theDirt Weekly: flip-flop weather
March 25, 2023
I sat down at my iPad this morning and heard in my head that same old drum that I’ve been beating for weeks. Before hammering away yet again, I paused. I wondered if other people in the house (you, dear reader) are getting annoyed as I bang the snare of interest rates and smash the symbols of monetary philosophy. Then I thought: nah, that’s ridiculous. Everyone in this house LOVES endless and very loud economic-philosophic drum solos. That’s why you’re here, right? So here we go.
…
Skies out, thighs out amiright? If the dress code of my children are a barometer of truth then yes. Even when it is a cloudy, blustery 40 degrees at the beach. Doesn’t matter. It’s spring break and shorty shorts will be worn. Which, to me at least, indicates a certain stubbornness in the face of reality1. Ah, to be young and careless. Or to be an economic bureaucrat which is kinda the same.
I could not refrain from giggling as Janet Yellen (thankfully NOT wearing shorty shorts) decided it is instead flip-flop weather. Folks, our beloved Treasury Secretary née Fed Chairwoman and expert on all things money-money-money walked back her forceful ‘we will not bail out all depositors’ comments only a day after making those comments (was it less than 24 hours?). It feels like maybe, just maybe, that nasty monetary pimple that we’ve all been talking and thinking about over the last few months is finally coming to a head. Bureaucratic tap dancing like that is a sign of something to be sure.
Guess what? That nefarious inverted yield curve chicken might be coming home to roost. The 2-year to 10-year curve narrowed to .38bps this week which is a sign of improvement. Who knew that bad things would happen when incentive structures are skewed? Who knew that people would take savings out of banks, savings earning a paltry .0000000000000001% (ish), and put them instead into short-term government bills and notes earning up to 5% (at least until recently)? Who guessed that genetically gifted calves would jump the fence. Not I, dear reader, not I.
You know who is NOT wearing flip-flops? Uncle Jerome. Said named Fed Chairman hiked interest rates another .25 bps this week. To combat persistent inflation, of course. With more of the same to follow if needed. Which seems a little aggressive when the credit market transmission is making weird grinding sounds. But naysayers be damned and go ahead and torque that screw way beyond specs because dammit they said we wouldn’t so we’ll show them. The comments and action this week tell me that nobody up there knows what they are doing and are flying by the seat of their pants. Speaking of pants…
As of this week it’s all premium wool suits and ties for Mr. Powell, thank you very much. But fashion changes with the weather and you never know what the future will bring. Because it’s likely to get hot this summer and flip-flops might still be an option.
What is money anyway?
The idea of money as an institution is absurd, fascinating, and also incredibly important. I recall my high school economics teacher, Mr. Thomas, tearing my $10 bill in half and proclaiming to the class that money was just an idea. It left me speechless (at that time mostly because he ripped my lunch money in half). And it got me thinking hard about money. I’ve been dwelling on the idea of money (off and on) ever since.
In her weekly column, Kyla Scanlon posed the question: What is Money? I will provide my answer (in as few sentences as possible but the answer really deserves a book… of which there are many). My answer is that money is a CONTRACT. Also, and implicit and derivative of the idea of a contract, is that money is TRUST. Two parties engage in commerce and one provides an object of value in exchange for another object of value. They reach an agreement of exchange. A contract. Billions, maybe trillions or more, of these exchanges occur every day. No fuss. No issue. That is the engine of commerce and it requires TRUST. And We The People do TRUST. We TRUST quite a bit. Maybe even more than deserved given the nature of We, Humans™. A lot of that TRUST is cultural and conditioned. Also, it is predicated on the idea that we will each abide by our agreements. If not, then as a society we’ve agreed that we will each enforce our CONTRACTS on each other. Hence the concept of LAW.
Guess what happens (or, if you believe in the idea of social contracts should happen) if you steal. Well, you will be the subject of LAW and its desired result: JUSTICE. And justice is how we keep the game a-playin’. Because people might stop playing if they think the rules are rigged. So we each need to at least FEEL like justice is possible. Else the wheels fall off. Justice is all of us keeping all of us honest(ish). Well, it would if we as a species weren’t so messed up. But anyways…
So blah-blah-blah and everything that we know is so much BELIEF written down as words on paper (so we don’t forget). Boil MONEY and CONTRACTS and LAW and JUSTICE down to their pure essences and what we find are a bunch of smart(ass) apes staring at each other from the corner of our eyes and keeping each other in check so that we all don’t murder ourselves over the necessities of life. And all of this because we all agreed to our rules a long time ago and continue to abide by them every single day. Mostly. But anyways…
Inherent in that logic is the breakdown in everything once the TRUST in any one of the systems mentioned above is lost. The minute we begin to fear that the idea of money, that construct, that contract, that figment of our imaginations, is null and void is the minute that commerce falls apart. No money - no more Amazon Prime. I know, it’s scary as hell. I present as example the failed nation-state of Somalia. Folks, there is no Amazon Prime in Somalia. There is no Same Day Delivery. There are no cheap tchotchkes from China delivered right to your door in Somalia. This is precisely what happens when everything falls apart. This is what happens when a society loses TRUST in its own institutions.
Dear reader, all of this is a VERY VERY down and Dirty explanation of why money is important. Now I reiterate what I find to be more important: MONEY IS NOT REAL. It cannot feed you. It cannot clothe you. It cannot make shelter. It cannot keep you alive. And seeing as one of the biggest objectives in the game of life is to stay alive as long as possible, this is important to consider. Because money, in and of itself, cannot do that. I find this to be an important idea to keep one from lusting after money for its own sake. Which is absurd.
What money can do, as a contract and agreement, is obtain for you the items needed to continue living. Therein is where money’s true value lies. It is why I consider money to be potential wealth versus real wealth. Real wealth are those tangible things which sustain life. So money only holds value when it can obtain for you the things which you need to continue existing; money only has value when people BELIEVE it can be exchanged for real wealth. The minute that is no longer true is the exact same minute that money is worthless. So TRUST and BELIEF.
In this day and age we need money for food and clothing and shelter. None of us is self-sufficient anymore and all of us has a burn rate of cash whose fire we must labor to stoke. So labor we do. To make things or do things that other people will give us money for. As in exchange. As in trade.
Money, dear reader, is the grease and oil of our economic engine. Commerce as we know it cannot sustain without the idea of money. We cannot obtain the things we need to survive without money. And that is why you and I and everyone out there obsess so hard about this little idea called MONEY even though money is but ones and zeros on a balance sheet. Like I said, a touch absurd.
Phwesh! And there is so much more to be written. Like the idea of inflation and the degrading nature of money over time and how that affects interest rates, etc. But for a humble weekly column this is where we stop.
What it all means for real estate…
Credit is a form of money. A derivative contract. I’d argue that, in our modern economy, credit has become the predominant form of money. Hence when one is dealing in Dirt (real estate), one should pay particular focus to the prevailing winds of the credit markets. As of this week, my sources tell me that residential mortgage underwriting is business-as-usual. There have not been any slow-downs beyond increasing interest rates which are now baked into the market and therefore no longer news. Also residential credit markets have evolved to be dominated by the Mortgage Backed Security and therefore have become largely estranged from the affairs of banks, especially regional banks. So, as of right this moment, residential RE appears to be okay.
Oh, but then there is commercial real estate. The Twitter-verse is alive with speculation that CRE is in for a real butt-kicking. This is because a lot of CRE credit comes from regional banks. And there is plenty of hot air swirling around that regional banks might be hurting as depositors remove deposits in favor of increasing returns on short term government securities. Of course Twitter is wont to be dramatic so I like to take it in small doses and with a bit of salt. Still…
In the land of the blind the one-eyed man is king. And in the land of thickening credit, cash is Supreme Emperor of the Universe. And its been a while since I’ve whacked this drum so now is a good time: for those with cash and patience, the weather is looking mighty fine. So put on your shorty-shorts and enjoy the sun.
Coda: dress codes -or- change is the only constant
Change is the only constant. I love that beaten down cliche. Because it is so damned true. To whit: March in Texas is known for temperamental and fussy weather. There are usually big swings in temperature. Today started at a chilly (for Texans at least) 50 degrees. But the highs will touch 80 degrees this afternoon. And it will be a sunny and beautiful day to be outside. I started the day in sweatpants. But, looking at the weather, there is little doubt that I will change to shorty-shorts and flip-flops by the afternoon.
But today I am writing and otherwise at my leisure. If I were meeting with a client it would be jeans and a button-up. If I were clearing cedar it would be heavy work pants and steel-toes boots. The point being that one should be expected to dress for the weather and also the task at hand. When it comes to fashion and investing, one should be flexible to conditions. Because today’s sunshine will inevitably lead to tomorrow’s severe thunderstorms. And today’s tightening credit market could be tomorrow’s heartache for some and opportunity for others. The Wise Investor is Nimble and Quick.
In the mean time the rest of us are reliant on a system of TRUST that is, more and more, inducing trust issues in its subjects. The flipping-flopping. The obstinate grinding on of flawed policy (Uncle Jerome is holding on just as tightly to increasing interest rates as he was to the idea of ‘transitory inflation’). The wearing of shorty-shorts when the weather is cold. The result is uncertainty and uncertainty is rust on the economic engine just as money is its oil. Which leads me to the final thought...
All things are subject to entropy. To disorder. That inescapable law of thermodynamics. The metal in engines wear and corrode and rust and will eventually blow out. Currency inflates and its value declines over time. Pastures turn to woodland and houses eventually fall down. Hence, because of entropy, all things are subject to change. Our laws. Our institutions. Our society. Our money. Even ourselves. Because, dear reader, change is the only constant.
I can neither confirm nor deny that those children’s parents are both incredibly obstinate.