There are not enough people to repossess all the motorcycles.
For what it’s worth, I put little throwaway jokes, or breaking news stuff, or sometimes links to serious stuff on Substack Notes. There’s no way to directly link to my Notes, but if you go to my profile page, and scroll down a bit, on the right if you click “Notes” (the default is “Posts”) you’ll see them.
Also there likely won’t be any new posts in the next week.
Don’t panic (or rejoice). I’ll likely post some Notes, but no Posts. If you want, scroll through some older posts. Everything before Mid-March is open to everyone.
Maybe even consider subscribing for the price of, what, one avocado-toast a month? And thanks to the 81 million of you who have already subscribed. I appreciate it. Feel free to share any of my stuff - with attribution please - on Substack or Twitter or wherever (hopefully not to mock it.)
“THE STOCK MARKET—the daytime adventure serial of the well-to-do—would not be the stock market if it did not have its ups and downs.”
John Brooks, Business Adventures
Post-Greenspan, the Fed does its best to eliminate the downs, because the top 1% they work for get hurt the most.
“Henry Flagler, in a conversation shortly before he died in 1913, remarked to a friend, “Those men and women there [in Miami] are like boys and girls. They have never been hurt, and they know no fear.” The old tycoon understood that there is always a price to be paid for excessive risk taking and for financial naiveté.”
Christopher Knowlton, Bubble in the Sun
Taxpayers face a bill of more than £200bn over the next decade to cover losses on Bank of England's massive bond buying programme, according to central bank estimates.
So Federal Reserve regulators screwed up - again - and you know what the solution is? Make up more regulations, and give more power to those same Fed regulators.
Asking the Fed to regulate banks is like asking a kid to regulate his parents. It’s not in their nature.
No mention of San Francisco Fed President Mary Daly though. As always, no accountability.
Also released today: FDIC’S SUPERVISION OF SIGNATURE BANK
In the case of SBNY, the bank could have been more measured in its growth, implemented appropriate risk management practices, and been more responsive to the FDIC’s supervisory concerns, and the FDIC could have been more forward-looking and forceful in its supervision
I had a flashback to the regulator coziness with the regulated from the bubble before this bubble, another one where the Fed was asleep at the wheel.
From Neil Barofsky, former Special Investigator in charge of oversight of TARP:
We met with Kashkari the day after the inauguration to tell him about the audit, and beforehand I asked Kevin if he thought that maybe we had misjudged him. If Treasury had decided to probe into how much lending the banks were doing, it might be appreciative that we were going out and painting a more complete picture for them.
Kevin told me he thought the Costa Rican sun must have melted my brain.
He was right. When we told Kashkari about the letters, his response was even worse than Kevin had expected.
“You can’t do this, you can’t,” he warned.
When I asked him why not, he rolled his eyes and snapped back, “Because it will destroy the program.”
“How will it do that?” I asked.
“Banks will run away from it. Your audit will scare them off,” he responded.
I explained to him that it shouldn’t be a shock to the banks that a survey like this was coming. After all, I said, Treasury had already sent its own survey, and a bill that had passed the House that day required even more robust reporting than what we would call for in the audit. In addition, the banking regulators, to varying degrees, had also indicated that they would launch some type of initiative to measure uses of TARP funds.
“It’s different,” [Kashkari] argued. “The banks view you as the TARP special prosecutor. They’re terrified of you. They view their regulators differently. They know them. They trust the regulator who is on site all week with them. You are a lot different than the guy who has a beer with them every Friday night.”
Unbelievable, I thought. He actually seemed to be arguing that the banks’ comfort with their thoroughly captured regulators was a good thing.
We need more Neil Barofskys and fewer Neel Kashkaris.
There are not enough people to repossess all the motorcycles. That was the message from Harley-Davidson Inc., which said Thursday its credit losses in the first quarter were due in part to a shortage of repossession agents…For Milwaukee-based Harley, the repo shortage combined with a decline in retail bike values...contributed to realized credit losses of about $52.6 million in the first quarter for the company’s financial arm
Remember, Harley-Davidson is a finance company.
“In March, the percentage of subprime auto borrowers who were at least 60 days late on their bills was 5.3%, up from a seven-year low of 2.58% in May 2021 and higher than in 2009, the peak of the financial crisis, according to data from Fitch Ratings.”
Companies bought by private equity firms are far more likely to go bankrupt than companies that aren’t. Over the last decade, private equity firms were responsible for nearly 600,000 job losses in the retail sector alone. In nursing homes, where the firms have been particularly active, private equity ownership is responsible for an estimated — and astounding — 20,000 premature deaths over a 12-year period, according to a recent working paper from the National Bureau of Economic Research. Similar tales of woe abound in mobile homes, prison health care, emergency medicine, ambulances, apartment buildings and elsewhere. Yet private equity and its leaders continue to prosper, and executives of the top firms are billionaires many times over.
Why do private equity firms succeed when the companies they buy so often fail? In part, it’s because firms are generally insulated from the consequences of their actions, and benefit from hard-fought tax benefits that allow many of their executives to often pay lower rates than you and I do. Together, this means that firms enjoy disproportionate benefits when their plans succeed, and suffer fewer consequences when they fail.
Remember - Jay Powell is a private-equity guy who was at the Carlyle Group from 1997-2005.
Consider the case of the Carlyle Group and the nursing home chain HCR ManorCare. In 2007, Carlyle — a private equity firm now with $373 billion in assets under management — bought HCR ManorCare for a little over $6 billion, most of which was borrowed money that ManorCare, not Carlyle, would have to pay back. As the new owner, Carlyle sold nearly all of ManorCare’s real estate and quickly recovered its initial investment. This meant, however, that ManorCare was forced to pay nearly half a billion dollars a year in rent to occupy buildings it once owned. Carlyle also extracted over $80 million in transaction and advisory fees from the company it had just bought, draining ManorCare of money.
ManorCare soon instituted various cost-cutting programs and laid off hundreds of workers. Health code violations spiked. People suffered. The daughter of one resident told The Washington Post that “my mom would call us every day crying when she was in there” and that “it was dirty — like a run-down motel. Roaches and ants all over the place.”
In 2018, ManorCare filed for bankruptcy, with over $7 billion in debt. But that was, in a sense, immaterial to Carlyle, which had already recovered the money it invested and made millions more in fees. (In statements to The Washington Post, ManorCare denied that the quality of its care had declined, while Carlyle claimed that changes in how Medicare paid nursing homes, not its own actions, caused the chain’s bankruptcy.)
Carlyle managed to avoid any legal liability for its actions.
Blackstone foresees a 'golden moment' in private credit after bank failures "We believe this could be a historic opportunity for capital deployment [in private credit]," said CEO Stephen Schwarzman.
Great guy, Stephen Schwarzman…
Columbus, Ohio investigative reporter Robert Fitrakis: "If you're gonna get involved in questionable activities, make sure you're a philanthropist, because a lot of people will forgive you."
Just came across this fascinating article on Schwarzman: “The real golden age”, Stephen Schwarzman told Robert Peston in a 2008 interview, “comes when you have a mess. You have economies that are on their back.”
Reminds me of Larry Fink’s comments that “markets like totalitarian governments, where you have an understanding of what’s out there.”
If you remember, this is what happened after the 2008 bailouts:
David Rubenstein has doubled his fortune since 2009. Jamie Dimon has more than tripled his net worth. And Stephen Schwarzman has increased his wealth six-fold.
Same thing post-Covid, except the “Davos billionaires” made way more this time.
The Mao poster here is a nice touch, Stephen.
The company, based in Carlsbad, California, was acquired by H.I.G. Capital, a $55 billion private equity firm, for an undisclosed amount in April 2019.
By the way, in the original NBC article the link to H.I.G. Capital’s web page on the acquisition now returns this:
For fun, do a search for this: “H.I.G. capital bankruptcy.”
As I wrote in 2020, whenever I read about a company going bankrupt nowadays, I search for two words: "Private" and "Equity."
I’m reminded of Thomas Mann’s comment:
there is neither system nor justice in the expropriation and redistribution of property resulting from inflation. A cynical "each man for himself" becomes the rule of life. But only the most powerful, the most resourceful and unscrupulous, the hyenas of economic life, can come through unscathed.
Private-equity firms are the hyenas of today’s financial system.
These are the type of people at the top of private-equity:
David Rubenstein, co-founder of the private equity firm The Carlyle Group, is ubiquitous on the Davos-crowd kleptocracy circuit.
Anyway, THIS is the type of person David Rubenstein promotes:
Melody Wright and Mike Farris Spaces on Florida real estate (starts a couple minutes in). Melody’s substack is here, and Farris has a podcast.
“I think people have a huge misunderstanding about how many rich people we have in this country.”
Much more below…
One of the speakers on that Spaces made a comment about some overpriced home in Florida, saying “That’s not Florida money!” - meaning no local can afford that price. The top employer in town is Publix.
Out-of-Town Moves Remain Popular As High Housing Costs Push Homebuyers to Affordable Areas “…house hunters moving to a new area make up a bigger piece of the homebuying pie than ever. A record one-quarter (25.1%) of Redfin.com home searchers looked to relocate to a new metro in the first quarter. That’s up from 22.8% a year earlier and around 18% before the pandemic.”
Melody Wright wrote this in December 2022: A Storm Brews in Florida, Even After Hurricane Ian The state’s mortgage market faces a litany of challenges exacerbated by extreme weather
In July 2022, the Florida Office of Insurance Regulation placed 27 companies on a watch list due to financial-stability concerns. Florida’s insurer of last resort, Citizens Property Insurance Corp. (which is backed by the state and established by the Florida Legislature to protect homeowners who are unable to obtain coverage in the private market) recently reached 1 million policies [now projected to be 2 million in 2023 - rh] as a result of affordability and coverage concerns...
The state is responsible for a whopping 79% of the nation’s homeowners insurance lawsuits while only accounting for 9% of all claims.…of the $51 billion that was paid out by Florida insurers over the past 10 years, 71% went to legal fees and public adjusters. So, when hurricanes arrive and a homeowner has coverage, a tug of war ensues with insurance providers, with the homeowner left holding the bag until the matter can be resolved, typically through litigation.
This from a month ago:
Florida Gov. Ron DeSantis raised some questions Friday when he suggested that Citizens Property Insurance Corp., the state-created insurer, has “not been solvent” and may be unable to pay all claims from a major hurricane.
Business Insider and Yahoo Finance push some of the trashiest click-bait headlines. This one was particularly annoying.
“Schrodinger's millennial - both too poor to buy a hoom, yet at the same time, buys up all the hooms.”
I would interpret this to mean “First Republic asset sales would pose damage to Goldman Sachs.”
That so much of the recent acceleration in household growth was dependent on headship rate changes, rather than population growth, explains how we could have such a high level of household growth at a time when population growth in the US was hitting hit record lows. In fact, in each of the years 2019, 2020, and 2021, the Census Bureau reported new 100-year lows in population growth.
However, its dependence on headship rate increases also suggests the current surge in household growth is temporary. Headship rates for most age groups have recovered to rates from a decade ago, and with deteriorating affordability for both renters and homeowners over the past year, further gains in household formation may be limited. Additionally, looking back over the decades, headship rate changes have historically had a net negative effect on household growth anyway, lowering it by an average of 200,000 per year since 1990, which further suggests the current period of rising headship rates may be an aberration and not a lasting trend.
With additional increases in headship rates unlikely, population growth will retake its historical role as the main driver of household growth. But population growth has slowed to a near standstill, and it remains unclear when and if it will fully recover. So, although we haven’t felt it yet because of the jump in headship rates and the fact that some of the decline in population growth has been fewer births (which don’t affect household growth), the record low population growth levels will soon be reflected in lower levels of household growth. And these lower levels could be around for a while.
Over the long term, less population growth could also mean future household growth will continue to depend more on driving factors that are less stable and predictable, such as immigration and headship rates and the factors that support them, including changes in incomes and housing affordability. Given that household growth is the largest source of new housing demand, the impact on markets could be significant.
There’s a great 1931 book by Frederick Lewis Allen called, “Only Yesterday.” It is an outstanding contemporary history of the 1920’s (clearly Ben Bernanke never read it). It has a great deal of detail about the Florida land boom of the 1920’s:
A lot in the business center of Miami Beach had sold for $800 in the early days of the development and had resold for $150,000 in 1924. For a strip of land in Palm Beach a New York lawyer had been offered $240,000 some eight or ten years before the boom; in 1923 he finally accepted $800,000 for it; the next year the strip of land was broken up into building lots and disposed of at an aggregate price of $1,500,000; and in 1925 there were those who claimed that its value had risen to $4,000,000. A poor woman who had bought a piece of land near Miami in 1896 for $25 was able to sell it in 1925 for $150,000. Such tales were legion; every visitor to the Gold Coast could pick them up by the dozen; and many if not most of them were quite true—though the profits were largely on paper…
…by New Year's Day of 1926 the suspicion was beginning to insinuate itself into the minds of the merrymakers that new buyers of land were no longer so plentiful as they had been in September and October, that a good many of those who held binders were exceedingly anxious to dispose of their stake in the most Richly Blessed Community, and that Friendly Sun and Gracious Rain were not going to be able, unassisted, to complete the payments on lots…
It began obviously to collapse in the spring and summer of 1926. People who held binders and had failed to get rid of them were defaulting right and left on their payments. One man who had sold acreage early in 1925 for twelve dollars an acre, and had cursed himself for his stupidity when it was resold later in the year for seventeen dollars, and then thirty dollars, and finally sixty dollars an acre, was surprised a year or two afterward to find that the entire series of subsequent purchases was in default, that he could not recover the money still due him, and that his only redress was to take his land back again. There were cases in which the land not only came back to the original owner, but came back burdened with taxes and assessments which amounted to more than the cash he had received for it; and furthermore he found his land blighted with a half-completed development…
By 1928 Henry S. Villard, writing in The Nation, thus described the approach to Miami by road: "Dead subdivisions line the highway, their pompous names half-obliterated on crumbling stucco gates. Lonely white-way lights stand guard over miles of cement sidewalks, where grass and palmetto take the place of homes that were to be...Whole sections of outlying subdivisions are composed of unoccupied houses, past which one speeds on broad thoroughfares as if traversing a city in the grip of death."
Another contemporary book if you’re interested in the topic is Miami Millions, from 1936.
I have been in the industry long enough to have lived through the 80s real estate crash, the dotcom bust, and the great recession. Between possible realignments with work from home, interest rates that are not going down for at least a few more years office is going to be crap for a good while. Soon the bank defaults will start once people cant make their balloon payments and things will begin to get ugly for landlords and business owners.
For what it’s worth, in February 2018 the 5-year inflation expectation was 2.7%. Over the five years since then, (I think understated) official CPI has jumped 21%, about a 3.9% annual inflation rate.
That’s a big difference for the 300 million or so Americans who are really getting slammed by high cost of living. You just don’t see them on CNBC.
50% higher inflation than the end of 2020? Anecdotes aren’t evidence, I get it. Or are they?
This is the spread between the 3-month T-bill yield and the 1-month yield.
It hit what looks to be a record 1.78% on Friday, April 21. The only time it got close to this was when it hit 0.78% in September 2008 (post-Lehman) and in June and August 2007.
Lyn Alden comments:
The 1-month T-bill will likely mature before the U.S. Treasury runs out of cash, whereas the 3-month T-bill faces a possibility of default unless Congress raises the debt ceiling by then. The Treasury market is taking the possibility of a temporary default somewhat seriously.
I’d say very seriously. One-year US credit default swaps are trading at 106 basis points
The Equity Risk Premium
Now, for the first time in about 15 years, there is an alternative.
Speaking of the “Nifty Fifty,” here’s Peter Bernstein in “Against the Gods”:
In the late 1960s and early 1970s, major institutional portfolio managers became so enamored with the idea of growth in general, and with the so-called “Nifty-Fifty” growth stocks in particular, that they were willing to pay any price at all for the privilege of owning shares in companies like Xerox, Coca-Cola, IBM, and Polaroid. These investment managers defined the risk in the Nifty-Fifty, not as the risk of overpaying, but as the risk of not owning them: the growth prospects seemed so certain that the future level of earnings and dividends would, in God’s good time, always justify whatever price they paid. They considered the risk of paying too much to be minuscule compared with the risk of buying shares, even at a low price, in companies like Union Carbide or General Motors, whose fortunes were uncertain because of their exposure to business cycles and competition.
For many real estate buyers who lined up to sip a cocktail and purchase a condo unit at a high-profile launch party, the euphoria is a distant memory…Sahil Jaggi, broker with Re/Max Realtron Realty, recalls the heady days of project launches in Toronto in recent years. He believes many buyers are not sufficiently aware of the risks of buying a unit preconstruction.
“A lot of people who purchased at premium prices were overly optimistic when the market was doing well,” he says. “People are scared because the valuations have dropped. I see a lot of panicking happening.”
…As projects approach completion, some of those buyers are lining up financing from lenders who require an appraisal. In many cases, the appraised value is less than the buyer agreed to pay at the time the agreement was signed.
“They were over-priced to begin with,” Mr. Jaggi says of contracts which reached $2,000-per-square foot for a condo unit…
In one case, the original buyer of a one-bedroom, 648-square-foot unit at 88 Queen Condos paid $810,000 a couple of years ago. The buyer tried to sell the contract in the assignment market for $909,000, then recently dropped the price to $860,000 after 86 days on the market.
But Ms. Wong points out that a buyer can purchase a unit of a similar size in the resale market for about $700,000…Many of the people trying to sell assignments are investors, she says, who could only qualify for a mortgage when interest rates were 1.8 per cent. Some are first-time buyers with no back-up plan now that the Bank of Canada’s benchmark rate is 4.5 per cent.
You pays your money and you takes your chances.
As usual the comments are amusing:
Typical example of the disinformation I used to spread on the Twitter:
History doesn’t rhyme. It repeats exactly.
14-year Weekly S&P 500 Chart, With Massive Federal Reserve Interventions Marked With Band-Aids
Crowning the King of Wall Street by Whitney Webb
In addition to intimate associates of Leslie Wexner, JPMorgan’s Jamie Dimon’s ascent to the highest tier of Wall Street power also depended heavily on the Crown family – whose deep ties to organized crime and the military-industrial complex made them one of the richest, most powerful and most corrupt families in America.