Beyond Thunderdome - June 2023

I have to start this month's Thunderdome with a mea culpa: my "monthly" note has been AWOL for the past two months. Why? The youth sports spring season is insane in the Moran household. There isn't much free time between orchestra concerts, dance competitions, gymnastics meets, and coaching 43 (and counting) travel baseball games. Jason Gay at the WSJ (a fellow Badger) even wrote an article about how crazy spring sports are for parents:

That said, I love every minute of it.

On to the good stuff... the Fed continues to be overly scrutinized as we approach the end of this rate hiking cycle. This has been, far and away, the fastest rate hiking cycle when we look at cycles over the past 30 years. And, despite skipping a rate hike this month, the Fed edged up its terminal rate forecast by 50 bps, which suggests two more rate hikes this year. Why didn't they raise rates again this month if they are hell-bent on raising another 50 bps this year? Just do it and get it over with. The end is nigh, but we aren't there yet.

So, what has been the effect on real estate so far? There has been an absolute crash in transaction volumes. I have been telling people we are in this standoff between buyers and sellers where the bid-ask spread is wider than ever, and neither side shows any side of giving in. This can be quantified as Green Street calculated that transaction volume has plummeted by more than 70% this year. However, average sales prices are still showing year-over-year increases. How is that possible? Well, it suggests only the highest quality assets are trading hands today.

The most significant difference between today and the GFC is a distinct lack of a credit crisis, at least not yet. Sure, we have seen some high-profile office and retail assets get their keys sent back to the lenders (aka - jingle mail). Yet, these were just accelerated secular trends that seemed inevitable even before the pandemic. The doom and gloom headlines about "commercial" real estate (they really just mean office these days) being a ticking time bomb are pure tabloid fodder. There will be pain, of course, but it is hardly a systemic risk given that office values as a share of commercial real estate have declined for years. But no one would click on the headline, "The Office Market Sucks, and it Will Continue to Suck."

What about the rest of the economy? While we are seeing a sharp drop off in real estate transactions, we are also seeing inflation cool without the labor market cratering. The labor market, stock market, and housing market are the three most important factors going into the average person's confidence, and all three are doing well despite the rapid rise in rates.

Regarding the labor market, something near and dear to me these days, I saw a few things that help explain why the labor market is still hanging in there.

The first two things are thanks to Brian Reynolds at Reynolds Strategy, one of my favorite Wall Street strategists. First, the Baby Boomers left the labor market during the pandemic and have yet to return. You can see this in the labor force participation for the 55+ cohort:

This is no surprise as many of these people were nudged into early retirement during the pandemic while home values rose significantly, giving them the peace of mind to retire.

The other, more interesting chart is of new business formations. New business formation took off during the pandemic, and it hasn't slowed down since. The pandemic gave people a taste of what it's like to work outside the Corporate America construct of five days in the office plus being reachable 24/7. And now, as corporate America tries to return to its golden age of wringing profits from its employees, employees are fighting back. This innovation is undoubtedly good for the future of the American economy.

So, as corporate America tries to backfill these employees that have moved on to greener pastures, there are all these articles about how hard it is to hire good people. The WSJ finally highlighted the elephant in the room: most companies are bad at hiring.

Why are they bad at it? This pretty much sums it up:

But there is a more obvious reason hiring is hard: Many companies just don't do it well. Too often, they alienate prospective hires by subjecting them to a tortuous vetting process. They reject promising candidates who don't meet their impossibly long list of requirements... The prevailing attitude toward applicants seems to be, "You'll be lucky to work for us at Heaven Sent Corporation."

I have never read more truthful words in my life.

Finally...

I have a couple of interesting things this week. The first concerns AI since we are clearly at peak AI regarding news headlines. However, the more I learn about ChatGPT and the like, the more I am unimpressed. For the record, I tried to use it for work once. Once. It impressed me because it is more intelligent than a rock but didn't provide the output I needed to make my life easier.

Cal Newport summed up ChatGPT the best:?"It can write grammatically correct text about an arbitrary combination of known subjects in an arbitrary combination of known styles, where 'known' means it encountered it sufficiently many times in its training data. This ability can produce impressive chat transcripts that spread virally on Twitter, but it's not useful enough to disrupt most existing jobs."

With that, the FT did a simple test to see if ChatGPT could pass the CFA exam, and it turns out it would likely fail miserably.

AI may take all our jobs one day, but in 2023, AI is more an entertaining circus act than a life-changing disruptive technology.

Elsewhere in peak headlines, you can't make it a day anymore without hearing something about the "culture wars." This is because today's information space is filled by the tail ends of the bell curve and not the average person.

Take, for example, this school principal at a Florida charter school who was forced to resign because one (1!) parent complained that showing a photo of the statue of David during an art lesson was "pornographic," and two other parents complained that they should be notified in advance about "controversial" subjects.

Kudos to the mayor of Florence for offering to host the former principal at Tallahassee Classical in response. Perhaps the school board should work on improving their 3/10 score on GreatSchools at the next meeting.

Now, I should end on a funnier note. The end of?Succession?has led to some great memes related to current events. First, we have a natural successor to Tucker Carlson at Fox News - Chuckles the Clown!

Second, with the merger of the PGA Tour and LIV Golf, Rory McIlroy got the Kendall Roy treatment up and down the internet after being the PGA Tour's sacrificial lamb: