Five Things You Need to Know: The World Didn't End on Monday
A collection of rants that got me through a wild week
To learn about the origins of Five Things, scroll to the bottom of this piece.
On Monday, the world appeared to be ending.
Financial markets went berserk as something called the "Yen carry trade" unwound with abandon, and supposedly level-headed, sane people made comparisons to 2020, 2008, 1987 and a bunch of other years when everyone’s retirement accounts went into the toilet.
And now at the end of the week, things seem to be OK again.
Markets have cooled, fresh data painted a less dire picture of US employment, and as we wrap up the week, the stock market sat more or less where it closed last Friday.
1) So, what actually happened?
Nothing really, if we’re honest.
The panic started last week when the Bank of Japan nudged up interest rates, catching a bunch of over-leveraged traders offsides which created a massive squeeze that sent the Japanese stock market reeling to its worst two-day stretch in history.
Meanwhile, the Federal Reserve hinted that maybe the economy wasn't as strong as everyone thought, followed by a jobs report which got everyone talking about the R word again (Recession).
This provided cover for tin foil hat types who have been pounding the table that the stock market is overheated and AI is a bubble and the economy is about to collapse from too much government debt to sell without feeling like a chump.
Also, Warren Buffet sold something like $80 billion in Apple stock and now holds more US treasuries than the Federal Reserve.
So over the weekend global financial markets started to crash and Wall Street woke up Monday morning deeply in the red.
Markets found their footing and recovered some of their losses Monday, further stabilized Tuesday, started to fall apart again on Wednesday, only to rally Thursday to end the day about where they started a week previous.
And here on Friday everyone is just exhausted and its the summer, time to close up shop and go the beach.
So in short, nothing changed.
There’s still too much government debt, the stock market is still pretty pricey, AI is still a bubble, the geopolitical situation remains fraught, and its still very possible that the US economy will tip into recession.
2) All that about a recession?
I mean, aren't recessions pretty normal?
I think so, but not everyone does.
I had a nice back and forth on the Twitter this week with a well-known economic and political commentator about the value (or not) of recessions.
This is boring, esoteric stuff but the implications for the US couldn't be more important.
I contended that the Fed's dual mandate (inflation & jobs) has given them cover to print money rather than let the natural business cycle run its course.
It started with Greenspan, then Bernanke and now Powell is carrying the torch.
Recessions cull the herd, forcing companies to get lean and efficient. At which point they can hire from a more abundant labor supply and grow sustainably. They reduce malinvestment which leads to excesses, bubbles and fraud.
By inflating our way out of recessions, the Fed has blown multiple asset bubbles, which has driven a wedge between the haves and have nots, exacerbating societal divisions and resentment up and down the socioeconomic ladder.
Not to mention given Treasury free reign to run up $34 trillion in federal debt, which in turn puts massive pressure on the Fed to lower rates again.
Wash rinse repeat.
And guess what: nobody seems to care.
My theory is that either everyone in finance knows that the Fed is just inflating our way out of recession but doesn’t make a big deal about it because asset prices keep going up or …. wait.
I think I just answered my own question.
3) Let me set down the tinfoil hat and come back to the streets, where in San Francisco its still kind of OK to throw rocks through strangers’ windows
I saw a post this week that perfectly captures the vibe in San Francisco right now.
In it, the writer tells a story of a mentally disturbed person throwing rocks through his window and harassing people on the street, without any legal recourse available to him and his neighbors.
But he ends the story with an upbeat tone, succinctly capturing the undercurrents of why San Francisco is back.
"[post-Covid], the folks that stayed were all the people who, despite everything, LOVED San Francisco .... You had to be if you rode out the pandemic here."
Here's my version of the same storyline:
In 2020, buying multifamily in San Francisco was the only business worse than operating a cruise ship.
Unlike the rest of the country, apartments were not renting and no one was buying them for stupid prices with reckless debt.
So I had literally nothing to do.
Fortunately, I had a loyal client who didn't fire me when he definitely should have, and we sat around trying to come up with something useful for me to do.
I gave our pro forma some much needed maintenance, and then as the pandemic deepened and San Francisco emptied out, we got curious if the city would actually die.
Were we actually witnessing the end?
So during the summer of 2020 we wrote a white paper on the current state and future prospects of the office market in San Francisco.
Which we figured would be the bleeding edge if San Francisco was in fact about to fall into the Pacific.
We amazingly got a lot right, despite the fog of everyone being trapped at home.
And one thing we did a lot of in writing the report was talk to brokers. Who also had nothing to do, so were happy to chat.
From all those conversations, one stuck in my head above the rest.
A retail leasing broker who specialized in restaurants and I had the following conversation:
Me: Are you doing any deals?
Him: Not many, but some. A few restaurants actually.
Me: Really. Who is signing restaurant leases right now? I mean, they can't even open.
Him: Die hard San Franciscans. People who love this place. People who are never leaving. People who have seen the booms and busts and know that fortunes are made during the busts.
He told me about a sou chef at a Michelin star restaurant who would have never gotten a shot at her own place without rents being this low.
Without landlords having literally no options.
I never forgot that story, partly because I kept hearing it throughout 2020 and 2021.
I mean, if you were leasing or buying real estate during that time, you were really committed to San Francisco.
You weren't there for just some job, you were there because you really wanted to be there. You believed in what San Francisco could be, unburdened by what it was (sorry, had to).
They were the people setting up businesses, renting apartments at 10-year lows, opening up bars, throwing parties and hosting events when the rest of the world obsessed over the "Doom Loop."
And these are the people whose startups are getting another round of funding, who are out touring office space while the "smart money" is convinced that not only is downtown San Francisco dead forever, but that the office generally is dead.
I can't speak for places like Houston, DC, Baltimore - other cities with urban office problems.
But San Francisco will be back. It always comes back. The trick is you can't always see it coming.
I remember renting space at the Phelan Building on Market Street for $24 per foot in 2008. And then for $30 we subleased space in a Class A building on Sansome.
We had no business being in that building, but there we were, and people were pretty convinced that the world was ending then, too.
It didn't end, and helped along by some pro-growth, pro-business policies, technology companies flocked to San Francisco over the next decade.
Not Silicon Valley, San Francisco.
I see that same mentality seeping into the ultra-progressive politics of a city plagued by mismanagement for decades, and it gives me hope. Business leaders, long wary of mixing it up in politics, are fighting for a better San Francisco that retains its Liberal (capital L) values.
Because San Francisco is worth fighting for.
4) There are a lot of ways to make it in the city
If you’ve made it this far, you can tell that this week is a bunch of rants that helped me navigate the wild week.
So while we’re talking about San Francisco being worth saving, I was reminded of this while trying to wrap up due diligence on an apartment building we are buying right now in the Richmond District.
One reason I love multifamily is that you get to see how people live.
The good, the bad and the ugly.
A long-term tenant wouldn’t provide access to their unit, wouldn’t sign an estopple and no one could find their lease.
We feared the worst.
Finally as due diligence wrapped up, we were able to get into the unit.
And were pleasantly surprised.
The tenants are a friendly couple in their 60s, musicians who play late night gigs around the city and sleep during the day.
They deadbolt their door for privacy, which is why we could never get in.
But we also found out that they’re in a feud with the property manager. Who (according to them), has refused to fix maintenance items brought to his attention.
They showed us the lease and said the manager had a copy too. Which he has never shared despite our repeated requests.
They moved in in 2006, and pay $1,200 per month for a 1-bedroom which would rent for around $3,000 on the open market.
We’ll fix their maintenance issues and get off on the right foot.
Our business plan works if they never move, which is pretty likely:
These are tenants who will leave their apartment horizontally.
And that’s ok.
As a policy matter I oppose rent control - it exacerbates housing shortages and raises the cost of housing for tenants at large.
But I do understand the benefits of musicians, artists, teachers and other non-white collar, non-tech (in the case of San Francisco) tenants being able to afford to live in the city.
These mystery tenant situations are common in SF and other rent control cities, and don’t always turn our so copacetic.
But it’s usually just someone living a life that I can appreciate, even if it’s not for me.
5) Can’t we all just get along?
The story above reinforced my lack of understanding of the motivations of tenants who refuse to cooperate with a property sale process.
This couple for example, could have made everyone’s life a lot easier by just being a bit more responsive.
This behavior creates suspicion of shady activities even if there is none.
There’s no upside to being uncooperative.
Just cooperate and be reasonable - most (not all) owners treat their tenants well if they are treated well in return.
The Story of “Five Things You Need to Know”
During a stint at Minyanville, a financial news and education media company, I was fortunate to work under the tutelage of a talented editor named Kevin Depew. Depew is now the deputy chief economist at consulting firm RSM, and wrote prolifically during the Great Financial Crisis, brilliantly capturing the mood of America during that trying time.
Depew’s "Five Things You Need to Know" was required reading every week for thousands across Wall Street and even down to DC, and covered topics from high finance to macroeconomics to social trends. This series is an homage to Kevin, who patiently mentored me and often quipped "I majored in philosophy, but since none of the big philosophy firms were hiring, I went into finance."