the pandemic. Either way you look at it, the market is slow right now.
Vacancy Rates
Rent Growth (or lack thereof)
Prices are Falling for All Asset Classes
Seven Takeaways from Preqin’s Guide to the U.S. Real Estate Investment Universe in 2023
“As of May 2023, there were almost 1,400 active fund managers in the U.S. real estate space. That was an increase from 1,338 fund managers active in 2021 and 1,074 active fund managers in 2019, before the pandemic.” A 30% increase in “active fund mangers in the U.S. real estate space” just since 2019? Boo-yah!
“Private equity firm the Blackstone Group remained the most active buyer of U.S. real estate for the past four years, between 2018 and 2022, with 233 deals. Real estate investment firm Faropoint came in second place, with 216 deals. Multifamily-focused investment firm BH Equities (172 deals), publicly-traded industrial REIT Rexford Industrial Realty (167 deals) and investment manager Nuveen Real Estate (140 deals) rounded up the top five dealmakers for the period.”
Blackstone was the buyer in 233 U.S. real estate deals from 2018 to 2022?!
How could they not be in trouble?
Here’s is a great comment from a December 2022 FT article I’d saved:
Where to begin with this mess?
First, with BREIT it doesn't matter how smart their investment team is. When you are that big, you end up just buying the market. Looking at the bar charts of the fund size, most of what they bought was in 2021 when rates were super low and valuations super high. The fact is the market is down. I don't care what Blackstone's nonsense valuations say. In reality property valuations are down materially, and rising rents aren't going to rescue them. Public REIT valuations are showing you what real valuations are likely to look like.
Second, if BREIT redeems at NAV, and NAV is artificially high, that creates an incentive to get out now. Essentially, by jumping ship now you get a peak valuation set by Blackstone's delusional internal valuation team. Not only that, to pay you out BREIT will have to the sell the most liquid, highest quality investments (such as the casino stakes they just sold). The guys who stay in will see their asset pool reduce in quality. This is classic negative selection.
The best way to stem outflows would be to immediately mark the portfolio substantially lower, but Blackstone don't want to do that for reputational reasons ("Sorry, we put a ton of leverage on rate sensitive assets at the top of the market..."). But a gated fund with constant cash calls also is a reputational burden. In other words, Blackstone has a problem.
"If Blackstone REIT is 'mark to myth',
then the venture capital funds are 'marked to fraud' almost, right?"
Just as a point, Blackstone doesn't actually operate any assets. They buy assets and have other operators manage them. And then they take their cut off the top. Other than the diversification benefits, you are generally better off working with an operator directly. I used to work as an operator. Blackstone does NOT have any secret sauce. They do have a big wallet to swing around and their operating structure does allow them to dedicate capital for years at a time (big asset). But other than that, they are at a disadvantage in almost every other way for the asset class they pursue.
Nothing here is ever investing advice. In fact, the single most-bullish thing that can ever happen to a company you are long is if I suggest it may have some problems.
One of the most important figures in Bank of America’s second-quarter earnings report, due Tuesday, likely won’t be included in its main press release. The size of the company’s loss on a huge bond portfolio will probably be tucked into the financial supplement.
The portfolio of so-called held-to-maturity securities, which totaled $625 billion at the end of March, showed a loss of $99 billion on that date. The loss reflects the drop in the bond market since that debt, mostly mortgage securities, was purchased in 2020 and 2021 at historically low interest rates of around 2%…
Based on accounting rules, banks don’t have to reflect losses on securities classified as held-to-maturity in their capital positions. But the economic losses in the Bank of America portfolio are real and would account for a sizable chunk of the $182 billion of tangible equity it had on March 31 even adjusting for taxes.
"One of my jobs during the Covid housing boom was...I would get called in to look at personal finances, and the amount of Tesla-only portfolios I saw was just - it was staggering."
Man Muss Immer Umkehren
Someone sent me this (I think it’s the SPX and the 2 year/10 year note - I’m a caveman remember), and I saw the divergence:
I immediately - and I’m not quite sure what the above chart means - thought of this recent divergence:
I don’t know. Here’s something - US 2-year yield/US 10-year yield and SPX:
3-Month/10-year ratio here:
These yield inversions are very ominous - or rather, they previously have been. That drop above from 2007-2009 was about 50% in the S&P 500. Bigger than it looks.
Adam Taggart and Nick Gerli: “A Coming Surge In Inventory To Drop Home Prices By Up To 35%?” Gerli is not popular with many, but I found this interesting. Back in the mid-2000’s people who warned about the crazy housing market were routinely laughed at and attacked.
"Coffee and a Mike" episode #645 with Daniel McNamara | Talking CRE “If you had a building that was in mid-town Manhattan that was worth $100 million dollars, pre-Covid, but occupancy has dropped from 90% to 50%, well that building is going to be worth a lot less, and that old owner is not going to own that building anymore because he has defaulted on his mortgage.”
5 of the houses I competed for over the last year are now listed as rentals The plural of anecdote is data!
The number of rigs drilling for oil and gas has dropped to about 670 from around 800 at the beginning of the year, with private drillers accounting for roughly 70% of the decrease…The slowdown augurs tepid U.S. crude-production growth for the rest of the year, analysts said.
The Dollar Index
Remember, this is the dollar vs the Euro, a pretend currency, the Yen, which the BOJ is desperately trying to hyperinflate, the pound, which was good as gold until BREXIT ruined everything, and Trudeaucoin.
Best-selling author of “One Nation Under Blackmail”, Whitney Webb, is back to discuss her latest article on the covert moves that are being made by one of the most polarizing figures in recent American history, Erik Prince.
Just another great Webb interview, about much more than Erik Prince.
I don't know what happened in Vegas on October 1, 2017. I do know that I don't believe the official story. For what it’s worth, Here John Cullen and Mike Farris talk about it.
If you’re intrigued, for a deeper dive here’s friend of the show Dave Collum and John Cullen talking about a scenario that - to me - is much more plausible than the official narrative: Part 1 Part 2
If you want to skip all this, I can’t blame you.
"It turns out, one place the casino’s cameras don’t have eyes is the network of hallways inside the Mandalay Bay hotel."
"If you tilt the whole country sideways,
Los Angeles is the place where everything loose will fall."
attributed to Frank Lloyd Wright
Excellent post (and thank you). I fear for any individual trying to sell in Round Rock. I have never, never seen anything like that in my life. Already congested and new-build site after new-build site. Many built to support an Amazon warehouse project that got cancelled. Not good.
Tampa is high priced now because many people are fleeing NYC and other big cities. It's a strange time with people imagining Florida to be well run. It does have good protection for people going bankrupt, do that might motivate some ... Look, a bird!