Yield Curve inversion


#1

Just notable, the 10-year T-note rate dipped below the 3-month T-bill rate yesterday (again). It did this before on March 25 and much news about it then but nothing today. There is a “sag” in the curve around 3-7 years that is widening.

Personally, I think this is reflecting uncertainty about the 2021 presidential race and the economic changes that could happen in 1-10 years, which could be very varied depending on location. Location, location, location.

What do you do at the top of the market?


#2

Great post.

Good time to de-leverage IMHO. I have been selling a lot lately for this purpose, and also to focus more on strategic deals (e.g. RV park development in this case) with a 10 year investment outlook.

While I am not convinced we’re at the top of the market I believe risks associated with trade wars, mounting national debt, political polarity creates a lot of economic uncertainty and link to the presidential election. And as a result increased market volatility until an issue tips the scale for a bear market. I feel confident any downturn would be less severe than our last, barring a new surprise such as war.


#3

An inverted yield curve has always preceded a recession, but the length in time of the run up to the recession and the length in time of the recession itself has varied quite widely throughout the years. So, we know we are headed for a recession, but we don’t know when or for how long.

I’m acquiring assets, and I’m not totally stoked on my timing, but sitting on the sidelines for an indeterminable amount of time does not seem like an answer given where I am at in life.


#4

No comments but i appreciate the replies and discussion .


#5

The global chase for yield has finally caught up to our asset class. I’ve been in the “lower for longer” camp for some time re: rates, so don’t see demand from an acquisition standpoint changing dramatically. We still offer more asymmetric risk/reward on a relative basis to multi/industrial/office/etc, even as cap rates continue to compress Trump claiming “best economy ever” and simultaneously trying to push more QE is hilarious (and frightening). That, coupled with an insanely timed massive tax cut, gives me pause as I think about the long term fiscal prospects of the country, but won’t impact our asset class in my opinion. I am still in acquisition mode.


#6

Note: I am also in the recession in next 3 years camp.


#7

Worker participation is 63% thus many potential workers have given up or enjoying drugs. Fiscally, the USA economic is the envy of the world, but many large corporations have their fingers stuck in China which is a totally controlled by the communists and steal easily our advance technology; and presently 5G is the prize. We have made numerous offers on properties with even banks giving the green light and yet in the details the banks would ignore in our view point normal reg flags. Most properties being offered today normally would never even be consider to purchase; BUT we definitely are at the TOP of the cycle and prepare for the results of over valuations and cheap money. Being owner-operators we are noticing the poor are even poorer than people 25 years ago and that is ONE reason park owners HAVE to bring in home to fill vacancies and tenants mostly have NO money saved for difficult times which will result in NO payment to park owners when the down turn occurs. Four years ago there were lots of good value parks for sale–today 75% ???


#8

I would have to agree that a recession is eminent and I see two motivations at play that could put it either before or after the elections. Obviously, Trump is planning to run on the basis of our economy being spectacular and on the basis that he kept most of his promises and is making real progress towards goals many didn’t think he’d pursue. On the other side, there is a real incentive to push levers that put us into a slow down for Democrats to take the air out of Trump’s reelection bid.

Aside from that, the embassy I used to work at in Baghdad is evacuating non-essential personnel in response to threats from Iran. https://www.stripes.com/news/middle-east/state-department-orders-evacuation-of-non-emergency-us-government-employees-from-iraq-1.581042?fbclid=IwAR3DpUiSSYM08WPNlSo5nh5VYlYyztoKKxwnWOp58UHMaalSWE1iUpIdy4M

The last time this happened was 2012-2013 while I was there and that was ISIS. The US military intervened after that and pushed ISIS out of Iraq and into Syria.

I spent a lot of time watching suspected Iranian spys take pictures of our embassy and the routes our diplomats traveled. War with Iran, North Korea, and China has been on the front of our military’s mind for a very long time. Will it happen? Probably not. This is a cold war in the same sense as it was with the Soviet Union. However, I suspect we’ll use a lot of dirty tricks to tank the economies of these countries. (e.g. Venezuela) Many of those tricks are likely to bring instability to our own markets which is why it’s probably a safe bet to be extremely careful as an investor right now and avoid making mistakes that could ruin you.

The key in this business seems to be to underwrite the refinances of your purchase at higher interest rates to find out what you could absorb. Additionally, you should underwrite the exits at higher cap rates too. It’s pretty simple but unfortunately the conclusion naturally means you probably won’t buy too many deals until things become a little less stable and there’s less liquidity in the marketplace. Either way, given time the market will become more favorable but it just isn’t right now for guys like us. At least not to buy. To sell, there’s been very few more favorable times for that decision.


#9

Could not agree more with this. I am going to try development. Unless it doesn’t work out.

Time was, you could buy a park for less than the (my estimate of) development cost. I always thought that was the start to a good deal. You make most of the money on the front end (buying a property that will cash flow).

Nowadays, parks are listed pro forma 6-7% and you know, it’s never as good as pro forma. The price per lot is more than rebuilding from scratch.

And that doesn’t include the (very real) need for capital reinvestment.


#10

I’m assisting a seller on a 175 space 4-star asset in FL. Current bid is a 4cap. $15.25mm. Sun bought the 200 space park down the road in 2008 for $5.9mm. It’s just insane right now.


#11

My offer on this thing was $12.4mm but I dropped to a ~$9-10 after visiting. I thought $12.4 only because I thought I could capture money fleeing China to be the LP in an “Evergreen” style fund. Worst part is, The $9-10mm is using that model for the returns I thought made it worthwhile. @Brandon


#12

I spoke with a guy the other day and he’s building a large park in Florida. The local area restricted him to 1.75 homes per acre yet he has city water/sewer.

The frustrating thing about development is clearly dealing with most cities who have their heads in the sand about how screwed they are with this affordable housing thing. HUD delegates to Local and Local acts like they don’t know there’s a problem in their area…