Landmark Links May 25th – Still Dancing

Lead Story…. In the dark days of mid-2007, right before the subprime bust and ensuing financial collapse nearly brought down the world economy, former Citigroup CEO Chuck Prince made an interesting statement during an interview with the Financial Times. Prince answered a question about his firms market posture at a risky moment with a quip that would forever be immortalized in the annals of financial history as one of the stupidest things a CEO of a major bank has ever been quoted as saying.  Via Time Magazine (emphasis mine):

The Citigroup chief executive told the Financial Times that the party would end at some point but there was so much liquidity it would not be disrupted by the turmoil in the US subprime mortgage market.

He denied that Citigroup, one of the biggest providers of finance to private equity deals, was pulling back.

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he said in an interview with the FT in Japan.

As we now know, several months later the music did stop, global liquidity all-but dried up, the economy ground to a halt and Prince – along with several of his cohorts at other major banks – was shown the door for behaving recklessly.  The reason that this is still relevant in 2018 is that its the classic example of someone who is supposed to know better making a dumb statement that most observers know would age terribly, the only question being how long this would take.

The current economic cycle may have had its very own “music is still playing” moment  last week when California League of Cities spokesperson Dane Hutchings made an absolutely absurd statement about pension fund returns in an interview with Chief Investment Officer Magazine.  While Hutchings is nowhere near as high profile as Prince was, he still is a person of influence when it comes to the nations largest pension fund, CalPERS.  Hutchings take on CalPERS projected returns may prove to be just as ill-fated as “we’re still dancing.” Via Chief Investment Officer (emphasis mine):

The legislative representative to the League of California Cities urged the CalPERS Investment Committee Monday to think “out of the box” in finding a way to exceed its 7% investment return projections, saying that cities won’t be able to pay their monthly contributions to the pension plan if returns are that low.

There is so much wrong with this statement that it’s somewhat difficult to know where to start but I’ll take a stab at it:

  1. The market doesn’t give a damn what your needs are as in investor.  It could care less that California and it’s cities can’t afford the astronomical and stupid commitments that politicians made to public employees.
  2. Achieving higher returns means taking on a higher level of risk.  This is the case always and forever.
  3. The larger that a fund becomes, the more difficult it is to outperform the market.  CalPERS currently has $341.5 billion in assets.  At that size it is virtually impossible to outperform the broader market.
  4. If bonds return 3% for the next decade (28% of CalPERS current portfolio) and stocks return 5% (50% of CalPERS current portfolio) then the remaining 22% of the portfolio which is invested in real estate, private equity and other alternative investments would need to earn a whopping 16.6% net of fees in order to achieve a 7% yield which is just not going to happen.  What this means is that CalPERS is overstating their return already.  Seven percent is too aggressive but no one is willing to admit that because it would reveal an even more massive deficit than the $153 billion already reported.  Instead, they continue to partake in a strange variation of Kabuki Theater where everyone involved knows they are screwed but no one is willing to admit it publicly.
  5. We are in year 8 of an epic bull market.  If a fund can’t achieve its returns during this period, it probably won’t ever happen.  Also, taking more risk to shoot for a higher return this late in an economic cycle is incredibly unwise.

Ironically, this is not the first time that stakeholders have pushed CalPERS to push the pedal to the floor in order to attempt to plug a funding gap.  The pension fund infamously got aggressive at the wrong time during both the tech bubble of the late 1990s and the real estate bubble of the mid aughts.  The last time around ended in tears when CalPERS decided to double down on land development and housing construction around 2006-2007 figuring that they would cash in on a boom that would never end.  Things went poorly to say the least.  In one particularly glaring example of greed, stupidity and style drift, a CalPERS advisor who specialized in urban infill development persuaded the fund to invest in the recapitalization of Newhall Land and Farming.  Newhall is a massive 15,000 acre master planned community in the suburbs north of LA that was still in it’s early phases and would be contributed to a new venture called LandSource along with a hodgepodge of other land and development assets of questionable quality.  CalPERS invested $1 billion in that deal and lost ever single penny by the time that the dust cleared.  As a result of that and other missteps, CalPERS decided to pull out of the home building and land development market at the worst possible time, failing to capitalize on the recovery in land and home values while also cutting the legs out of much of the private builder community that they had previously financed in the process.  In doing so, CalPERS effectively made their own contribution to the massive affordability and supply crisis that we are experiencing today.

There are going to be painful decisions to be made about public pensions in the coming years no matter what.  I sincerely hope that CalPERS ignores the League of Cities and doesn’t give into their stupid and financially illiterate request to layer on risk in order to plug a massive funding gap at a very mature point in the economic cycle.  Then again, past missteps and current denial about projected returns don’t give a whole lot of reason for hope.


Baby Bust: US births have hit their lowest number since 1987 as the fertility rate last year saw it’s largest one-year decline since 2010.

Straight Up: Oil prices are up nearly 50% year-over-year.

Priced Out: Jobs in construction, logistics, and call-center employees are increasingly missing from expensive metros. But pricey metros have more than their share of tech, science, and high-end service jobs.

Subsidized: A large portion of the US economy has become Movie Pass – selling services and products at an unprofitable discount with the difference made up by investors, all in the name of growth.

Rollback: The House and Senate both passed a bi-partisan revision to the 2010 Dodd-Frank law that will cut regulations for small lenders and substantially raises the asset threshold at which larger regional lenders automatically face stricter rules.  However, Dodd Frank’s major planks such as emergency government powers and curbs on derivatives will remain in place.  The bill does include mortgage-underwriting-standards relief for banks with fewer than $10 billion in assets.


Mixed Use: US mall owners at the ICSC RECon convention in Las Vegas highlighted re-positioning plans to replace vacant former JC Penney and Sears stores with apartments and hotels.

Hanging In There: Commercial and multi-family originations were up 1% over 2017 in the first quarter of 2018 despite the headwind of higher interest rates.

Bottoms Up: Store owners and downtown planning committees in cities around the U.S. are organizing shop crawls—often with alcohol flowing—to spark consumer interest in an era of online shopping.


Too Big to Fix: No one can figure out what the hell to do with Fannie Mae and Freddie Mac which are still under federal conservatorship and more critical to the US mortgage market than ever before.

Nobody Walks in LA: Los Angeles has long been known as a town that loves its cars.  However, traffic and high priced parking, along with a bunch of newly-constructed high end urban condos have wealthy buyers increasingly paying a premium for walkability.

Pack Them In: Shared housing startups are taking off as housing expenses in high cost cities make it more necessary than ever to have roommates.


This Sucks: America is losing the battle against robocalls as auto-dial fraudsters continue to blast out millions of calls at little cost, utilizing software that disguises their identities despite harsher penalties for getting caught.

Locked Out: Shoppers who create headaches for Amazon by returning too many items or reporting too many problems with orders are getting banned from the service without warning.

Under the Counter: It’s still early but California’s underground pot market continues to thrive after legalization at least in part because of high state taxes and a complicated Federal tax structure that can drive marginal rates as high as 70%.

Chart of the Day

Despite worries about Baby Boomer retirement tanking the economy, the working age population is still growing:

Source: The Fat Pitch


Get Out: A NY couple is suing their son in order to evict him from their home after he refused to move, get a job, pay rent or help out around the house because Millennials.

Super Poopers: Police in Ohio are on the lookout for two people who have been caught on camera entering an under-construction home several times over the past few weeks to poop on the floor.

Plunger Needed: A high school in North Carolina was evacuated this week after a clogged toilet led to an odor so toxic that several students complained of teary eyes and burning throats.  (h/t Steve Sims)

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