Cash, Jobs & Hope
Plus, gold climbs to 9-month highs, commercial real estate teeters and Googlers get the sack...
Joel Bowman, checking in today from Buenos Aires, Argentina...
We used to have Johnny Cash, Steve Jobs and Bob Hope... now we have no cash, no jobs and no hope. Let’s just hope Kevin Bacon doesn’t die...
~ Popular “dad joke”
We’ll get to the jobs market in a second, dear reader... but first, a quick recap of the past week in the markets, where the price action was a bit of a snooze.
Stocks rallied Friday to pair losses for the week. The Dow rose 330 points for the session, or 1%. The S&P 500 advanced 1.9%. The Nasdaq finished 2.6% higher.
The major indices were mixed for the week, with the Dow and S&P 500 down 2.7% and 0.6% respectively, each breaking two week winning streaks. The Nasdaq, helped along by strong gains from Netflix and Alphabet, finished higher by 0.55%.
About those mega cap tech darlings...
Netflix (down roughly 50% from its all time high of $690 back in late 2021) missed quarterly earnings estimates... and proceeded to rally 8.5%.
Alphabet (Google), meanwhile, announced it would lay off 12,000 employees...and promptly jumped 5%.
Hmm...
In other news, it was a good week for gold. The Midas Metal flirted with the $1,940/oz mark this morning and was last seen trading around in the $1,920s.
Oil (WTI) remains over $80/barrel.
Oh, and Bitcoin, perpetually eulogized by anyone who can hold a pen (and many who can’t), is back over $23,000. The Big Dog of the crypto world is up almost 40% year to date.
But let’s return to the jobs market. In some ways, it’s the one sector of the economy that seems to have held up pretty well... at least so far. But is all as rosy as it seems?
As usual, Bonner Private Research’s macro analyst, Dan Denning, is hard on the case. Here he is, chiming in from his (presumably frozen?) bolthole up in Laramie, Wyoming...
What else is it going to take for Wall Street to realize that the path of least resistance in 2023–the new Primary Trend–is for higher interest rates and lower stock prices? It was a boring week, in terms of price action. But all the macro data–retail sales, industrial production, manufacturing output–were weak. All pointed to a recession.
Only the labor market has refused to turn negative. And even that is looking shaky. Microsoft announced plans to fire ten thousand people this week. Google sent out a note to ‘Googlers’ saying it would cut staff by twelve thousand. CEO Sundar Pichai said that the company had ‘hired for a different economic reality than the one we face today.’
But the ‘different economic reality’ is one with persistently high structural inflation (3-4%), deflating stock market and real estate bubbles, and a global world currency order slowly moving away from the US dollar. This journey will take years. Yet for now, the bond market isn’t buying it. Have a look below.
Three month US government bond yields closed at 4.63% today. The 10-year closed at 3.48%. That inversion—where short-term yields are higher than long-term yields–is now over 100 basis points. And as you can see on the chart, every time that particular yield curve inverts, a recession follows.
The 10-year yield is almost a full percentage point below the Fed’s target policy rate of 4.5%. That means the bond market thinks the Fed has tightened too much into a recession. The Fed keeps telling anyone who will listen that rates are headed over 5% this year and will stay there for a while. Who’s right? Who will win the fight? The bond market or the Fed?
The important thing to remember is that in previous recessions, the stock market begins to fall AFTER the Fed cuts rates. The Fed isn’t even done hiking yet. That means both punches–the recession and the fall in stock prices–haven’t even landed on the bull’s jaw yet. They will. Duck. Bob. And weave.
Meanwhile, BPR Investment Director Tom Dyson has his eye on the commercial real estate market, where he’s beginning to see more signs of economic distress. Here’s a snippet from his January Report, available to members here...
This week, the Chicago Sun Times reports that the Chicago Board of Trade Building, an iconic 44-story art deco high rise in Chicago’s financial district, has fallen into delinquency and has reverted to the mortgage holder. The owners didn’t even bother going through the foreclosure process. They just handed back the keys. The building was purchased for $151m in 2012 and had a mortgage of $198m on it.
The entire commercial real estate industry operates at 90% leverage. What do owners do when an asset appreciates in value? They borrow more money against it, as the owners of this building must have done. Then, because owners always seek to maximize leverage, any significant fall in property values ensures huge swathes of the industry turns into negative equity.
An article in the San Francisco Chronicle this week reports that San Francisco’s largest landlord, Veritas, has just defaulted on a $448m loan. The loan is secured by a portfolio of 1,734 rent-controlled units in 62 buildings across San Francisco.
Here’s another story, from Globe St, published yesterday. A company called Chetrit Group from New York is looking to sell a portfolio of 43 buildings in order to pay off a floating rate $481m loan that it can no longer afford.
Are these stories just random misfortunes or are they the tip of an iceberg that hasn’t been revealed yet? I’m inclined to think it’s an iceberg, but we’ll have to wait and see...
You can stay up to date with all of Dan and Tom’s research and investment analysis by joining Bonner Private Research today. Members enjoy twice weekly updates (from Tom on Wednesdays, Dan on Fridays), plus monthly reports, private Zoom calls with Bill’s network of money managers and some other bells and whistles besides. It’s not quite as cheap as a Netflix subscription, but we reckon it’s more than worth it. Find a membership program that works for you, here...
And now for Bill Bonner’s missives from the past week...
Plus more from the Fatal Conceits Podcast…
And that will do for another Weekend Wrap, dear reader. Join us again tomorrow for your regular Sunday Session, where we’ll check in on our Dear Leaders up in Davos and see what the good and the righteous have in store for us mere mortals next.
Until then...
Cheers,
Joel Bowman
As a 40 year commercial real estate broker and investor, Tom’s comments relative to the industry operating with 90% leverage is patently false! Perhaps large institutional REITS can obtain higher loan to value ratios, but typical underwriting requires a minimum of 30% equity often times more depending on the asset and NOI.
Certainly there are investors who achieve higher leverage, but those provide the value investors the opportunities to pick up the pieces when they go bust.
Clearly like any asset class real estate is wrought with malinvestment for the same reason equities, cryptos and bond markets. It Starts with paying too much for the asset to begin with, ignoring the warning signs that are usually in plain sight and then talking themselves into it being a good investment.
To borrow one of my favorites from Robert Ringer: “Hyping oneself is toxic, believing one’s own hype is deadly”!
While I don’t disagree that real estate is facing headwinds with a higher rate environment, it is not on the edge of a cliff as depicted by Tom in last weeks missive. The industrial sector in particular remains robust and properly underwritten real estate investment even in the retail sector offers stable returns.
Long Time Bonner Devotee
TC
Raytown, MO
Just till my skin clears up!
Your statement that the entire commercial real estate market operates with 90% mortgage leverage is not correct. For the last decade, lenders have rarely exceeded or even met 75% leverage.