The subtitle is The Extraordinary Saga of How One Building Broke the World's Toughest Tycoons and the author is Vicky Ward (2014).
Another happy marriage of New York City and real estate history, this time focused on Harry Macklowe's short tenure as owner of the GM Building. As a bonus, it's a story in which the President-Elect also has a fairly major supporting role (largely to his detriment). Lastly, it introduced me to a great quote from one of my investing heroes, Sam Zell:
"As good as [most] real estate guys are as transactionalists, that's how poor they are as conceptualists. That's why they keep getting caught in oversupplies. Because what they do requires such a micro focus, their ability to then go macro is limited."
Highly recommended.
Thursday, November 24, 2016
The Holy Grail of Macroeconomics
The subtitle is Lessons from Japan’s Great Recession and the author is Richard Koo (2009).
After seeing the author interviewed on RealVision TV, I decided to pick up his book. He is an economist most well-known for formulating the concept of a balance sheet recession, and then convincingly ascribing it to be the cause of both Japan’s lost decades and America’s Great Depression. What it describes is in the aftermath of a large bubble bursting, balance sheets are damaged – and whereas all classical, mainstream economists assume that economic actors are always profit-maximizing, Koo understands that borrowers prioritize paying down debt in these moments, not further borrowing, and so monetary stimulus holds no weight to turn the economy around until balance sheets are repaired. Therefore, the answer must be fiscal policy to maintain aggregate demand and to avoid a deflationary gap. The government must be the borrower of last resort to keep the economy on a steady plane during these periods.
What are the implications and particular nuances of this theory relative to anything else that gets tossed around?
For starters, it tells us that quantitative easing will not create economic growth, because low interest rates are not an impetus to borrow and invest when the priority is simply to pay down debt. Koo implies that the current global recession is also a balance sheet recession, which might explain why QE has not had the consequences that were hoped for. But I am not sure that his theory offers a complete explanation – specifically, it sure seems like QE has led to another bubble in financial assets, and nowhere do I see an explanation in his theory for why that is happening. Unless we aren’t really dealing with a balance sheet recession.
He distinguishes himself from Keynes in explaining the liquidity trap – which is the effect of zero rates causing bonds and cash to be substitutes for one another. But, Keynes still assumed that economic actors were profit maximizers, and therefore identified the logjam in borrowing to be with the lenders rather than the borrowers. More generally, in contrasting himself to the acolytes of Keynes, Koo understands that the fiscal policy solution is only appropriate for a downturn that qualifies as a balance sheet recession, not just any and all recessions, otherwise government borrowing will crowd out private investors and cause inflation and rates to rise.
With respect to gold, and the idea that the gold standard exacerbated the great depression by preventing the creation of needed reserves, Koo’s theory obviously suggests that where there are no borrowers that the creation of new gold-backed reserves was not the problem – the demand for funds was not there. As a corollary of that point, Koo acknowledges that the Central Bank system requires confidence, and even though the gold standard has been eliminated, it is important that central bankers operate as if such a restraint was still in place.
Overall, another tool and theory to understand the world.
After seeing the author interviewed on RealVision TV, I decided to pick up his book. He is an economist most well-known for formulating the concept of a balance sheet recession, and then convincingly ascribing it to be the cause of both Japan’s lost decades and America’s Great Depression. What it describes is in the aftermath of a large bubble bursting, balance sheets are damaged – and whereas all classical, mainstream economists assume that economic actors are always profit-maximizing, Koo understands that borrowers prioritize paying down debt in these moments, not further borrowing, and so monetary stimulus holds no weight to turn the economy around until balance sheets are repaired. Therefore, the answer must be fiscal policy to maintain aggregate demand and to avoid a deflationary gap. The government must be the borrower of last resort to keep the economy on a steady plane during these periods.
What are the implications and particular nuances of this theory relative to anything else that gets tossed around?
For starters, it tells us that quantitative easing will not create economic growth, because low interest rates are not an impetus to borrow and invest when the priority is simply to pay down debt. Koo implies that the current global recession is also a balance sheet recession, which might explain why QE has not had the consequences that were hoped for. But I am not sure that his theory offers a complete explanation – specifically, it sure seems like QE has led to another bubble in financial assets, and nowhere do I see an explanation in his theory for why that is happening. Unless we aren’t really dealing with a balance sheet recession.
He distinguishes himself from Keynes in explaining the liquidity trap – which is the effect of zero rates causing bonds and cash to be substitutes for one another. But, Keynes still assumed that economic actors were profit maximizers, and therefore identified the logjam in borrowing to be with the lenders rather than the borrowers. More generally, in contrasting himself to the acolytes of Keynes, Koo understands that the fiscal policy solution is only appropriate for a downturn that qualifies as a balance sheet recession, not just any and all recessions, otherwise government borrowing will crowd out private investors and cause inflation and rates to rise.
With respect to gold, and the idea that the gold standard exacerbated the great depression by preventing the creation of needed reserves, Koo’s theory obviously suggests that where there are no borrowers that the creation of new gold-backed reserves was not the problem – the demand for funds was not there. As a corollary of that point, Koo acknowledges that the Central Bank system requires confidence, and even though the gold standard has been eliminated, it is important that central bankers operate as if such a restraint was still in place.
Overall, another tool and theory to understand the world.
Friday, November 18, 2016
Bond Update
The move in interest rates since the election (and really since the low over the summer) has been impressive. There are a whole host of unintended consequences if rates move higher in a world where the stock market is overvalued, economic growth is tepid, debt is in large supply already, and the spigots of fiscal policy seemed poised to be turned on under Trump.
So, with that as context, I decided to look at the charts to determine whether it is safe to say that the 35-year bull market is over. Short answer, until the 10-year bond (as proxy for all bonds) cracks north of 3%, then the downtrend in rates remains intact. With that said, the double bottom (hit almost exactly 4 years apart in 2012 and 2016) speaks to a potential change of course. But, we must wait for confirmation, especially as there are plenty of smart people that I follow who are making the case for even lower rates when the next recession hits.
So, with that as context, I decided to look at the charts to determine whether it is safe to say that the 35-year bull market is over. Short answer, until the 10-year bond (as proxy for all bonds) cracks north of 3%, then the downtrend in rates remains intact. With that said, the double bottom (hit almost exactly 4 years apart in 2012 and 2016) speaks to a potential change of course. But, we must wait for confirmation, especially as there are plenty of smart people that I follow who are making the case for even lower rates when the next recession hits.
Wednesday, November 16, 2016
Swing States
I look at this map from 2015, detailing economic confidence by state, and I think to myself...did Hillary ever have a shot at winning?
Monday, November 14, 2016
More Reaction
Starting with the markets. After Trump won (which wasn’t supposed to happen), the stock market made an impressive move higher (which also wasn’t supposed to happen). The interesting cross-current, though, was how much interest rates moved up as well (in another clear example of how the Fed is not bigger than the market). Part of the “explanation” is that Trump’s anti-regulation, lower tax policy stance, within the backdrop of a Republican-controlled congress, should be good for growth. But, to my thinking, stocks were already very over-valued, and the debt problem did not suddenly go away. If these immediate reactions remain the trend, and don’t reverse, higher rates will have an impact at some point. That I believe.
As for the whining post-election, I chalk it up to my favorite internet meme: “When everybody gets a trophy, nobody knows how to lose.” To be clear (for the millionth time), I am not a fan of Trump, and as much as I do not like Hillary, I still couldn’t hold my nose and vote for the guy. But, any notion that the popular vote is more indicative or important than the Electoral College outcome is just ridiculous. Everybody knew the rules going in. As a result, the candidates campaigned so as to win the Electoral College, not the popular vote. Moreover, I am not even sure that the popular vote outcome is truly informative anyway. Sure, at a minimum, it tells us that the country is highly divided, but we also know that the existence of the electoral college structure in the first place means that plenty of people think that their vote holds very little value (I live in New York City and there was no difference in the election results whether I voted Clinton, Trump or not at all). Just consider that only 53% of eligible voters participated – the non-voters actually won the election by that metric. Therefore, it’s hard to argue that the popular vote tells us anything of import. But, everybody likes to have something to complain about. And in the land of safe spaces, winning the popular vote is something to hang on to.
As for the whining post-election, I chalk it up to my favorite internet meme: “When everybody gets a trophy, nobody knows how to lose.” To be clear (for the millionth time), I am not a fan of Trump, and as much as I do not like Hillary, I still couldn’t hold my nose and vote for the guy. But, any notion that the popular vote is more indicative or important than the Electoral College outcome is just ridiculous. Everybody knew the rules going in. As a result, the candidates campaigned so as to win the Electoral College, not the popular vote. Moreover, I am not even sure that the popular vote outcome is truly informative anyway. Sure, at a minimum, it tells us that the country is highly divided, but we also know that the existence of the electoral college structure in the first place means that plenty of people think that their vote holds very little value (I live in New York City and there was no difference in the election results whether I voted Clinton, Trump or not at all). Just consider that only 53% of eligible voters participated – the non-voters actually won the election by that metric. Therefore, it’s hard to argue that the popular vote tells us anything of import. But, everybody likes to have something to complain about. And in the land of safe spaces, winning the popular vote is something to hang on to.
Wednesday, November 9, 2016
The Day After
Let’s start with the obvious. I took the recent polls at face value and believed that Hillary Clinton would win. As much as I understood the parallels to Brexit, and did not just dismiss out-of-hand that the media was in collusion with the Clintons, I fell for the hype. But, I was wrong. At least I can say that I am not shocked by the result, since I was not the typical consumer who merely scopes the headlines, but does not then read the actual article. So, this outcome was realistic to anyone who understood that you vote your pain. And for many Americans, that meant bucking a system that had left them behind, earning barely enough to subsist. You didn’t have to be a racist or sexist or moron to vote for Trump. The common denominator was frustration and despair.
With that said, despite the histrionics of the election season, I don’t think that Trump will launch a nuclear bomb just because someone says something unflattering. I also don’t think that he is really the man of the people who tapped into the zeitgeist of Midwest blue collar voters in order to win. But he does have a chance to surprise us. I’m hoping that he does.
With that said, despite the histrionics of the election season, I don’t think that Trump will launch a nuclear bomb just because someone says something unflattering. I also don’t think that he is really the man of the people who tapped into the zeitgeist of Midwest blue collar voters in order to win. But he does have a chance to surprise us. I’m hoping that he does.
Tuesday, November 8, 2016
Tick Tock...
I sounded "sad" in yesterday's post, but really I am pretty sanguine about the election. Change is going to come even if the status quo candidate wins today -- and it's going to happen because we can't escape the debt problem in this country. So, to explore the issue a bit, I put together a table of annual U.S. fiscal deficits and the cumulative changes in total outstanding public federal debt since 1960. I think it brings home the point. Enjoy.
| Year | Deficit | Public Debt Fed | ||||
| 1960 | 4.8 | 290.5 | ||||
| 1961 | 10.5 | 292.7 | ||||
| 1962 | 7.2 | 302.9 | ||||
| 1963 | 4.8 | 310.3 | ||||
| 1964 | 5.9 | 316.1 | ||||
| 1965 | 1.4 | 322.3 | ||||
| 1966 | 3.7 | 328.5 | ||||
| 1967 | 8.6 | 340.5 | ||||
| 1968 | 25.2 | 368.7 | ||||
| 1969 | (3.2) | 365.8 | ||||
| 1970 | 2.8 | 380.9 | ||||
| 1971 | 23.0 | 408.2 | Bye-bye gold standard…notice anything about deficits afterwards? | |||
| 1972 | 23.4 | 435.9 | ||||
| 1973 | 14.9 | 466.3 | ||||
| 1974 | 6.1 | 483.9 | ||||
| 1975 | 53.2 | 541.9 | ||||
| 1976 | 73.7 | 629.0 | ||||
| 1977 | 53.7 | 706.4 | ||||
| 1978 | 59.2 | 776.6 | ||||
| 1979 | 40.7 | 829.5 | ||||
| 1980 | 73.8 | 909.0 | ||||
| 1981 | 79.0 | 994.8 | ||||
| 1982 | 128.0 | 1,137.3 | ||||
| 1983 | 207.8 | 1,371.7 | ||||
| 1984 | 185.4 | 1,564.6 | ||||
| 1985 | 212.3 | 1,817.4 | ||||
| 1986 | 221.2 | 2,120.5 | ||||
| 1987 | 149.7 | 2,346.0 | ||||
| 1988 | 155.2 | 2,601.1 | ||||
| 1989 | 152.6 | 2,867.8 | ||||
| 1990 | 221.0 | 3,206.3 | ||||
| 1991 | 269.2 | 3,598.2 | ||||
| 1992 | 290.3 | 4,001.8 | ||||
| 1993 | 255.1 | 4,351.0 | ||||
| 1994 | 203.2 | 4,643.3 | ||||
| 1995 | 164.0 | 4,920.6 | ||||
| 1996 | 107.4 | 5,181.5 | ||||
| 1997 | 21.9 | 5,369.2 | ||||
| 1998 | (69.3) | 5,478.2 | Clinton "Surpluses", but federal debt grows $400Bn…hmmm | |||
| 1999 | (125.6) | 5,605.5 | ||||
| 2000 | (236.2) | 5,628.7 | ||||
| 2001 | (128.2) | 5,769.9 | ||||
| 2002 | 157.8 | 6,198.4 | ||||
| 2003 | 377.6 | 6,760.0 | ||||
| 2004 | 412.7 | 7,354.7 | ||||
| 2005 | 318.4 | 7,905.3 | ||||
| 2006 | 248.2 | 8,451.4 | ||||
| 2007 | 160.7 | 8,950.8 | ||||
| 2008 | 458.6 | 9,986.1 | ||||
| 2009 | 1,412.7 | 11,875.9 | ||||
| 2010 | 1,294.4 | 13,528.8 | ||||
| 2011 | 1,299.6 | 14,764.2 | ||||
| 2012 | 1,087.0 | 16,050.9 | ||||
| 2013 | 679.6 | 16,719.4 | ||||
| 2014 | 484.6 | 17,794.5 | ||||
| 2015 | 438.4 | 18,120.1 | Federal Debt grows $1.4Tn…hmmm | |||
| 2016 | 587.4 | 19,537.4 | ||||
Monday, November 7, 2016
Final Pre-Election Thoughts
My instinct for a long time has been that Hillary would win, and so now we are finally at the finish line where this country will be hoisted by its own petard. And, for that reason, even as I don't support Donald Trump, I am saddened by what seems like an inevitability now. When she wins the election, it will confirm absolutely that there is a class of people in this country who are able to operate and live above the law. That is not up for debate.
There are too many who would say that nothing came out of the of private server issue, but I would beg to differ. People who traffic in confidential information get prosecuted and fined, even when that act was performed without mal-intent. But, in this instance, the next President, who clearly did exactly that, gets away with a job promotion.
And it doesn't even end there. The Wikileaks emails confirmed what we also already knew -- that her non-profit served her profit motive in many ways -- she and the other Clinton have made $150 million, simply by being politicians.
And the list goes further as well. She was a first lady who failed at health care. She was a senator who did not sponsor a single bill of substance (forgive me if I don't think that she deserves much credit for the legislation that supported NYC after 9/11 -- as I challenge you to tell me that any senator from New York would not have been able to do that, at that moment in time). And, as Secretary of State, her resume should read:
-Failed reset with Russia
-Failed pivot to Asia
-Benghazi
-Libya (failed state)
-Syria (failed state)
Stellar, all.
So, to parrot a quote that I posted on this site earlier this year, she seems to have the magical ability to fail up in her political career. She is a useful servant of the elites and oligarchs -- in fact, she is an oligarch herself. And with the money that she has behind her, she is able to convince enough of the uniformed masses/useful idiots that the status quo is better than the unknown. Better to fail conventionally then to succeed unconventionally.
In any event, tomorrow is another day, and life will go on after that. The fate of humanity does not hang in the balance, but it's still disappointing that so many continue to be asleep.
There are too many who would say that nothing came out of the of private server issue, but I would beg to differ. People who traffic in confidential information get prosecuted and fined, even when that act was performed without mal-intent. But, in this instance, the next President, who clearly did exactly that, gets away with a job promotion.
And it doesn't even end there. The Wikileaks emails confirmed what we also already knew -- that her non-profit served her profit motive in many ways -- she and the other Clinton have made $150 million, simply by being politicians.
And the list goes further as well. She was a first lady who failed at health care. She was a senator who did not sponsor a single bill of substance (forgive me if I don't think that she deserves much credit for the legislation that supported NYC after 9/11 -- as I challenge you to tell me that any senator from New York would not have been able to do that, at that moment in time). And, as Secretary of State, her resume should read:
-Failed reset with Russia
-Failed pivot to Asia
-Benghazi
-Libya (failed state)
-Syria (failed state)
Stellar, all.
So, to parrot a quote that I posted on this site earlier this year, she seems to have the magical ability to fail up in her political career. She is a useful servant of the elites and oligarchs -- in fact, she is an oligarch herself. And with the money that she has behind her, she is able to convince enough of the uniformed masses/useful idiots that the status quo is better than the unknown. Better to fail conventionally then to succeed unconventionally.
In any event, tomorrow is another day, and life will go on after that. The fate of humanity does not hang in the balance, but it's still disappointing that so many continue to be asleep.
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