Landmark Links March 27th – Headed in the Wrong Direction

Wrong Way

Lead Story….  One topic that I’ve written about from time to time since starting this blog is the growing stratification in the US housing market between entry level and premium housing stock.  The bubble of the mid 2000s represented a major turning point for the US housing market.  The entry level segment of the market experienced far more distress than other higher priced segments and was riddled with underwater borrowers and foreclosures.  The initial market response was a plunge in pricing that drove ownership costs well below rental parity.  In a functional market, this would have resulted in a great buying opportunity for aspiring home owners.  However, high unemployment and low earnings during the Great Recession, coupled with a severely restrictive mortgage market meant that few were actually able to capitalize on the deep discount.

Prospective home buyers’ loss of ability to buy presented an opportunity for investors.  Large and small landlords began buying up entry level homes in record numbers with the intent to lease them out to those who could not longer save up a down payment or qualify for a mortgage.  They purchased many tens of thousands of units, often at the court house steps using cash rather than individual mortgages.

At the same time that existing entry level homes were being taken out of the potential purchase pool by investors, rising construction costs – among other factors – made it very difficult for home builders to profitably construct entry level product.  As such, they shifted much of their production to the high end where borrowers had substantially better means to save for a down payment, mortgage credit was generally more available and profit margins were substantially larger, serving to dry up entry level inventory even further.

Initially, the lack of new construction of entry level homes coupled with large scale investor purchases of existing homes helped stabilize the market by drying up excess supply and slowing or reversing the falling prices that had plagued many cities since 2008.  While this initial elimination of so much distressed inventory was arguably a good thing, the long term consequences have not been.

Fast forward to the present day.  On the surface, the inventory situation in the US appears to finally be turning the corner after years of extremely low supply have led to ever-increasing prices.  Indeed, the supply of homes in the US increased by 3.3% in the 4th quarter of 2017.  However, a closer look reveals that the increase is due to a large 13.3% increase in the supply of premium homes while the supply of starter homes continues to decline (see Chart of the Day below).  Bloomberg’s Noah Buhayar highlighted the impact of this ever-declining entry level inventory citing a recent Trulia study (emphasis mine):

“Starter homes have become scarcer, pricier, smaller, older and more likely in need of some TLC” than they were six years ago, the real estate website Trulia reported Wednesday after analyzing housing stock across the country. Trulia began tracking prices and inventory in 2012.

It’s grim all over. American homes are at their least affordable in the report’s history. But the median listing price of available starter homes has risen 9.6 percent in the past year, easily beating out the trade-up and premium categories, while starter-home supply has fallen to a new low this quarter, Trulia reported.

Perhaps the most striking finding is that the very buyers who are typically least able to plunk down a lot of money are confronted with the least affordable homes. The share of income needed by those in the market for a premium home was 15 percent, and for a trade-up home 27 percent. For a starter it was 41 percent.

Adding insult to injury, the homes aimed at first-time buyers are less likely to be ready for human habitation than others, with fixer-uppers accounting for 11.2 percent of the category. They’re about nine years older than they were in 2012, and 2 percent smaller.

All of this begs the question: at what point is a starter home no longer a starter home?  If prices continue to rise like this, eventually much of what is considered stater home inventory today will be re-classified as move up.  Eventually, there isn’t much left other than serious fixer-uppers, tiny homes or units in remote or highly undesirable areas.  I’ve seen this happen up close in coastal Southern California over the past 17+ years and the results aren’t pretty.  Unfortunately, as construction costs continue to rise, it’s not going to become more economical to build new entry level homes anytime soon short of a major technological breakthrough.  In addition, rising rates make it less likely that existing starter home owners will move or that landlords will sell parts of their portfolios, meaning that there is little to suspect that a change in this trend is on the horizon.  Downward trending starter home supply appears to be the new normal – at least until the next recession.


Jumping In: Investors poured $804 billion into private equity investments in 2017 in an effort beat a low-yield bond market and richly priced equity market.  However, the supply of capital is outstripping the number of good deals which could lead to disappointing returns.

Muddy Waters: Nobel Laureate Robert Shiller says that recent shifts in tax policy and deregulation may make it difficult to see the next recession but rest assured, that it will still happen in a way that few see coming, as it always does.

Shot in the Dark: The Fed is trying to manage inflation but really doesn’t know what causes it, how to measure it, or how to move it up and down.  This is why history shows that once central banks start tightening, they almost always go too far.


Incentivized Behavior: A provision in the new tax law that limits the interest write off for leveraged buy outs will likely lead to less Toys ‘R’ Us-like over-leveraged debacles.  However, an interest cap exemption for real estate investment could lead to more private equity pouring into the space.


Technically Problematic: Housing costs in technology centric markets have soared since the last housing crisis.  That’s great news for long-time home owners but not so great for everyone else.

In the Drivers Seat: Americans are increasingly relocating to retirement hot spots and returning to suburbia according to Census Bureau figures released last week.

Opportunity Knocks: Housing speculators are making a lot of money flipping waterlogged homes in Houston, much to the chagrin of long term residents who can’t afford to rebuild.


What’s the Point? For the life of me, I will never understand why several top VCs just dumped $12MM into something called CryptoKitties:

The game lets users create and breed virtual cats, storing the digital genetic material on the blockchain as new generations of kitties are created. Then, in turn, users can buy and sell the cats using the cryptocurrency Ethereum, which means users have to buy Ethereum in order to play.

Why Didn’t I Think of That?  The economic geniuses in Venezuela are tackling their raging inflation problem by deleting zeros from their currency.

In the Cross Hairs: The cryptocoin market may have met its match in the Securities and Exchange Commission as increased scrutiny leads to a plunge in ICOs.

Chart of the Day



Fitting:Berkeley vegan activist covered herself in poop and laid down on a sidewalk outside of a Bay Area Trader Joe’s to protest the treatment of chickens because vegans, also because Berkeley. (h/t Dave Clarke)

Out on a Limb: A woman married a ficus tree in order to avoid having it cut down because Florida.  In fact the most incredible part about this story is that it didn’t happen in Berkeley.

Flying High: An Fly Jamaica Airways crew member was busted at John F. Kennedy International Airport with a whopping 9 lbs of cocaine inside his pants.  Either that, or he was very happy to see someone.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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Landmark Links March 27th – Headed in the Wrong Direction

Landmark Links March 23rd – No Easy Way Out


Lead Story…. It’s no secret that the last few years have been brutal ones for retail landlords and tenants.  The American economy is still driven by consumer spending but overbuilding, loss of share to e-commerce and ill-conceived leveraged buyouts that saddled retailers with debt have brought the industry to it’s knees.  Worst of all, this is happening in the midst of a prolonged economic boom so it’s not as if retailers and property owners can see a light at the end of the tunnel as they could if we were in a recession and the macro picture was poised to turn upward.  If anything, prospects will deteriorate further when the economy inevitably enters a recession, whenever that may be.  Just when things couldn’t get any bleaker, the sector is experiencing it’s own “hold my beer” moment (at least until Sears meets its long-anticipated end) as iconic Toys ‘R’ Us announced that it is going out of business and shuttering it’s more than 700 US stores.  Natalie Wong, Matthew Boyle and Claire Boston of Bloomberg took a look at what is going to happen with all of those empty stores (emphasis mine):

The collapse of Toys “R” Us Inc. is yet another blow for landlords, who now will have gaping holes of suburban retail space up for grabs. And few tenants would want them.

The debt-laden toy chain, with more than 700 stores across the U.S., became one of the largest victims of the retail decline when it announced on Thursday that it would go out of business after a failed rescue effort. The liquidation could dump millions of square feet of real estate onto a market that’s already bloated with vacancies from retailer bankruptcies and store closures, a trend that’s been escalating as shoppers increasingly turn to the internet.

“It’s really tough right now to find a solution for something that’s that big and with that many locations,” Jan Kniffen, a retail consultant and founder of J. Rogers Kniffen Worldwide Enterprises, said in an interview. “How many people need more stores right now? How many people need more square footage? Not very many.”

Toys “R” Us has stores in all types of shopping properties — from standalone locations to community strip centers to large regional malls. Many centers are in the hands of publicly traded real estate investment trusts that lease space to the chain and may struggle with declining values for the properties. Some stores are owned by Toys “R” Us itself.

There is nothing close to a one-size-fits-all solution here.  Some of the 700+ locations are viable and will find replacement tenants/buyers but many others will not.  Those in tight – typically affluent – markets where the very few remaining big-box retailers looking for more space want to be will find themselves occupied in relatively short order.  The stores that Toys ‘R’ Us owns directly will be sold and the remaining stores will sit vacant for a protracted period of time unless the (typically large) landlords who own them decide to be proactive.  The stark reality facing retail landlords is that the prospective tenants have all of the negotiating power and there is still far too much space built out in the US.  The eventual solution will be re-development of many of these sites, especially when one considers that the odds that Toys ‘R’ Us will be the last major retailer to fail or shutter stores in the coming years is slim to none.  However, only time will tell if the coming flood of available but un-wanted retail spaces from the closure of Toys ‘R’ Us locations will be the catalyst to force wholesale redevelopment of ghost town retail centers or if more pain will be required before landlords throw in the proverbial towel.  If landlords dig in their heels to wait for the market to return, there may very well be a light at the end of the tunnel but it will be that of an oncoming locomotive.


Smoke Signals: Stronger global growth, a weaker dollar, tax reform and rebounding business investment could make the economy overheat and appear to have the Fed signaling more than 3 rate hikes this yearBut See: The Federal Reserve raised rates 25 basis points earlier this week but still plans on only 2 more rate increases for 2018. for now.

Hard At Work: Weekly initial unemployment claims increased last week but are still low by historical standards.

High Concentration: A whopping 80% of all venture capital investment goes to just three states.


Warning Signs: Green Street’s Mike Kirby says that REITs’ current discount to net asset value (NAV) is typically a reliable indicator of negative repricing of private market real estate. (h/t Steve Sims)

Piling In: Large investors like pension funds are allocating ever-larger sums into illiquid assets such as real estate in order to boost returns.  However, many are using bad assumptions in unsophisticated models and are ill-prepared for the risks that come with illiquidity.


Winds of Change: Demographic changes continue to point towards coming tailwinds for for-sale housing and headwinds for rentals.

Spillover Effect: California’s housing problems are spilling across it’s borders as a population boom leads to soaring home prices and rents as well as a growing homeless crisis in Reno.  See Also: Lower income and middle class Californians fed up with housing costs and high taxes are fleeing the state in large numbers as domestic migration continues to ramp up.


Land Mines: The legalization of marijuana in California along with the strict laws governing it’s use is going to lead to a harsh reckoning for outlaw marijuana producers who can’t or won’t comply with licensing requirements.

Insufferable: Reading this story about a bunch of 20-something entrepreneurs building a utopian club for Millennial elites in Utah makes me hope that everyone featured in it gets tossed into a lit volcano.

Long Shot: Don’t feel bad if your bracket is busted because you didn’t pick UMBC (which was previously best known for it’s chess team) to beat UVA in the first round of the NCAA Tournament.  After all, the odds are pretty long.  By way of example, the odds of hitting the Mega Millions lottery jackpot are 1 in 302.6 million and the odds of winning the Powerball jackpot are 1 in 292 million.  The odds of filling out a perfect bracket?  1 in 128 BILLION.

Charts of the Day 

Updates on for-sale and rental housing production from The Daily Shot

The residential construction report was disappointing.

• Housing starts:


• Building permits:


• The inventory of multifamily housing that is coming to market remains near multi-decade highs. This trend has to weigh on new apartment construction investment and credit.


• This chart shows single-family vs. multifamily building permits over time.

• Separately, shelter costs (rentals and homeownership) have been outpacing wages since the 1970s.


Don’t Try This at Home: Tide Pods are so last month.  Teens are now eating raw slugs on a dare which is leading to brain damage because, Millennials.

Ultimate Filibuster: Members of the Kosovo opposition party set off tear gas in parliament in order to stop a vote.

No You’re Not: A Romanian court has ruled that a 63-year-old man is dead despite what would appear to be convincing evidence to the contrary: the man himself appearing alive and well in court after he failed to contest a 2003 death certificate within the statute of limitations.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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Landmark Links March 23rd – No Easy Way Out

Landmark Links March 20th – Chop Shop

ghetto limo

Lead Story….  Imagine that you run a commercial real estate fund and made some very prudent investments back when the world appeared to be falling apart in 2009-2010.  You bought trophy buildings when there was blood in the streets and are now sitting on hundreds of millions of gains on some assets, if not billions.  You still like the fundamentals of owning the property long term and do not want to sell it outright.  At the same time, you have low leverage, long term debt at an attractive rate and do not want to further encumber the property in order to take some equity off the table.  We should all be so lucky to have this “problem” but there is an increasingly widespread solution to it: so-called partial interest sales where a seller parts with a portion of the equity but still holds onto a controlling interest.  When it comes to trophy properties, such a transaction is a lot more common than I would have though.  From Keiko Morris of the WSJ (emphasis mine):

Last year, “partial-interest sales” made up 83% of all deals for Manhattan office buildings valued at more than $1 billion, according to real-estate services firm Cushman & Wakefield. In 2015, minority-interest sales made up 42% of such transactions.

Selling a minority stake in commercial properties is far from a revolutionary idea.  It’s been happening for a very long time.  However, recent market and financing conditions have pushed it more into the mainstream thanks to high asset prices and less available debt financing.  Again from the WSJ (emphasis mine):

Before the financial crisis, debt was abundant and cheap, and buyers could borrow at high loan-to-value ratios, making large deals manageable because less equity was needed, Mr. Harmon said. Since then, lenders have been more disciplined, requiring more equity, and those who bought trophy properties during the current cycle are under less pressure to sell.

“If you create enough value and have no pressure to sell, you can sell a 49% interest, refinance and get all your money back and still own 51%, which is what we have done in our properties,” said Scott Rechler, chief executive of RXR Realty LLC, a private real-estate company.

A more prudent approach to debt also has meant investors have to write bigger checks for the equity required for these big commercial deals. In this environment, minority-interest sales of property make the amount of equity needed more manageable and avoid incurring city and state transfer taxes, which, combined, are 3.025%, real-estate experts said. These types of transactions also can widen the pool of potential buyers.

Partial-interest acquisitions, particularly of large, high-end office buildings, have been growing at a time when overall sales of Manhattan commercial properties are down, tumbling 66% from a peak total of $63.2 billion in 2015 to $21.6 billion in 2017, according to Cushman. Some real-estate experts said minority-interest sales often can boost the overall value of these pricey buildings compared with the value achieved with a full sale of the property.

Clearly, this is a trend is not going away any time soon and I think that, if anything, it will become more pervasive in buildings at lower valuations in the future.  Interestingly enough, the Wall Street Journal article quoted above did not make any mention of the technology that is most likely to efficiently make widespread partial-interest ownership a more-liquid reality: blockchain.  Dave Kidder, one of my partners at Landmark has been talking about this for months and I’ve come to agree with him that eventually, this will become a reality.  Today, Bitcoin and other cryptocurrencies hog most of the blockchain coverage.  However, there is a good chance that security tokens or tokens backed by real assets like equity, LP shares or commodities may be where the real potential of distributed ledger technology and smart contracts lie.  If correct, this will ultimately, this will lead to disintermediation, increased liquidity and falling transaction costs as real estate transactions are tokenized.  We could be years off from this actually happening but the amount of capital flowing into blockchain technology and the increasing prevalence of partial-interest sales lead me to believe that a future of being able to buy and sell tokenized shares of an individual real estate asset or portfolio of assets may be coming sooner than we think.


This Time Isn’t Different: Bond king Jeffrey Gundlach called the demise of the housing market and subprime back in 2006.  Today he sees markets on the edge with crypto speculation and the inverse VIX implosion as signs of excess speculation.

Stalling Out: Earlier this year it looked as if the yield curve was going to start widening again.  However, longer rates have stabilized – at least for the time being – as investor begin to question whether or not higher growth is sustainable, flattening things out once more.  See Also: For hedge funds, bond buyers and savers, higher rates are a good problem to have.

Help Wanted: The tight labor market is bringing workers off the sidelines but we are getting close to the point where America runs out of unemployed people to fill available jobs.


Giving Away the Farm: A new study found that all of the tax breaks that cities throw at Amazon do not create enough good jobs to make them a worthwhile investment.  See Also: How Amazon’s bottomless appetite became corporate America’s nightmare.


Locked Out: It’s not only the high barrier to entry markets that have a historic shortage of new homes.  Even development-friendly cities are struggling to add units fast enough to keep up with population growth thanks to labor shortages and rapid cost inflation making it next to impossible to profitably build entry level homes.


What Not to Do: The Toys ‘R’ Us story is a cautionary tale about leveraged buyouts and strategic shortsightedness, and offers a how-not-to guide for the retail industry.  See Also: The failure of Toys ‘R” Us is more about over-leveraging than it is about Amazon. Contra: Toys ‘R’ Us’ management is digging in their heels and blaming the retailers failure on Millennials not having enough children.

Hot Air: Here are the seven most egregious lies that fraudulent blood testing startup Theranos and its disgraced founder Elizabeth Holmes told investors.  See Also: The Theranos crackdown offers a welcome check on the tech startup frenzy.

Challenged: A Supreme Court challenge over beach access filed by a tech billionaire could potentially bring down the California Coastal Commission.  I’m having a difficult time finding a side to root for here as this boils down to a billionaire who wants to keep a beach to himself versus an all-powerful, completely unaccountable and often capricious appointed government entity.  Frankly, I wish that they both could lose.

Chart of the Day



Gotta Hear Both Sides: A man wearing a bull costume was caught on camera trying to burn down his former lover’s trailer park home because Florida.

Extra Protein: An Arkansas man found a dead mouse inside his can of Red Bull.  In an ironic twist, tests revealed the mouse to be the least unhealthy thing in the can.

Thunderdome: Between wrestling moves and flying chairs, this IHOP brawl is one of the best fast food restaurant fights that I’ve ever seen.  The manager should get a raise for the perfectly executed pile driver around the 32 second mark.

Wasn’t Me: China Eastern Airlines is denying that flight attendants took part in an orgy despite being caught on film.  In related news, China Eastern Airlines was recently named the best airline for singles. (h/t Darren Fancher)

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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Landmark Links March 20th – Chop Shop

Landmark Links March 16th – Unexpected Outcomes


Lead Story….  Between a hectic stretch at work and an under-the-weather 3 year old, I didn’t have much time to blog this week.  However, I read a Wall Street Journal article by Greg Ip about the 10-year anniversary of the Bear Stearns bailout and found this section about increasing risk in the global financial system particularly interesting (emphasis mine):

Mr. Shin pointed out that bond markets are growing at the expense of banks in supplying credit, enabling business and government debt loads in many countries to surpass their precrisis peaks. Emerging markets have borrowed heavily in dollars, which leaves them vulnerable should the dollar’s value rise sharply. Before the crisis, 80% of investment-grade corporate debt world-wide yielded more than 4%; as of last October, less than 5% did, according to the International Monetary Fund.

Total U.S. debt, at around 250% of GDP, still stands at crisis-era peaks while debt levels in China have caught up and passed the U.S., according to the BIS. U.S. companies’ debts had reached 34% of assets by the end of 2016, the highest at least since 2000. Debt-servicing burdens haven’t risen commensurately thanks to low inflation and low rates, but they have begun climbing. More than $1 trillion a year still flows into emerging markets each year, according to the Institute of International Finance.

This tells us little about when or where a crisis will happen or what may trigger it. Crises surprise because they usually start with an assumption so sensible that everyone acts on it, planting the seeds of its own undoing: in 1982 that countries like Mexico don’t default; in 1997 that Asia’s fixed exchange rates wouldn’t break; in 2007 that housing prices never declined nationwide; and in 2011 that euro members wouldn’t default. James Bianco, who runs his own financial research firm in Chicago, speculates that the equivalent today might be, “We will never see higher inflation or higher growth.” If either in fact occurs, the low interest rates that have raised household stock and property wealth to an all-time high relative to disposable income won’t be sustainable.

Mr. Rogoff concurs: “It’s much harder to get a crisis when you can borrow for virtually nothing and keep rolling it over.” A 1.5 to 2 percentage point increase in real interest rates, which he isn’t forecasting, would be small by historical standards but could potentially make the debts of Italy or Portugal unsustainable.

Central banks know this, of course, which is one reason they are wary of raising interest rates too quickly—while nervous that if they raise them too slowly, the problem will get worse.

Economist Hyman Minsky came up with the “financial-instability hypothesis” which postulates that long stretches of prosperity sew the seeds of the next crisis.  IMO, that is what Ip is referring to above.  If an asset or financial instrument is perceived as being absolutely safe, investors and speculators will naturally take on more risk in order to own it.  This ultimately leads to abnormally high valuations, too much leverage and ever-increasing risk.  Eventually, values get pushed to such a high level that a tipping point is reached.  It made sense to borrowers and lenders to borrow aggressively to buy homes in the early 2000s.  Why not since homes only go up in value over time?  It was easy money until it wasn’t.

In recent years, I’ve frequently heard that one of the biggest macro risks in the market was that the Federal Reserve didn’t have enough “fire power” to provide stimulus in the next recession since rates were already so low.  However, of late I’ve been noticing a different theme among several investors and writers that I have great deal of respect for.  That theme is that the true market risk is not the Fed’s inability to cut rates but rather it’s inability to raise them should inflation begin to take hold.  US debt to GDP was in the low 30% range in the early 80s when Fed Chair Paul Volker hiked short term rates close to 20% in order to stomp out raging inflation.  In contrast, today’s debt to GDP ratio is approximately 104%.  As a result, should inflation flare up again, the Fed would not be able to respond as aggressively since it would push government borrowing costs through the proverbial roof.  Ironically, that very lack of an aggressive response could be the catalyst that ultimately leads to even more severe inflation and soaring long term rates.  I’m not saying that this is going to happen, nor am I saying that it is anywhere close to the most likely outcome.  My point is that it’s simply prudent to ask yourself what the other side of the argument looks like when a financial assumption is so pervasive and widely accepted that it becomes conventional wisdom.


Graying: The elderly will outnumber children for the first time in US history in 2035. So basically, the entire United States is becoming Florida other than the weird crime part..

Missing Middle: Despite California’s immense wealth, its middle class is in decline because it turns out that none of them can actually afford to live here.  See Also: California is losing residents via domestic migration.

Resurgence: So called “bond vigilantes” are poised to return to the market as expansionary fiscal policy and resurgent inflation expectations buoy bond bears.  But See: The latest economic data still show soft inflation despite economist expectations and a tight labor market.


Help Wanted: Construction jobs are booming and postings on are at a six-year high for this time of year.  However, job seeker interest in the sector is declining.  See Also: The labor pool is shrinking and it could be decades before it comes back.

Mixed Use: The mall of the future may not have any stores as owners look to bring in a mix of tenants that drive traffic such as office users to replace dormant department stores.


No Vacancy: There are almost no empty houses in California as vacancy hits a 13-year low.

Twisted Logic: California State Senator Scott Weiner’s SB 827 transit density bill has put left-wing anti-development activists in a difficult positionSee Also: If you really want affordable housing, follow Tokyo’s example just build more of it.


Sleight of Hand: Private equity shops are increasingly dragging their feet on bridge loan acquisition takeouts in order to artificially boost IRR’s, making it difficult to find an “apples to apples” return comparison in the industry.

Boom and Bust: How Toys R Us grew from a small children’s furniture store into a retail empire only to miss the boat on e-commerce and eventually crumble.

Broken Clocks: Predicting the demise of Silicon Valley has become a virtual cottage industry but the actual data suggests that the Bay Area economy is doing just fine in spite of the astronomical cost of living.

Chart of the Day.

Shocking(end sarcasm her) News: California impact fees are higher than the balls on a giraffe.

Source: Terner Center at Berkeley


Side Effects: A startup is pitching a mind-uploading service that preserves your entire brain in a computer hard drive with the minor side effect of being 100% fatal.  This is why I never buy first generation technology.

Take the Edge Off: A bride who was driving to her wedding, in her wedding dress was arrested for driving under the influence.  I wonder if the wedding album will include her mug shot.  (h/t Adam Werblow)

Darwin Award Update: A Minnesota woman who shot and killed her boyfriend in a Youtube stunt gone wrong was sentenced to 6-months in prison.  The following is a perfect summary of why I have no hope for the future:

The stunt that killed him June 26 involved Perez shooting a powerful handgun at a thick, hardcover book that he held to his chest in the mistaken belief that it would be enough to stop the .50-caliber bullet.

Apparently, you get a reduced sentence if the video goes viral.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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Landmark Links March 16th – Unexpected Outcomes

Landmark Links March 13th – Crazy Train

Train Crash

Lead Story…  It’s becoming increasingly obvious that the California “bullet train” is as big of a boondoggle as pretty much every sentient being thought it would be.  The state rail authority released it’s latest business plan last week and surprise, surprise the price tag just went way up and the completion date was pushed out (again).  From the LA Times (emphasis mine):

The California bullet train project took a sharp jump in price Friday when the state rail authority announced the cost of connecting Los Angeles to San Francisco would total $77.3 billion, an increase of $13 billion from estimates two years ago, and could potentially rise as high as $98.1 billion.

The rail authority also said that the earliest trains could operate on a partial system between San Jose and the farming town of Wasco would be 2029. 

If you aren’t familiar with Wasco, you are not alone.  It’s podunk town just to the north of Bakersfield that is best known for being home to a state prison.  Wasco is nowhere near Los Angeles and the prospects of bringing the bullet train through the mountains into LA will require 36 miles of deep tunneling which are virtually assured to come with additional billions of dollars of overruns, not to mention the challenges of actually connecting all the way through urban areas of San Francisco and Los Angeles.  In short, no one, and I mean NO ONE is going to drive 140 miles from LA to board a train to San Jose.  So how did we end up here?  Politicians sold their marks…I mean constituents a project based on phony assumptions back in 2008 and constituents took the bait.  More from the LA Times (emphasis mine):

The disclosure about the higher costs comes nearly a decade after voters approved a $9-billion bond to build a bullet train system. The original idea was that the federal government would pay about a third of what was then an estimated $33-billion project, with private investors covering another third.

But those assumptions proved faulty on numerous counts. In later business plans the projected price went to $43 billion, somewhere between $98 billion and $117 billion, down to $66 billion, and then $64 billion in 2016. And the funding sources dried up. The federal government only put in $3.5 billion and Republicans have vowed not to add another penny. Private investors have said they would not commit any investment to the project without a guarantee that they can’t lose money.

Being in the line of business that I’m in, one must accept the inevitability cost overruns. as they happen on nearly every single project.  However, I have to call into question the magnitude in this case.  Being off by 3x (depending on which estimate you believe) is a pretty spectacular failure and leads me to believe that the politicians knew that they were selling a bundle of crap with a bow on it but could only get initial funding approval  passed by giving the most optimistic projections – no matter how unrealistic they may be (quick side note: if you think that I’m being paranoid here, I invite you to listen to this recent podcast from Freakonomics which goes into great detail about politicians and project managers bullshitting costs and benefits of major infrastructure projects in order to gain approval).  So where do we go from here?  California taxpayers are probably going to be subjected to a lot of justification about having to continue to move forward to make good on the tremendous sunk costs and eventual environmental impact when the train is complete and if the rosy ridership projections ever come to fruition.  The problem is that there is now a funding gap of approximately $65 billion under the current best-case scenario (which absolutely no thinking person should believe) and no one knows where any of that money is going to come from.  In the meantime, if you want to see how large infrastructure projects should/can be done, check this out:

While California has been pulling teeth to finish the first phase of its train by 2029, China has relentlessly expanded its own bullet train network. In the same year that California voters approved its project, China fully opened its first high-speed rail line—75 miles (120 km) connecting major cities Beijing and Tianjin, with trains designed for a maximum speed of 217 mph (350 km per hour). California’s train would have a comparable cruising speed of 220 mph (354 km per hour). Now, a decade later, having already spent an estimated $360 billion (2.4 trillion yuan), China boasts 13,670 miles (22,000 km) of high-speed rail lines—greater than all other countries combined—and is in the process of laying down 9,321 miles (15,000 km) more by 2025.

So, China built almost fourteen thousand miles of high speed rail for $360 billion in less than 10 years and it’s going to take us 25 years and $77 billion to build a measly 381 miles of track (again, under the current best-case scenario).  Then we wonder why we can’t have nice things.

Where I take the most exception with this project is not so much the amount of money being spent – although it is egregious – but rather how it is being spent.  We live in a state that has some of the worst major city mass transit systems in the first world.  In addition to that, California is incredibly drought prone and has terrible and tremendously outdated water storage infrastructure.  Investing the money being spent on the boondoggle bullet train in either or both of those would likely pay for itself in economic growth while also being good for the environment.  One of the primary points that proponents of the bullet train have made was that it would reduce greenhouse gasses by taking cars off the road.  Ok, fine.  Buy you know what would take a lot more cars off the road?  Dramatic improvements to the mass transit infrastructure of our major cities.  Study after study shows that developing denser neighborhoods is good for the environment, yet it’s almost impossible to do without a robust mass transit system.  Imagine New York’s economy without the subway.  It wouldn’t exist, at least not in its current state.  Now imagine how much more productive California’s major cities would be if we spent the money currently being used for an absurd project like the bullet train and actually used it for much needed – if less flashy – projects like improving our neglected city mass transit and water infrastructure.


Moment of Truth: Jeff Gundlach sees sentiment shifting negative and a potentially combustible situation brewing with bond yields and inflation for 2019.

Uneven Boom: Non-farm employment gained a whopping 313k jobs in February, compared to the median estimate of 205,000 and the two prior months were revised higher.  However, average hourly wages increased just 2.6% from a year earlier missing expectations.  See Also: US household net worth rose more than $2 trillion in the 4th quarter with help from rising stock and home prices.

See No Evil: The market doesn’t believe what the Federal Reserve is saying when it comes to inflation.


Bold Vision? WeWork’s new WeLive apartment brand wants to disrupt city living with a focus on community.  But See: Why co-living is nothing more than Single Room Occupancy (SRO) with a hipper paint job and name.


Punch in the Gut: The new tax law has already proven to be a major hit to subsidized affordable housing as lowered corporate tax rates devalue the low income tax credit that nearly all subsidized projects rely upon to be financially feasible.  The result is that projects can’t get built because they are no longer financially feasible.

Jammed Up: Besides discouraging borrowers, rising mortgage rates could make current homeowners less likely to move, creating a bottleneck throughout the system while also greatly curtailing refinance activity.  See Also: Higher prices, tax changes and rising interest rates combined with low inventory could lead to a weak spring home sale season despite the booming economy.

Don’t Believe the Hype: Gavin Newsom and Antonio Villaraigosa are both front runners to be the next governor of California.  While both have announced incredibly ambitious housing goals, neither seems to have a strategy to actually achieve them.


Not As Intended: Once trumpeted as a way to get cars off of the road, studies are increasingly clear that ride sharing services like Uber and Lyft actually increase congestion in citiesBut See: How ride sharing services are changing Los Angeles for the better.

Underdog: The amazing story of how Steve Francis went from selling drugs on the corner to NBA super star in 4 years.

Prospectors: The Mountain West is experiencing a second gold rush.  Only this time, thanks to plentiful and and cheap power, they’re mining bitcoin rather than precious metals and neighbors aren’t happy about it.

Chart of the Day

The January wage growth pop was artificially inflated by the frigid weather conditions early in the month. That effect was reversed in February.


Don’t Do This: A drunk patient got so bored waiting for a psychological evaluation at a hospital that he stole an ambulance to drive himself home, because Florida.

Stop Me If You’ve Heard This One Before: A woman in a thong bikini and a midget enter a packed night club on a horse…….. because Florida.

Healthy Livin’: Meet Don Gorske, the 64 year old Wisconsin man who is about to eat his record 30,000th Big Mac because some people are apparently invincible.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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Landmark Links March 13th – Crazy Train

Landmark Links March 9th – Hot Boxed


Lead Story…. In recent years there have been few segments of the commercial real estate market as hot – or as controversial – as the legalized marijuana space. As landlords, operators and capital sources deal with the growing pains of an already massive industry coming out of the proverbial shadows, they are dealing with an unprecedented amount of red tape as legalizing states try their best to avoid the wrath of the federal government.  Public opinion in the United States has shifted massively towards legalization of marijuana over the past +/- 30 years. As recently as 1990, only sixteen percent of Americans believed that pot should be legal with eighty one percent opposed.  By 2017, sixty one percent were in favor of legalization with only thirty seven percent opposition.  What’s more, a majority in each US adult generation except for the Silent Generation (born between 1928 and 1945) now favor legalization by 56% or greater.  Not surprisingly, nine states have fully legalized pot for recreational use, and many more have either decriminalized, legalized for medicinal use or both.  At the same time, marijuana is still classified as a Schedule I narcotic by the federal government, meaning that many businesses, even those conducting business legally in their state, are unable to access federally regulated banking institutions.

I am not going to make an argument for or against the legalization of marijuana in this post primarily because my opinion is irrelevant.  What I am going to do is explain why having state laws and federal banking laws in conflict with each other is incredibly dangerous from a law-and-order standpoint and I’m going to use Las Vegas as an example.  Marijuana was legalized in Nevada last year which has led to over $200MM in sales over the past 8 months and $30MM in new tax revenue for the state.  The problem here is twofold:

  1. Marijuana is still a cash business in Nevada as with the rest of the US
  2. Nevada’s largest and most powerful industry – casinos – are regulated by the federal government

On a minor level, this means that tourists can’t use pot inside a casino since it would put the casino at risk even thought it is legal outside – not exactly a huge deal although I suspect that this is going to be tested a lot with the growing prevalence of vape pens and edibles that are incredibly hard to detect since they are odorless.  However a larger problem is the incentive for a federally regulated casino to be used as a tool in a form of money laundering.  CNBC’s Jane Wells hosted a segment this week about how money from pot dispensaries is finding it’s way into federally regulated banks via federally regulated casinos.  The process goes something like this:

  1. A dispensary owner has a large amount of cash from sales of pot that he cannot deposit into a federally regulated bank.
  2. Not wanting to stuff it in a mattress or safe, the dispensary owner takes the cash to a casino in a briefcase and trades it in for chips.
  3. The dispensary owner hits the tables for a short amount of time to gamble, then turns the chips in and the casino writes him a check which he deposits at a bank.

The casino is taking a major risk in the transaction that I described above since they just violated federal law.  Casinos in Las Vegas are huge businesses that are owned by very rich/powerful people and corporations.  They clearly want no part of this which is why they are tightening up on compliance and security as much as possible.  However, its nearly impossible to weed out completely (pun fully intended).  Sure, compliance will be tipped off when someone shows up with a briefcase filled with $1MM but in many cases the dispensary owners may only have a few thousand to exchange and are therefore harder to detect.

The sad part is that it doesn’t have to be this way.  Cash businesses are inherently dangerous because their proprietors are targets for crooks who know that the loot will be hard to trace.  In addition, forcing legal marijuana businesses to operate “all cash” encourages and incentivizes all sorts of sketchy/illegal behavior from tax evasion to money laundering and puts other business owners like the casinos at risk.  Whether the federal government agrees with state legalization or not, they should want the money in their system both from a public safety and tax standpoint.  The businesses in this industry are jumping through an incredibly high number of state regulatory hoops in order to stay on the right side of state law.  They clearly would rather have access to the banking system for a host of reasons – if not, why bother with the casino scheme that I outlined above?  The train has already left the station with regards to legalization by evidence of the direction of both public opinion and state law.  If the federal government continues their stance, they risk further encouraging an underground all-cash economy that empowers criminals and tax cheats and encourages money laundering.


Overstated? No, US manufacturing isn’t dwindling away to nothing as some would have you believe but it isn’t exactly booming either.

Backfire:  Why corporations will likely end up absorbing the cost of tariffs rather than passing price increases on to consumers in sectors like packaged food and restaurants.

Lurking: The real inflation danger is that governments won’t raise rates high enough to cool the economy out of fear of raising their own borrowing costs too much and that will eventually lead to the severe inflation that investors are starting to fear.


Expansion Mode: Last year, Apple announced that it is going to build a fourth US campus.  Here’s a good rundown of which cities could get it.

All Clear: Bank commercial mortgage delinquencies have hit their lowest level on record in the US.


Soaring: Mortgage rates are now at their highest level since 2014 and a full 100 basis points off their low.

Over-Parked: California cities’ stringent parking requirements on new construction act as an expensive roadblock to building more housing….and also mean that many buildings that were constructed decades ago would be illegal today. (h/t Daniel Geissmann)

Read the Small Print: It’s becoming increasingly obvious that reverse mortgages are little more than an expensive con hocked to gullible seniors on late night infomercials.


Rise of the Machines: Amazon has admitted that Alexa is creepily laughing at people but doesn’t know how to fix it yet.

Passing on the Joint: Stifling federal regulations have led to the US is essentially ceding the entire $30 billion medical marijuana industry to Canada and Israel.

Chart of the Day

By continuing to finance student loans, the federal government now owns over 30% of the total consumer debt in the US.

Source: The Daily Shot


Happens All The Time: A doctor in Kenya performed brain surgery on the wrong person because brain surgery clearly isn’t rocket science.

Who Among Us… Authorities say a New Jersey man whose home has been without power since last week’s nor’easter threatened to kidnap a utility company employee and blow up a substation.

Rational Response: An American Airlines passenger tore off his shirt and aggressively chased airport employees around the tarmac with a plastic signal wand after being warned about his behavior.  I’ll be the first to admit that I’ve considered doing this more than once while flying American.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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Landmark Links March 9th – Hot Boxed

Landmark Links March 6th – Capped


Lead Story….. Conventional wisdom and basic financial math both dictate that commercial real estate cap rates should rise when interest rates do.  However, we’ve been in a rising interest rate environment for well over a year now yet cap rates are basically flat during that time – with the exception of certain segments of the retail market, which has little to do with interest rates.  Over the past few quarters, we have heard a lot of concern from capital partners about cap rate expansion, yet cap rates themselves have remained quite sticky to the downside.  So, why has the relationship between interest rates and cap rates broken down of late? Spencer Levy, CBRE’s Senior Economic Advisor and Head of Research, the Americas had made a good point last week that was picked up in World Property Journal (emphasis mine):

“Secular factors, particularly the strength of equity capital flows, have upended the historic relationship between interest rates and cap rates. For foreign capital flows, the fall in the dollar is a big offset to rising interest rates.”

At a time when the vast majority of large real estate owners where domestic, it made more sense for cap rates to closely track interest rates.  However, once the market is increasingly exposes to large buyers with foreign currency, it makes sense that the correlation would become weaker.  When the dollar falls (as it has been doing for a year now), dollar denominated assets become relatively more attractive to holders of foreign currency who make up an ever-growing share of commercial real estate investment in the US.  The irony here is that conventional wisdom also dictates that the dollar should increase in value as interest rates rise, reflecting a strengthening underlying economy.  However in our current case, deficit concerns coupled with rising inflation expectations have caused the opposite to happen, attracting even more foreign investors.  I’m not saying that the era of relatively stable cap rates will last forever in the face of climbing interest rates but it does bear mentioning that in a true global economy, long-standing financial correlations can deteriorate….at least in the short term.


Winds of Change: Bill McBride of Calculated Risk is starting to get concerned about the direction of the economy

Over the last several years, the economic story has been consistent: Strong employment growth, steady economic growth (solid given demographics), low inflation, and an accommodative monetary policy – with no fiscal stimulus. I noted several times that the future was bright, and in late 2016, I pointed out that the cupboard is full.

However, tax changes that impact housing and now new tariffs that may lead to a trade war could mean that the economic story is starting to change.

Pop: Americans’ wallets fattened in January on recent tax cuts, indicating increased spending power may boost the economy this quarter as real disposable incomes in the US increase the most since 2015.

Disproportionate: Last weeks’ announced tariffs would help two smallish industries and hurt some much larger onesSee Also: Tariffs do nothing but hurt the White House’s pro-business agenda.


Family Feud: With Republicans all but extinct in California, a battle over state policy involving the development of housing is raging between older liberals (generally anti-development) and younger progressives (generally pro-development):

No Upside: US home builders are not happy with the recently announced Trump tariffs which will make steel and aluminum more expensive on the heels of the 20% Canadian soft lumber tariff announced last year.

Limited Impact: Mortgage rates have risen 8 consecutive weeks to their highest level in years.  However, early indications are that housing demand remains robust even in the face of mounting affordability issues.


Beating the System: I’m generally pretty good at predicting when a book that I read will make a good movie but I’ve never come across an article that I felt that way about….until now.  This amazing story about a septuagenarian convenience store owning couple who cracked the code of a state lottery game in Michigan and Massachusetts and made a $7.5MM profit over an 8-year period should definitely be made into a movie.  It’s a long read but will be the best thing that you read today.

Your Welcome: A new study claims that having two drinks a day is more likely to extend your life past your 90th birthday than exercise isBut See: Decades worth of research proves that the chemicals used to make bacon do cause cancer. So how did the meat industry convince us it was safe?

Clucking Weird: Chickens that wear diapers and have personal chefs are the latest elite status symbol in increasingly bizarre Silicon Valley.  Remember kids, when your poor it’s called crazy, when you’re rich it’s eccentric.

Chart of the Day

Submitted without comment


Big Bucks: A candidate in the race for a South Texas state House seat has reportedly received $87,500 in campaign donations — more than half of which is made up of deer semen.

Nap Time: Three day care aides in Chicago have been charged with giving kids sleep-aid laced gummy bears in order to get them to calm down for nap time.  As the parent of two toddlers, I still can’t figure out why they got in trouble for this.

All In The Family: A 39 year old man was busted having sex with his 19 year old daughter in their back yard, because (of course) Florida.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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Landmark Links March 6th – Capped