The Dirt Weekly: Spring sneezes & spring squeezes
The Dirt Weekly: Spring sneezes & spring squeezes
March 11, 2023
It’s spring on the ranch which means two things: sneezes and squeezes. The first due to all of the green things throwing their reproductive potential into the air. The second is a squeeze chute through which the cattle are moved one by one to check and process (mainly castration of male calves). Spring squeezes also means weaning calves from their dams. For me, on this particular week, it was also a time to re-learn the sad fact that control is a very slippery notion. Got a little story for ya…
On the ranch we practice fence-line weaning (or, as you shall soon read, we try to). This means that calves are placed into one pasture and their mothers placed into the neighboring pasture. Calves can see their mothers but cannot suckle. It’s a little stressful and uncomfortable for everyone for a couple of days but, done well, both groups adjust pretty quickly. That is, unless your herdsman is Your Humble Author making absent-minded and unintentionally disastrous decisions. To whit: the cows like to follow my truck as I drive away into the sunset. I suppose this is because my ride is the cow’s version of the ice cream truck which is usually laden with delicious treats. And on this particular train wreck of a day, I was departing the pasture and the cows followed as per usual. BUT! The calves in the other pasture saw them jogging after my exiting truck and must have thought they were leaving forever. Dear reader, the calves panicked.
Folks, let me tell you that a happy bovine is a lazy bovine. But place enough stress on that animal and in an instant they become several hundred pounds of Olympic athletes. Speaking of world-class hurdlers, a number of the calves in the herd are progeny of a neighbor’s bull who was also a phenomenal fence jumper. I had not considered this when sorting calves from cows. But it all came back to me very suddenly when stressed out calves, closely resembling that bull in athletic ability, became severely panicked at the thought of mother leaving them behind. Said calves started jumping the electric fence like gravity-defying NCAA track stars. And just like that, my day’s plans were shot as I spent a couple-few hours restoring order and righting the mess at hand. I also regret to inform you that weaning was pushed back another couple of weeks. I have my plans, and God has his. Sometimes they are the same. Often they are not.
8 seconds to a hard landing
Well it’s bulls and blood It’s dust and mud The roar of a Sunday Crowd… - Garth Brooks, Rodeo
Spring is also rodeo season in Austin. And I do love the rodeo. I love the history and the fanfare. The cold beer and good music. The smell of livestock and hay. Also, the numerous parallels between rodeo events and the economy is a verbal goldmine for Your Humble Author.
This week, Uncle Jerome came out hot and heavy and made a strong-handed speech that one supposes is meant to castrate the economy (Spring squeezes). It looks like inflation has metastasized and drastic action is needed by that Civil War surgeon with a bone saw. And so we get speeches like this:
Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy. As I mentioned, the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.
Semiannual Monetary Policy Report to the Congress By Chair Jerome H. Powell
Those who have been following for a while know that my economic thesis has been structural inflation that very well may be more than the Fed can handle. I think that there might be a glass ceiling as to how far they can push. I also believe that given the choice between depression and severe inflation (really two sides of the same coin when it comes to economic destruction), decision-makers will choose inflation as their preferred option. BUT! Just as I was blind to the fence-jumping potential of calves, I could be wrong here too. The world is just too big to see everything.
But this also applies to that monetary cowboy named Jerome Powell, doesn’t it? Might the economy and financial markets hop the fence and completely ruin his day? Might the economy buck him before he lasts the full 8 seconds? He certainly drew a tough bull, and I don’t envy him the ride.
My lesson from this week is that anyone who thinks it ain’t possible that the Fed looses control of rates and the economy is a damned fool. Control is an illusion and sometimes the herd, properly stressed, finds a will of its own. Sometimes the bull is too much and the rider, no matter how skilled, ends up on his ass with a broken bone or ten.
What it all means for real estate - or - other kinds of Spring squeezes
A couple of weeks ago I wrote of ‘traffic jam real estate’ where the market will pick up speed as interest rates decline and then come to a braking halt as they rise again - like a traffic jam. Dear reader, I regret to inform you that we are hovering near 7% mortgage rates which means (I think) that real estate markets across the nation will slow. Right into the start of the busy season. Which means that there are two, opposing and confounding forces jostling for control of the market. It will be interesting to watch and see which one wins (rates versus the traditional spring-summer busy season). I’ll bet a shiny nickel on rates. If the fluctuation in the amount of incentive emails and texts I get from home builders is any indication (and it must be some kind of indication), buyer traffic has slowed proportionally to rate increases1.
Regarding last week’s column, one reader noted that I was uncharacteristically optimistic. And I was. Spring and bluebonnets can do that to a man. But just as a train wreck of calves jumping over and breaking fences can ruin that same man’s day, cause him to utter some naughty words, and then be a touch pessimistic for a few hours, so too will bucking monetary bovines and panicked interest rates land real estate markets on asses and cause market participants to get grouchy. Which, if you are a monetary cowboy named Jerome Powell trying to rope a runaway economy, is what you want. The best case for Uncle Jerome is for financial market traffic to stall - this means he still holds sway. The worst case for him (and maybe for all of us) is the financial market moo-moos jumping the fence and scattering across a nearby interstate.
The bottom line is, the “Home ATM” is now closing with refinance activity off sharply and HELOC borrowing declining.
Bill McBride of Calculated Risk Newsletter: “Home ATM” is closing
Confusion reigns
Among the prognosticators, confusion reigns. The signals, trends, and relationships that we’ve come to expect and rely on are all out of whack. For example: high interest rates and a strong labor market. Those used to be inversely related. But one does not seem to be affecting the other in the traditional way.
Which is another realization that I’ve come to (one comes to many realizations as one is fixing fence on a bitter and dusty afternoon): as economics is our Culture of Exchange, and as humans are constantly changing, adapting, and evolving, so too must economics and all of the relationships implied therein Change, Adapt, Evolve. One of my favorite cliches is that change is the only constant. Too true. Too true. What this means is that the second you think you have something figured out, it will change on you. At least when it comes to that chaotic-complex thing that is the market. All of it makes living and life simultaneously infuriating and entertaining, doesn’t it? Like panicked calves leaping hot wire to get back to momma - it was all so predictable in hind sight.
So the labor market is slowing and softening - and in key areas. But it’s not as slow as maybe the Fed wants it to be. And that’s where things get kind of hard, right! Like we have this entity that is under a massive microscope - every word Jerome Powell says gets scraped and dissected as people try to figure out what the Fed is thinking about.
The Fed is trying to be data dependent in a world where the data just doesn’t make a lot of sense.
The curve must revert (but when is anybody’s guess)
Today’s money is worth more than future money? That just don’t make no sense.
Yep. The curve will revert. I am pretty-pretty danged sure about that (but not 100%, refer to paragraph above). And when it does revert is when fences break and all hell breaks loose. If the old relationships hold, that is also when the Fed lets off the brakes and hits the gas again. A possible sign of the necessary catalyst is when banks start folding like rusty lawn chairs.
For those of you located on planet Uranus over the last 12 years, the major story in markets is that West Coast VC banks are on the verge of collapse, led by SVB Financial Group, which got porked $161.79 yesterday, falling to $106.04, down -60.41% in the cash session - all before taking one final Spaceballs-style Schwarz-ring-induced zap to the testicles in the after hours session, plunging another -22.2% to $82.50 on news that, in general, it has been agreed upon to get assets out of the bank.
Coda: focusing on the real
One thing about ranch work is that it forces me to pull back from the constant, hand-wringing negativity of the news and focus, even if only for a day or two, on the tangible and the real. I find honest, hard, and Dirty work to be soul cleansing and mind clearing. And so with the drone of the skid steer in the background, my mind wonders to the abstract and ephemeral which stands in stark contrast to the real.
Last week I wrote that I was optimistic because our national economic potential is sound; in terms of the real (raw materials, labor force, etc) we as a nation (and world, really) still have incredible potential to produce. We are nowhere near played out. Most of the buzzing issues, it seems to me in the heat of cedar destroying passion, are paper issues. Ones and zeros on balance sheets. Which means that our problems are so much monetary imagination that we conjure out of thin air and impose upon ourselves. As with much in life, when you get down to brass tacks, it’s all a touch absurd. As animals, We, Humans™ sure are a kooky bunch.
Riding my steel ox, I also got to thinking about what is real in terms of wealth. Which is to say I got to thinking about the nature of wealth and what that word actually means. Folks, money ain’t wealth! Money is a claim on resources. It is an accounting mechanism. At most it is potential wealth. I also happen to feel that way about stocks and bonds. They are a contract. Derivative of an agreement. An idea. Just like money they are lots of paper - at least they were before all of it was digitized. Now financial assets lack the tangibility even of paper and ink. You cannot hold them nor eat them. They cannot sustain you. They cannot comfort nor succor. They cannot shelter2. They cannot produce. And yet we spend a good chunk of our lives working and thinking and obsessing about all of it - especially Your Humble Author. Like I said, absurd.
I suppose this Luddite philosophy is also why I am a Real Estate person. From a bit of Dirt I can collect sunshine and make grass. Thence cows eat the grass and make beef. And beef is food and food sustains life. And what is more real or more valuable than the adventure that is life itself? The wins and losses. Failures and successes. Highs and lows. And so in the afterglow of righting a train wreck, sun setting and cold beer in hand, Dirty from hard and physical labor, and full of life and the infinite possible futures ahead of me, I consider myself a very wealthy man indeed. Interest rates be damned. Now how’s that for optimism3?
Coincidentally, for the all cash buyer a Spring squeeze might be a great time to pick a few, discounted deals.
At least the citizens of Weimar Germany in the 1920’s could use their Reichsmarks for something useful. Like wallpaper. Or, better yet, toilet paper.
I think you’ll find that farmers and ranchers are the grouchiest, most cynically optimistic people that God placed on this Earth.
Your coda from 3/11/2023 theDirt, especially the last 2 paragraphs with foot notes 2 and 3 had me grinning and smiling so hard my face is still aching. Well-done. Bob U