WeBroke
How avoiding the "Big Loss" becomes harder (and more critical) as the years go by...
Bill Bonner, reckoning today from Paris, France...
As predicted, WeWork didn’t work. Bloomberg:
WeWork Goes Bankrupt, Signs Pact With Creditors to Cut Debt
Former high-flying startup WeWork Inc. filed for bankruptcy listing nearly $19 billion dollar of debts, a fresh low for the co-working company that struggled to recover from the pandemic.
The New York-based company said it had struck a restructuring agreement with creditors representing roughly 92% of its secured notes and would streamline its rental portfolio of office space, according to a statement. The Nov. 6 Chapter 11 filing in New Jersey listed assets of $15 billion.
Our main goal is to avoid the Big Loss. Today, we look at what causes it.
The idea of the Big Loss comes from the great Richard Russell. He pointed out that most people make most of their money incrementally, over a long period of time. They earn; they save; they invest. If they’re lucky they end up with a nice little pile of money, but only after they are well into middle age.
The danger is not that they will miss the next great investment opportunity – AMZN, Google, Netflix, etc. Those opportunities are few…and unpredictable. Thousands of new companies emerge. Few survive.
Avoiding the “Big Loss”
The real danger for most people, over the age of 55, is not missing out on some unknown new innovation. Instead, it’s getting whacked by something well-known…that turns out to be untrue.
In the late ‘90s, the threat of the Big Loss came from the faith that people placed in new technology – specifically, in the internet and its spin-off dot.coms. Heavily investing in the sector would be okay for a young person. They usually don’t have much to lose; and the most important thing for them is to learn. The popping of the dot.com bubble provided a lesson they wouldn’t soon forget.
The next Big Loss came in the real estate market. It looked like a sure winner. In 2002, the median house sold for $145,000. By 2007, it was $215,000. In other words, it gained about $15,000 per year. Assuming the buyer put down a 20% deposit, that was a return on cash of nearly 50% per year for 5 years. Smart investors figured out how to leverage it – ‘flipping’ houses themselves, or investing in housing-related industries.
There was a lesson to learn there, too. Over the next 5 years, the median house lost $45,000 in value. The buyer in 2007 would have seen his entire 20% deposit wiped out. As a homeowner, he could hold on for another 5 years…and he would have been okay. Prices came back. But the speculator, flipping multiple houses or buying shares in a go-go mortgage lender, was doomed. In June 2009, in an article cleverly titled ‘Angelo’s Ashes,’ the New Yorker looked back at one of the great mortgage finance businesses and its founder, Angelo Mozilo:
…Countrywide Financial Corporation was regarded with awe in the business world. Fortune published a story in September, 2003, called “Meet the 23,000% Stock,” which said that Countrywide had “the best stock market performance of any financial services company in the Fortune 500, measured from the start of the Great Bull Market over two decades ago.” Shareholders who had invested a thousand dollars in 1982 would in 2003 have more than two hundred and thirty thousand dollars. …
On January 11, 2008, Bank of America announced it would buy Countrywide for four billion dollars in stock—a
sixth the amount of its market value before the crisis began.
That was a loss of 83%.
Bonds Go Bust
The next big opportunity for a Big Loss came in cryptos. A few people got rich – especially those who got out early. Most cryptos were dreamy scams. Pity the poor investor who put his whole wad into them.
And then came a Big Loss in an area that should have offered no loss at all – bonds. An oft-stated allocation rule is that you should subtract your age from 100; the remainder is how much of your money you should have in stocks. Obviously, as you get older the allocation to equities (considered risky) goes down.
The rest, typically, is invested in the safety of bonds. But bonds are less safe, now that the feds have shown themselves willing to ‘print’ their way out of any emergency. That’s why we have no bonds in our own portfolio. Since 2020, the US Aggregate Bond Index is down 17%. After inflation, investors have lost about a third of their value.
US Treasury bonds should be about the safest credit in the whole world. But they’ve been going down for the last 39 months, the longest drawdown in history, so odds are that they will recover in the months ahead. But they are far from safe.
And remember, the Big Loss always comes as a surprise. You think you can depend on…real estate…bonds…stocks? Where will the next Big Loss come from?
Stay tuned…
Regards,
Bill Bonner
Joel’s Note: Avoiding the Big Loss is a large part of the thinking behind BPR’s Doom Index. As our resident macro-analyst, Dan Denning, explains it, “If the Dow/Gold is about when to buy, the Doom Index is about when to sell. Everyone thinks they can get out in time. But avoiding 'the Big Loss' is harder than it looks.”
We caught up with Dan for another Private Briefing last week, when we touched on the WeWork story in relation to the meltdown in commercial real estate. Here’s what Dan had to say on the subject...
I think the one that's most interesting right now [...] and that's office vacancies, which is a really interesting convergence of several things. One, there's a financial element to it because there is a massive correction or impending crash going on in commercial real estate. And part of that is driven by the rise in interest rates from the Fed, that a lot of projects that made sense when interest rates were at 1%, do not make sense anymore when interest rates are at 5%. So there's been a lag between the increase in interest rates and its impact on commercial real estate developers and lenders being able to get their money back.
We think, or at least I think [...] that as those developers try to refinance those projects or reprice them, it doesn't make sense. So you're going to see huge write-offs in the office space, in the commercial estate space. Now the other part of that is two years down the road from COVID, there are still a lot of people who are reluctant to return to the office. And when you add into that what looked like some pretty alarming trends from our urban centers, where people used to take the train into work to work in downtown Seattle, San Francisco, Washington, Boston, Chicago, people don't want to do that for a variety of reasons, one of which is crime. So that's going to change the economics of whether these office buildings make sense.
I think, when we get the next official read on office vacancies, it will lead us to revising our own recent reading, lower. Right now, the latest data we have is from about eight weeks ago. So I think it's probably propping up the current reading on the Doom Index. And I think that also touches on what the consumer's doing. So for example, recently Target reported that discretionary spending by its customers on things like apparel and food even, have declined seven quarters in a row, and that follows the closure of lots of stores by Walgreens, CVS, Rite Aid, these sort of half pharmacy, half retail businesses that are located in a lot of our cities.
So there's some sociological causes for the business performance, and then there's also evidence that consumers, instead of choosing cheaper products, just aren't spending their money at all on those things. So the office vacancy figure is one in particular that I think we'll be paying really close attention to in the next few months.
Everyone’s a genius during a bull market. It’s when the tide goes out, as Warren Buffett used to say, that you get to see who’s been swimming naked. And that’s what the Doom Index is all about... avoiding the Big Loss.
In case you missed it, members can watch our entire conversation by going to the Private Briefings tab at the top of our Substack page, here. If you’re not already enjoying all our paid research, find a membership plan that works for you below and get on board.
"Where will the next Big Loss come from?"
I suspect the next "big loss" will be in cash/cash "equivalents", because the "government" is in the process of blowing up the "dollar", and it will go broke. Not the country, not the government, but the money: the money is in the process of going broke, i.e. becoming worthless. Gradual depreciation aside (chronic inflation since WWII), no one among us has experienced this form of distress. In the 30s, The Great Depression, money became scarce and, therefore, appreciated in value, the opposite of today. Now, with The Great Default at hand, the money will go broke, and anything related to the money will go effectively to zero. The "bitch" of it is that all of us need cash to function on a daily basis; we simply can't bail out of "cash", so a certain amount of loss is unavoidable. We will have to hope that appreciation of hard assets will offset the loss in cash. Hard assets are inconvenient; "broke" is ruinous. Thank your "government", and those who worship at its feet. Best always. PM
Houses have never been an investment. Ever.
We recently sold our home and moved into an apartment. After tallying up (conservatively) what we spent on our home of 27 years, we came up with a ballpark figure of $1.3M spent on that house for renos, maintenance, interest costs, property tax, and "chachkis" - unnecessary things we purchased for the home because we had to fill up the rooms.
After selling the house for 4x what we purchased it for and factoring out all common expenses we would have had to have paid in an apartment (current apartment only thing we pay for is parking and electricity) we would have came out $400k ahead if we had simply lived in an apartment all our lives. Using today's rental prices.
Imagine having invested portions of that $400k over time?
So while houses are great for raising a family (privacy), for hobbyists (who like to fix things - all the time), for people who love to entertain (lots of room in the backyard or in the rec room), and for hoarders (do we really need to keep ALL that stuff?), it all comes with a price tag. And the end realization, that we've been misled all along.
Houses are not investments.