Why is the Fed still buying bonds?
R.I.P. Sam Zell
"There is a major problem with using TIPS-implied inflation expectations as a report card for Fed policy and that is the fact that the Fed, after buying up more than a quarter of the total outstanding, is now the single most dominant force in the market for TIPS! To some degree then the Fed, in managing its TIPS portfolio via QE and QT, is able to write its own report card. And this at least creates the temptation to try to manage inflation more by controlling the narrative than by actually addressing it directly."
Why is the Fed still buying bonds?
And what would rates be under a free-market, without $8.5 trillion of Fed Fund coupons?
QT is a joke.
I mean, come on.
I know the 1-month Treasury yield is odd lately. We’ve had “debt ceiling” nonsense before, but this sort of inversion is wild:
Deutsche Bank pays up to $75mn to settle lawsuit from Jeffrey Epstein accusers
I’m reminded of a great line from William K. Black:
“The whole system weakens itself because it gets caught in this big lie that says we have to pretend that Deutsche Bank is a bank instead of a criminal enterprise.”
"Your problem is that you are trying to understand this as an economic story. Once you look at it as a crime story, you'll get it."
- Matt Taibbi describing the “GFC” to Joe Rogan, May 2018
Ugh. Price-Insensitive Market Cap Weighting Index Investing.
$SPX “equal weight” vs $SPX.
The top 10 (nine actually, since Google apparently takes two spots) S&P 500 Companies make up about 29% of the index.
Sad to hear that Sam Zell died. Brilliant guy. This interview was just a few days ago:
Q: If Sam Zell was sitting at the head of the Fed right now, what would be the next move you would make?
Sam Zell: Raise interest rates…If we don’t stop inflation - it’s a very, very deleterious thing. It robs the purchasing power of everybody. Until 1971, the world was protected from inflation by the fact that we didn’t have fiat currencies, we had currencies that were pegged to the price of gold, and then in 1971 we converted from pegged currencies to fiat currencies, and today there’s nothing backing the U.S. dollar.
I noted a number of Sam Zell quotes over the years…
Zell was prescient as usual in September 2021 with Grant Williams
"Real estate, I think, today is uniquely risk-free in the minds of investors, and history says that’s never been the case, and I wouldn’t vote for that being the case today."
"Well, I mean, what’s going on in the whole world, not just in the United States, is the debasement of currency."
Sam Zell, who amassed a nearly $6 billion fortune with roots in commercial real estate, is slamming WeWork, the office-sharing firm that’s widely expected to go public as early as this month. WeWork, which rebranded itself as the We Company, is not doing anything new, Zell told CNBC on Wednesday.
“I had the privilege of investing in this kind of company once before. As a matter of fact, this kind of company began in 1956,” when office subletting emerged, Zell said in a “Squawk Box” interview.
“Every single company in this space has gone broke,” he said, pointing to WeWork’s IPO disclosure last month of net losses of more than $900 million for the first six months of 2019 on revenues of $1.54 billion.
May 2021: “Obviously one of the natural reactions is to buy gold. It feels very funny because I’ve spent my career talking about why would you want to own gold?...And yet, when you see the debasement of the currency, you say, what am I going to hold on to?”
“I think the Fed screwed up by allowing zero interest rates to go on too long, I think we are just beginning to pay the price for that. It would be nice to say that it would be great if the Fed got lucky. I’ve been around for 50 years and I’ve never seen the Fed get lucky.” - Sam Zell, April 2023
Dealmaker Sam Zell can't make a deal (June 2022)
“At 80 years old, Zell doesn’t need more deals to burnish his reputation or add to his $5.8 billion fortune, as estimated by Forbes magazine. But it’s notable nonetheless that Zell, a creative contrarian who describes himself as a “professional opportunist,” hasn’t found opportunities for the two companies. That’s especially true for Equity Commonwealth, which has been hunting for a big deal since at least 2017 in the industry Zell knows best: real estate.”
“I need to be right seven out of ten times, but more important than my need to be right, I need not to be very wrong.” - Sam Zell, June 2022
Sam Zell in the house. Some April 2023 Zell quotes:
When Blackstone or Starwood or somebody else creates a quote “non-traded REIT,” as far as I’m concerned, the word non-traded means no price discovery.
I think that so far in the real estate space, I don’t think there’s been much opportunity created, and frankly the opportunities won’t get created until the regulators force everybody to mark to market
As far as the overall real estate market is concerned, I’ve been a seller for probably seven or eight years except for a few examples in our public companies. Most everything we’ve done has been done with the objective of liquidating our positions because we couldn’t justify the prices that were being paid for existing real estate.
I mean, here in Chicago, 25% of Michigan Avenue, which was the number one retail space in the city, is vacant. Go to Madison Avenue, New York and take Madison from 52nd to 83rd and the amount of vacancy is alarming. I think they have the same situation in parts of LA.
About six years ago we took over a public REIT that had 12 billion dollars’ worth of assets called Commonwealth. It had 145 assets of which we’ve sold 141. I’ve sold 141 assets. And I don’t have one regret. I don’t have one scenario where I said, “God, I wish I could get that back.” I don’t want any of it back because people paid me prices that I just couldn’t understand.
Some of the best deals I ever made occurred during periods when there was stress.
Great article from May 2020: Doordash and Pizza Arbitrage
That’s the thing about how industries have evolved over the past decade. I know I ascribe ZIRP as the cause of all ills in the world, but this sometimes feels like the greatest ZIRP story ever told.
You have insanely large pools of capital creating an incredibly inefficient money-losing business model. It's used to subsidize an untenable customer expectation. You leverage a broken workforce to minimize your genuine labor expenses. The companies unload their capital cannons on customer acquisition, while this week’s Uber-Grubhub news reminds us, the only viable endgame is a promise of monopoly concentration and increased prices. But is that even viable?
Sad news about Zell’s passing. Another source of wisdom denied.
I laughed at the obituary - my father only recently hoped that he’d survive long enough to know that Trump doesn’t regain office (he’s an old school republican). I think he’ll survive alright, but I’m not sure Trump won’t be back. Also not sure Biden is the better choice. Are we living in Jean Paul Sartre’s No Exit?
Thank you for the Sam stories. I miss him already.