Saturday, October 16, 2021

A New Rant

A new rant just posted at Pacemaker:

Real estate crashes are built into the plan and are not a bug but a feature.  And with every crash, assets are further concentrated at the top of the wealth scale.  Let's look at the last crash.  The end of the boom was signaled Thanksgiving 2006 when Chase and Wells simultaneously (But certainly without collusion.  It's a miracle!)  converted the lines of credit that were an essential part of their mortgage programs into 60-month amortized loans, closing off access to credit for thousands of small businesses.  Why?  Well after spending the boom dead to the world, SEC and DOJ had been politically forced into semi-comatose states and had given Chase and Wells taps on the shoulders.  They hurriedly solidified their LOC positions into conventional loans before throwing a few of their lackeys under the bus the following Spring to placate the regulators.  By then the cat was out of the bag.  But the crash didn't happen.  Because the players still had too much Quatsch on their books, and their shovels were only so big.  They had to find marks to unload it to.  Failing that, they had to find marks to hedge it.  And they had to position for post-crash opportunities.  It took a year.  There was turbulence along the way.  New Century and American Home Mortgage went Chapter 11, a bunch of funds either closed or froze withdrawals, and B of A snapped up Countrywide, ostensibly as a bailout of Countrywide, but really to shore up B of A's balance sheet.  Then the players pulled the plug, and the spring unwound.  IndyMac, Bear, and Lehman folded up; Chase pushed WaMu off a cliff so it could grab its assets and shore up its balance sheet; a bunch of players, but especially Chase and Goldman, broke AIG and the Greatest Balance Sheet on Earth by loading it with rigged CDSs and other hedge positions; the houses that had put enough lipstick on their positions to keep from folding got absorbed, so B of A got Merrill Lynch, and MUFG got Morgan Stanley; and Wells got a seat at the big-boy table by winning the Wachovia sweepstakes.  Then it spread to other industries, and to the rest of the world, and everyone got a nice Mike Tyson square in the face.

And since then?  Let's just say China is not the only bubble out there.  For example, right here in Salt Lake City we've been frantically tearing down commercial property and slapping up 5-8 story apartment and condo blocks.  And the financing makes no sense, even with tax weirdness thrown in.  Rates of return that should only acceptable on government securities, but here they are on real estate.  But with interest rates effectively at zero, I guess anything is preferable.  And with that we can see the game is once again afoot.  Build it, then flip it out in the current inflated market to marks who are desperate for any return above 0%, then sit on your cash and wait for the next crash so you can buy it all back on the cheap.  And are the regulators looking into any of this?  Don't be silly.  They'd rather be looking at every mortgage and rent payment in the country than at which financial institutions have all their money tied up in cash, waiting to throw the switch on the next collapse.  And the grift goes on.

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Friday, August 06, 2021

Speaking of Shills

I just have to shake my head at this flack piece by Dana Peterson, EVP and Chief Economist for The Conference Board.  First a bit about Ms. Peterson.  She was appointed to her position a year ago after doing undergrad and grad in economics (*SNORT*), a stint at the DC Fed, and several years as an economist at Citi.  In other words she has no real-world knowledge of real estate of business and only a selective and pigeon-holed knowledge of finance.  And she's wholly owned by The Powers That Be (TPTB).  As for The Conference Board, it was founded over a century ago by leading industrialists and financiers as the National Industrial Conference Board, and its job was to block labor organization and promote open-shop laws.  In spite of the name change, nothing has really changed there.  It has been declared "a trusted source" by the usual suspects (*COUGH*Chicago Tribune*COUGH*Wall Street Journal*COUGH*) but really just cranks out "research" designed to show that everything is proceeding smoothly and to keep regulators and media from looking into what TPTB are doing at the expense of the rest of us.  Which brings us to this article.

Ms. Peterson's thesis is we're not in a real estate bubble.  First off, she gets the dates of the prior bubble wrong.  In 2005 the bubble was already late-stage, and as I noted in my prior post, it lasted until 2008 due to the machinations of the perpetrators.  Second, she says fraud isn't driving the market increases this time, basic supply and demand are.  This is true in a narrow and frankly sick sort of way.  As she states, there is a percentage of Millennials who are moving into the housing market.  She doesn't state this is a decided minority of Millennials who overwhelmingly into two groups: those who've hit the jackpot and landed stable, well-paying jobs, and those whose parents can boost them (There is of course significant overlap.).  The bulk of Millennials are either scraping by in rentals they can barely afford or are still in the folks' basements (And by the way, there are plenty of folks older than Millennials scraping by with barely affordable rentals, right up to those of us on the cusp of retirement.  But TPTB like to flog us for not having $1,000,000 saved away.  We really do live in a bottomless crock.).

So I don't agree with Ms. Peterson that there is some youth parade driving the market.  The reason is the same as it has been to some extent all the way back to the 70s: There aren't enough stable, living wage jobs to support a healthy single-family residence market.  Since so much of our economy is dependent on that market, we've invented unhealthy ways of keeping it going, such as all the mortgage fraud 15 years ago.  These methods invariably produce bubbles, and the bubbles invariably pop.

I would also note Ms. Peterson is wrong about there being a big change in the mortgage market from fifteen years ago (There is one exception I'll look at below.).  The same banks (or their successors) are at play, the same secondary market, and the same securitization model funneling into REITs.  And if you think Dodd-Frank really makes a difference, I have some oceanfront property in Yuma, Arizona to sell you.

So if the kids aren't alright and we don't have a bunch of mortgage fraud going on, what is driving the market?  The answer actually lies in Ms. Peterson's article.  Fifteen years ago there weren't enough good borrowers, so they were manufactured via fraud.  Lots of creative financing: no down payment, no documentation, high loan-to-value (even over 100%), and variable interest rates everywhere.  As Ms. Peterson notes, the mortgages this time are overwhelmingly conventional.  Now ask yourself who can get these loans?  One group is the fortunate few who have either made it or whose parents did.  The other group is the one really driving this market: corporate landlords.  And that's not good.  Corporate landlords have deep pockets for obtaining financing, and they're using it to snap up single family residences to convert to rentals and older commercial properties to tear down and redevelop into mid-rise apartments and condos.  There are entire housing subdivisions being built out there to be flipped as a package to a corporate landlord, and the entire subdivision will then be rental houses.  So the housing supply is shrinking, which in turn drives prices up, which makes TPTB and their kids the only ones who can afford to buy, causing another shift of assets from ordinary people to the top.  So everyone has to rent, and rents are sky-rocketing as a result.  Bye bye affordable housing.

So what is TPTB's game?  What happens to their investments if only the top 10% can afford to live in them?  Are they really making a sucker's bet?  I don't think so.  I think they believe we've hit End Game.  They know everyone has to live somewhere and they can always count on their pet government entities to bulldoze homeless camps as needed.  I think they believe the next crash, and it will happen, will result in neofeudalism with them as the lords and ordinary people as serfs, exchanging their freedom for some hovel to live in.

So keep putting lipstick on that pig, Ms. Peterson.  But until you have some actual evidence for what you're shoveling, I'm not buying a bit of it.

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Another Post For Idiots To Ignore

As I have noted elsewhere (and many other elsewheres too), I started blowing the whistle on the real estate bubble in December 2005.  The market was too hot, there was obvious fraud, mortgage rates were going up, etc.  I didn't know when the bubble would pop because I had not yet identified the forces driving it, but I figured it had to be soon, say in the next year or so.  Frankly it should have, and I guess I'll relate that tale whilst I am at it.

Thanksgiving 2006 Wells Fargo and JP Morgan Chase froze a pile of business lines of credit and converted them to straight loans with 60-month amortizations.  When I contacted Chase, not one but two EVP/AGCs informed me Chase had done this pursuant to a clause in the LOC agreement that had been fully disclosed.  While the clause did exist, the allegation it had been in any way disclosed was patently false.  I then knew something strange was going on, but I did not yet know what.  It took me awhile to dig up the puzzle pieces and fit them together.  What was happening was that the levels of fraud in the mortgage market had become so obvious it was no longer politically feasible to continue ignoring them, and so the regulators had been awakened from their previously mandated slumbers and were now on the move.  Wells, Chase, Goldman Sachs, and all the other players needed to spread some chicken feed to keep the regulators distracted while they got on with the business of lining up a nice collection of marks (AIG, Bear Stearns, Lehman Bros., pension funds, and mortal schmucks who believed the rating agencies were playing a straight game) to take the garbage off their books.  The regulators pounced on the chicken feed in Spring 2007, which gave the players enough time to keep playing.  And then in 2008 everything conveniently hit the fan.  Wells got a seat at the big-boy table via taking over Wachovia, Chase got a new lease on life via its sandbag takeover of Washington Mutual and its sweetheart takeover of Bear (I imagine Barclays wishes it had gotten a deal like that for Lehman,), those with cash (And in spite of, or more likely because of, all the illiquidity, certain players had piles of cash.) snapped up piles of assets on the cheap (Because after all the purpose of bubbles is to pop them to allow further asset concentration in the hands of Those Who Matter.), and we hit the reset button for the next bubble.  So the evidence indicates the bubble pop was delayed by over a year to protect certain players that had created the bubble in the first place.

Anyway.  In the middle of all this, August 2006 to be precise, Peter Schiff concluded the real estate party was over and things were heading down.  In December he noted the market had peaked the prior December (Now when was it again that I called my shot?) and would crash in 2007.  It's apparent he was just looking at market fundamentals (as was I) and thought the market would behave according to those fundamentals (as did I), having no real knowledge of the market manipulation going on that would stall the inevitable for over a year (knowledge I did not have either).  But unlike me, Schiff became a major talking head and got lots of influence and money.  But I'm not bitter.  At least not much.  Because I can point to Schiff as an example of how even a broken clock is right twice a day.

Because since then he has a record of being spectacularly wrong.  He thinks Medicare should be slashed, demonstrating a fundamental ignorance of how Medicare works, how it could work if expanded, and how it would be better than our current system of no one seeking medical care and when they do they have to file bankruptcy.  He thinks we should replace the current income tax system with either a sales tax (which would be regressive and hit hardest those least able to afford it) or a flat tax (which would be little better).  And in a doozy of pretzel logic, the US went from being a creditor nation to a debtor nation in the 1970s because people stopped saving.  Yes, that must be it.  Let's ignore the October 1973 OPEC embargo that ended the US's energy price advantage that had kept its products competitive around the world.  Let's ignore the resulting recession that destroyed millions of jobs.  Let's ignore that most people had no options allowing them to adapt to this new normal because our entire society was based on urban sprawl and the automobile.  Let's ignore that productivity kept increasing, but instead of any of that gain going to wages, it was all syphoned off to pad corporate profits.  Let's ignore that in spite of the recession, expenses were still going up even though wages weren't.  Let's ignore that families had to get second, third, and fourth incomes to try and make ends meet.  Let's ignore that that didn't work any better then than it does now.  And let's ignore that people stopped saving simply because there was nothing left over to save.  Schiff's positions are designed to keep moving public and private money from all of us to the 1%.  He ought to change his name from "Schiff" to "Shill".

But he must be getting desperate, because with his latest move, he has outdone himself.  He has teamed up with none other than Jim Rickards.  I've noted the credibility, of lack of same, of Rickards's "financial advice" elsewhere.  Now they've partnered up and doubled down.  And what they're selling is no better than ever.  As I've said more times than I care to count, just because you've seen somebody on TV or YouTube doesn't mean you should listen to them.

Wednesday, March 10, 2021

Long, Strange Trip

What a year.  First, I'll admit straight out of the gate I was wrong about having a vaccine in Q1.  The lab folks pulled a minor miracle, and we have several.  I was still right about other things, though: 1) We're at the end of Q1 and have barely made a dent on the number of people vaccinated, 2) there is no end in sight for the mess the economy is in regardless of what the stock market is doing, and 3) always verify claims of expertise.

And of course we have had plenty of messes so far this year.  Our worst was 6 January.  It shouldn't have come as a surprise to anyone, but you must remember that people in general and Americans in particular don't like to notice warning signs.  Everybody was surprised by 9/11 even though everyone knew you could fly a plane into a building without much trouble.  Everyone was surprised by the 2008 recession even though everyone knew what goes up must come down (and had with a vengeance just eight years earlier).  Everyone was surprised by the pandemic even though everyone knows viruses are out there constantly reinventing themselves.  If you refuse to see what's right in front of you, expect to be punched in the nose.  A lot.

Wednesday, May 06, 2020

Beware Experts Who Aren't

Campbell Harvey, finance professor at the Duke business school, is an expert.  He must be, it says so right on his CV.  He also supposedly has a perfect track record for calling recessions.  He just put that record at serious risk.  He thinks the current economic crater will be over by the end of the year.  And he thinks that largely because he believes the world will know by then that we'll have a vaccine for SARS-COV-2 in Q1 2021.

Folks, there isn't an epidemiologist on Earth who believes we'll have a vaccine that quickly.  The good professor may know a lot about business finance, but he knows so little about epidemiology he doesn't even know how little he knows (See Dunning-Kruger Effect.).  I've helped a few biotech companies get started, but that in no way makes me an expert in research pathology.  So the next time some supposed expert starts giving an opinion, do what we do in court (or at least what we're supposed to do in court): Determine whether the opinion fits within the expert's field of expertise.  If it doesn't, you might as well be getting an opinion from the next person you meet on the street.  Or one of my cats.  Probably the brain-damaged one.

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Brighton High School Redux

As I mentioned previously, Brighton High School (Deep Space Brighton) is being torn down and replaced by a generic box.  The process is now well under way, and it really is shaping up to be just the sort of thing you eyes will slide right off of.  This sort of thing has become so pervasive, I have adopted a new standard for architectural aesthetics: the Ruin Test.  When the building falls to ruin, what will the people living then think of it?  Will it still be interesting like the ones we now have in Greece, Egypt, Thailand, or Mexico?  Or will it be something they'll want to scrape off into a dump as quickly as possible?  I have a good idea where all our ugly boxes are heading.  The only question is whether there will be enough landfill space.

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Law Enfarcement

OK, I'm going to pitch in on the general train wreck surrounding us, but first I have to make this comment based on a recent case.  A word of advice to law enforcement people: Before you write up another creative report trying to make the subject of a traffic stop look like the worst thing since Ted Bundy and claiming he threatened you by spinning his wheels and spraying gravel at you, you might want to remember that the days of rear-wheel-drive vehicles are gone and look into the spray patterns of front-wheel-drive.  Otherwise some defense counsel is going to get you on the stand and make you look like an idiot.  A lying idiot.

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Friday, January 17, 2020

A Store Closing That Hurts

Mountain Gear in Spokane is closing.  If you needed technical gear, that was THE place to go.  Now it's gone.  Roskelley and I have had disagreements over a few things, notably the Oregon Episcopal School disaster on Mt. Hood, but we are of one mind here:  The world is about to be a lesser place.

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Thursday, November 07, 2019

New Bankruptcies

So Murray Energy has filed a Chapter 11.  A few points here.  First, anyone connected to the Crandall Canyon Mine Disaster knows that Robert Murray shouldn't be in bankruptcy court, he should be in prison.  That place was one, big, deliberate safety violation, and nine people died.  Second, for anyone who has a lick of sense, this ought to put the lie once and for all to Trump's promise to bring the coal industry back, which is no surprise at all to those of us who have spent the last four decades or so following how well Trump has kept his "promises".  Third, watch out for another big load dumped on taxpayers.  Perhaps the biggest reason corporations file Chapter 11 is to shed pension plans and foist them on the Pension Benefit Guarantee Corporation.  Ordinarily, PBGC can refuse to take over an underfunded pension, but that authority is overcome by a confirmed Chapter 11 plan.  So the PBGC ends up with yet another underfunded pension, and one of two things happens: 1) PBGC cuts benefits down to the funds available, leaving the pensioners impoverished and compelled to seek public assistance, or 2) PBGC gets a special bail-out from Congress.  Either way, the bankrupt company shifts its private debt onto the general public.

Also filing Chapter 11 is EP Energy, one of the biggest players in the Eagle Ford Shale (Full disclosure: I represented EP Energy in the III Exploration II, LP bankruptcy.).  I think it is apparent that everyone in the oil shale play is hurting and the hot money that has been propping it up is cooling.  So is this why gas prices just bumped up?  Doubt it.  EP filed a month ago, and it was already common knowledge then there was trouble in Oil Shale City, so all that should have been factored into prices some time ago.  No, I think it's far more likely, as I've commented before, that gas prices just jumped for no other reason than that they can.  Don't expect gas prices to be affected by anything that happens in that place called Reality.

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Monday, August 05, 2019

More Market Craziness

As I recently blogged, markets are not making sense.  One of the things I noted was gas prices, which are jumping back up a full month before Labor Day and without any change in the threat posturing in the Middle East.  Prices are going up because they just can.  I also commented about the crazy money going into multi-family housing.  This week I learned it's worse than I thought.  The cap rates on these projects are running as low as 4%.  There is much debate about what all goes into a cap rate, but for our purposes it is the annual rate of return an investor expects from an investment.  A high cap rate indicates a risky, volatile, short-term investment.  The investor needs a high rate of return to get its return and quickly flip the investment.  In contrast, a low cap rate indicates a safe, stable, long-term investment.  4% is low.  In fact to get lower, you have to go into the world of government and high-grade corporate bonds.  Serious buy-and-hold strategies with almost guaranteed returns.  Is multi-family construction that stable?  Not hardly.  Which means Mr. Market has a fire hose of money aimed at a sector that can't give adequate returns.  Just like the Dotcom Boom.  Just like mortgage-backed securities.  Just like oil shale and tar sands.  Which means we're just pumping up another bubble.  When people talk about markets, what they are really talking about is marks.  Don't be their next mark.

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