It’s Clobberin’ Time!
I open with the famous quote from The Thing in the Fantastic Four. After what’s been going on in the markets, the reason is obvious. It seems that investors finally realized what they suspected all along, that the economy and certain stocks just ain’t what they were cracked up to be. Some less-than-great financials (Amazon), some absolutely dismal ones (Intel), some pessimistic economic numbers (unemployment), and the unraveling of some very crowded trades (yen-based interest rates, AI, vol dispersion) was enough to turn investor’s suspicions into reality.
You saw the reaction on Friday and Monday – to date, the biggest risk-off wave since everyone headed for the exits during the early days of the pandemic. For those who have been around long enough, Monday even reminded them of the crash on October 19th, 1987. That was the day when the Dow fell 22.6% in a single trading session, the largest single day loss in its history and almost twice what happened in Japan on Sunday night. If you want to know what a real, no kidding around panic is, do some research on that day.
The market’s favorite fear indicator, the VIX, jumped to as high as 65.7 early Monday morning, after languishing below 15 for most of this year and after being left for dead by a lot of volatility traders (and who, by the way, thought they could sell it with impunity – guess not). I hope this silences the “VIX is broken” crowd once and for all. But, don’t get too bullish on it. Although at the high it had jumped a record 42.3 from the previous close (a record), its level was actually lower than other intraday spikes we’ve seen. For example, during the height of the financial crisis in October 2008, it reached 89.5, and in the beginning of the pandemic, it reached 85.5. For reference, the highest VIX close of all time was in 82.7 (March 16, 2020).
As I’ve noted before, in order for the VIX to remain at elevated levels, it needs constant fuel to keep it going. Events that promise to be protracted, such as the pandemic or the 2008 financial crisis, are required. Absent that, it will settle down to its previous range as if nothing happened.
One interesting note: gold and bitcoin, always touted as safe havens, seem to have gone off-piste. During the panic sell off (if you could call it that), gold and bitcoin participated and were 0.9% and 7.2% lower, respectively, and that’s only after they recovered from their morning lows. If you bought either to diversify your portfolio during times of market stress, your hedge went the wrong way and you actually added to your exposure, not reduced it. What many gold and crypto “left tail” investors often overlook is that safe haven investments can act like any other risk asset — when times get tough, everything gets dumped over the side, no matter how clever the strategy. As Mike Tyson supposedly said, “Everybody has a plan until they get punched in the face.”
What comes next? I’ve lived through a few of these, and usually there’s a recovery, a “phew, that was close,” phase, which is rarely a sign that the blowout is over, just in remission for the time being. We shall see. Regardless, during periods of high volatility, almost always people start demanding that the Fed must immediately cut rates or inject capital, or both. After all, that was how they came to the rescue during previous crises (October 1987, Long Term Capital Management, the dot.com bust, 2008, and the pandemic). We should also be hearing soon about teetering hedge funds and how they may represent a systemic risk if the Fed doesn’t act. And lastly, and most distastefully, we should be hearing from various doom sayers that they were right after all (despite having said the same thing since 2008). Round up the usual suspects.
If you think Monday’s action was bad, take a look at the following:
Commercial Real Estate: I Can Get it For You Cheap – Very, Very Cheap!
You can talk about over or under valuation all you want, but nothing settles the argument like an actual deal. That’s the rigor of mark-to-market: no lying, no surprises, just hard, cold, dispassionate reality. Some asset classes, like real estate, escape its clutches, but that’s just a temporary reprieve. This became clear last week when something notable occurred in the epicenter of commercial real estate, Manhattan.
It was reported that 135 W. 50th St, a 930,000 square foot 23 story office building in the heart of midtown Manhattan, sold via an online auction for $8.5 million. No, that’s not a misprint — $8.5 million, a mere 2.6% of the $332 million it sold for in 2006! Wow.
Think about that. Instead of buying a really nice 2,000 square foot classic six or eight on Park Avenue for $8.5 million, you could get your very own 23 story, 930,000 square foot office building instead! Stretch out in a joint that’s 465 times larger, and has hundreds of bathrooms and closets! Think of the adventures your kids could have without ever leaving the house!
There’s fine print, of course. The sales price is just for the building, not the land underneath it (real estate is a weird market). The owner of the building then has to pay rent to the owner of the land, which increases every five years until 2123. That means that the office rents that the new owner collects has to be greater the land rent in order to turn a gross profit. I wouldn’t count on that, however – the building’s current occupancy rate is just 35%. And given its construction, converting it into residential units isn’t really an option.
On the face of it, the purchase doesn’t seem to make much sense, unless the price is so low that the downside is inconsequential. Who knows what the buyers were thinking (but it better be long term – this could be one of those investments that might pay off for your kids’ kids). In any case, it does show that real estate, commercial or potentially residential, can go down, and very violently, not just up. People who didn’t live through the most recent housing crash of 2008 – 2010, or any other for that matter, should keep that in mind. Nothing is a 100% sure bet.