On the week ahead the big items are Treasury Auctions, Fed Beige Book, Fedspeak (including Powell on Friday) and PCE data.
Today: New Home Sales, 2Y Note and 5Y Note
Tue: Home price data, Richmond Fed mfg index, Waller, Goolsbee, 7Y Note
Wed: Inventories, 3Q GDP (2nd), Fed Beige Book, Mester
Thur: Income & Spending, PCE, Jobless Claims
Fri: ISM Manufacturing, Powell speaks
I came across this question on LinkedIn: "Can CRE have value without leverage?" "I ask because there seems to be a lot of people that seem to bifurcate “opportunities” for assets then in a separate breath say subject to debt penciling out. Or can one claim to add any value to the asset beyond being a “core” type investment (hope to buy right then passively manage) if the debt penciling is a requirement?
Or so we live in a world where a decade plus of zero rates just completely obfuscated the real economics of the CRE industry?"
There are obviously a few questions there, but I found the first question regarding the value of CRE of some interest. I won't share my answer with you here (or on LinkedIn), but judging from the answers I saw from professionals on LinkedIn, I'd encourage my readers to reacquaint themselves with Modligliani-Miller's famous Proposition I on Capital Structure Irrelevance: "The market value of a company is not affected by the capital structure of the company." "Consider why this might be true. The operating earnings of a business are available to the providers of its capital. In an all-equity company (that is, a company with no debt), all of the operating earnings are available to the equityholders and the value of the company is the present value of these operating earnings. If, on the other hand, a company is partially financed by debt, these operating earnings are split between the providers of capital: the equityholders and the debtholders. Under market equilibrium, the sum of the values of debt and equity in such a case should equal the value of the all-equity company. In other words, the value of a company is determined solely by its cash flows, not by the relative reliance on debt and equity capital.".....and yes, I know the assumptions that underlie that theory are likely not to hold in the real world and yes, I know the propositions around taxes, etc. My point is simply that it's it worth revisiting MM from time to time.
XTOD: Idiot Lender Chronicles: Part Deux I'd like to begin today's story with a message of hope for all the C students out there. You may find yourself, on a gloomy fall afternoon, thinking, "I'm too dumb and lazy to run a large debt fund. Those jobs are for the smart people." Well, cheer up my downwardly-moble friend. You don't need to pursue a career as a venture capitalist.
With enough hubris, luck, and family connections, you too can run a debt fund. It turns out, much like VC and wealth management, intellect is not the limiting factor....The CEO (who lacks the requisite brain folds to walk my dog) told me, "we'll give you a bridge, and when rates drop in two years, you'll be in great shape." When I suggested the deals needed to work with today's debt, he snorted a little meth and hit me with this gem. "If you aren't underwriting a reduction in rates in two years, you have no business buying anything right now." Assuming he was distracted and misspoke, I asked him to clarify. He doubled down. So, you want me to definitely overpay today because rates might go down in the future? Yes. His suggestion was that if I wasn't underwriting a future rate reduction, I didn't understand capital markets. Which felt rich coming from a guy who's fucking portfolio is upside down. "Hell, all the forward curves are showing as much. That's how you should be evaluating our positions.
Ahhh, yes. The forward curve, a beacon of historical accuracy.
XTOD: Count me as one who thinks the economy will continue to surprise to the upside. Say 5% to 6% nominal (GDP) growth ... keeping upward pressure on long-term yields. Watch my discussion with Meb Faber two weeks ago for a detailed explanation. https://t.co/YsuSf5UrCh
XTOD: I, for one, can sleep a little easier now that the man who is trying to scan every retina in the world has been reinstated at his increasingly powerful artificial intelligence venture, and the people with concerns about the threat to humanity from this technology have been ousted
XTOD: If I buy a bond, the seller "owns" the stuff I offer in payment; I own the bond, a different financial asset. If I make a "deposit" at a bank, the bank owns the stuff I pay over to it; and I now own a claim against the bank, a different financial asset. This shouldn't be hard.
XTOD: Pretty damning essay from a Googler, departing after 18 years “I don't know anyone at Google who could explain what Google's vision is. Morale is at an all-time low” “The clock is ticking. The deterioration of Google's culture will become irreversible”
XTOD: “The quality of your business is directly proportional to the quality of the people you hire which is directly proportional to your character and your ability to cast a clear vision and how they fit in it (not how they help you accomplish yours).”
XTOD: One of the best hacks in the investment field is learning to be happy doing nothing.
XTOD: "Here's the essence of risk management: Risk no more than you can afford to lose, and also risk enough so that a win is meaningful. If there is no such amount, don't play." ~ Ed Seykota
XTOD: “Every investment price, every market valuation, is just a number from today multiplied by a story about tomorrow.” Truth. More in the image. @morganhousel ‘s latest book Same as Ever, has great nuggets filled to the brim. Highly recommend to read.
XTOD: For all of the most important things, the timing always sucks..The universe doesn’t conspire against you, but it doesn’t go out of its way to line up all the pins either. Conditions are never perfect. “Someday” is a disease that will take your dreams to the grave with you. Pro and con lists are just as bad. If it’s important to you and you want to do it “eventually,” just do it and correct course along the way.
https://x.com/mu2myoc/status/1728851268456886312?s=20
https://x.com/biancoresearch/status/1728854841596985586?s=20
https://x.com/BondHack/status/1727598663013142937?s=20
https://x.com/GeorgeSelgin/status/1728674323966329310?s=20
https://x.com/buccocapital/status/1727409252950753462?s=20
https://x.com/AlexHormozi/status/1727019093151392076?s=20
https://x.com/joyofcompoundin/status/1728258363056668883?s=20
https://x.com/TradingComposur/status/1728087953098842134?s=20
https://x.com/GrumpyBlackSwan/status/1727361856363434108?s=20
https://x.com/tferriss/status/1727448662312124563?s=20
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