Postcards: How Janet Yellen Nearly Ruined My Day

If you thought there might be a chance for you to buy into certain real estate opportunities in the coming years - think again. The Bailout Playbook is back, baby.                                                                                                                                                                                                                                                                                                                                                                                                                 Forwarded this email? [Subscribe here]() for more [Postcards: How Janet Yellen Nearly Ruined My Day]( If you thought there might be a chance for you to buy into certain real estate opportunities in the coming years - think again. The Bailout Playbook is back, baby. [Garrett {NAME}]( Feb 6   [READ IN APP](   Dear Fellow Expat: Greetings from the back bedroom of the house. I’m still laid up a tad, with my lower back barking at me. Painters are finally coming through our house to fix the walls after we needed to have the entire piping system replaced last year. Speaking of barking… I had to move Elsie and Gracie - our two dogs - back into this room with me. Every time our front door opens, our ADT system beeps… and they start barking like maniacs. It’s been a good day to be in the headache medication business. Especially after this report from Treasury Secretary Janet Yellen. [Upgrade to paid]( Commercial Real Estate Bailouts After COVID-19, they printed too much money, creating inflation that ripped through this economy over the last few years. But another form of “printing” put America’s economy on the brink: The commercial real estate market. It’s not so much printing… as it is overdevelopment. The commercial real estate model isn’t based on common sense economics: the laws of supply and demand. Here in Florida, I witness the development of new strip malls in “Opportunity Zones,” where few people live or have the capital to spend. Why? The tax write-offs and benefits. Right down the street are malls anchored by struggling retailers with countless vacancies. This trend takes you all up the East Coast if you pay attention. Last year, as the regional bank crisis exposed challenges in the office space, Senator Marco Rubio wrote a well-balanced op-ed titled “[No Commercial Real Estate Bailouts]( He led with the story of a man witnessing a strip mall go up in Minnesota in 2000. Twenty years later, it was never full of tenants, and a new strip mall… opened across the street. Makes perfect sense, doesn’t it? Rubio notes that vacancy rates in Washington, D.C., sat at 20% last year, and concerns emerged about overdevelopment in 2017. But we kicked that can down the road. After the collapse of Silicon Valley Bank, the Fed opened a new lending program, the Bank Term Funding Program, last March. This allowed banks to borrow capital while ignoring that the collateral value was not at its full value (or par). With interest rates rising, the value of bonds fell (the collateral for refinancing dropped in value). As the lender of last resort, the central bank engaged in yet another bailout - without calling it this by name? Now, we’re five weeks away from that lending program expiring. And banks have borrowed over $160 billion with a recent wave of borrowing that started in December 2023. Will the banks be able to repay that money with interest rates still above 5%? Probably not. At least not for a while. So… we’ll likely have another program. At least, that’s what I’m taking away from Treasury Secretary Janet Yellen’s statement today. When does it end? When will it end? Yellen Signals Support for Commercial Real Estate The commercial real estate market will continue to face stress. We’ve seen a spike in interest rates and the Fed’s inability to slash rates due to sticky inflation. We’ve seen vacancy rates plunge after COVID-19 as the workforce shifts. Exploding debt levels are coming due later this year. It feels like we’ve been talking about this problem forever… but it hasn’t quite bit the U.S. economy badly yet. In testimony before Congress today, Yellen said that she worries about commercial real estate but that regulators are “on it.” On it? Yellen said banking supervisors are watching this and that several banks are “quite stressed." Of course, we’re coming to the end of the one-year date on the Fed’s lending program. Has Yellen signaled that we might be ready to provide more liquidity support to the real estate market?” Or, as Rubio described, “An even greater transfer of wealth” from the middle class to Wall Street? Given the never-ending lending programs to shore up liquidity and prevent asset prices from falling, my money is on Yellen’s favorite hobby: Printing money. Who else will be bailed out this decade? Airlines? Airbnb owners? Insurance? More student loans? Credit card borrowers? Colleges? Pensions that own exploding “Chicago” levels of debt? Everyone but the responsible? More importantly - is there any real plan to prevent an inflationary debt spiral and rampant monetary expansion that feels inevitable? Not with Yellen in charge. Liquidity at All-Time Highs, S&P 500 to 5,000? Investors need to remain in the equity markets for the long haul. [Michael Howell noted]( that his liquidity measure hit an all-time high this morning. It’s no coincidence that the S&P 500 and the MSCI Global Index are near all-time highs. All this capital finds its way into the equity markets - until we find ourselves in another position where rates increase, and collateral quality weakens. This chart tells you everything about the impact of liquidity on global equity prices since 2010, when all this madness really started. Figure 1Source: CrossBorder Capital, US Federal Reserve, People’s Bank of China, ECB, Bank of Japan, Bank of England, MSCI Then… the central banks come right back in to provide monetary support. That orange line isn’t going down. Central banks have tried to ween us off the madness, and it hasn’t worked out. As Howell notes, the Federal Reserve can’t go backward. This is the world of finance and economics after 2008 and the massive levels of Quantitative Easing that started in 2012. There is no getting off this fiscal or monetary train. Your best defense against monetary inflation is in gold (a small amount) and in strong equity assets with great management, low debt, and strong return on invested capital (ROIC). Our Model Portfolio is the best pathway forward. [Check it out right here](. Stay positive, Garrett {NAME} Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.   [Like]( [Comment]( [Restack](   © 2024 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()