“The interval between the creation and the destruction of the illusion”
The above quote is from the article we linked to a few months back in our note on “Schrödinger’s Loss”. We used an article on bezzles/febezzles to describe the state of play in the real estate market, whereby reality had yet to hit. The idea blends nicely with some other ideas/aphorisms that have increasingly been popping up, such as the infamous Reddit/WSB line that “it’s not a loss until you sell” (often helpfully accompanied by the image below) and the idea that “it’s not the fall that kills you”. Personally, we suspect Upton Sinclair nailed this phenomenon, but as reality knocks with increasing insistence (see this tweet from a principal in a CRE firm), it threatens to break into the consciousness of even the most reticent. Hope dies last, but bond yields suggest a “plus-sized” lady is warming up in the wings.
To mix metaphors and beat a not-quite-dead horse, the dumpster fire that is Real Estate continues to smolder. WeWork announced this week “that it would not make two sets of interest payments totaling about $95 million” as a “precursor to a conversation” renegotiating its leases. This pain is not isolated to CRE. “[A]s an increasing number of landlords face foreclosures or sell off their properties at a steep discount”, “a recent challenge to New York’s rent stabilization law” is DoA as the US Supreme Court declined to hear the case. (Perhaps the Court didn’t want to hear any Defense of the Undefendable, Chapter 20). This comes as “Foreclosure filings are on the rise as property owners struggle to pay off their debt, and high interest rates spell trouble for those with impending loan maturities”. Both dynamics are bad news for regional banks, whose loan books may be less valuable than previously thought. There is, however, worse news for regionals. Observing that rates will have other knock-on effects for banks, this article from the WSJ notes that in addition to “unrealized losses on bonds and loans”, higher rates will likely further strain bank balance sheets “as they face pressure to pay more to keep depositors”. “In some instances, banks have elected to crystallize their losses by selling bonds below cost and taking the hit before matters got worse”. Before matters got worse? When the pilot grabs a parachute and jumps out of the airplane, perhaps it’s time to consider the valor of remaining in your seat.
P.S. Roughly one year ago, we noted that necessity could become the mother of intervention amidst BoJ and BoE fireworks and apologized to Spielberg for positing that policymakers were “going to need a bigger thumb” on the economic scales. Fast forward 12 months, and this week, there are rumors/hints/indications (pick your level of cynicism) that the BoJ’s thumb is back in action as the Yen weakened above 150 in USDJPY only to be resoundingly smacked back below the big figure. This elicited “no comment” from “top currency diplomat” Masato Kanda, the Vice Minister of Finance for International Affairs. This was, however, followed up with a page from OJ Simpson’s book “If I Did It”, with the clarification that policymakers were “ready to take necessary action against excess volatility”.
P.P.S. While we have pointed out that greedflation only works if those being gouged have the necessary wherewithal to pay exorbitant prices, recent revelations about the algorithm used by Amazon to “improve its profit on items across shopping categories” lends some credence to the idea that companies may not have been exactly altruistic in their price setting.
P.P.P.S. Jim Bianco took a dive into the state of Commercial Office Space in his presentation at the Global Macro Summit, and we look forward to having the recordings available as soon as early next week.
