Memorial Day didn’t become a national holiday until 1971 but it traces back to the Civil War. Originally called Declaration Day, it was held in remembrance of those that had died in our country’s bloodiest conflict.
Every school child in the country learns of Lincoln’s great Emancipation Proclamation. Though not the original cause of the war (the war had started nearly two years earlier), with the Proclamation Lincoln declared “that all persons held as slaves within the rebellious states…are, and henceforward shall be free.”
Through the years, Declaration Day, then Memorial Day, came to be one of the most important holidays for our country. As quoted by Doc Hastings, “137 years later, Memorial Day remains one of America’s most cherished patriotic observances. The spirit of this day has not changed – it remains a day to honor those who died defending our freedom and democracy.”
This idea of the great freedoms of the United States is a concept that began with the Civil War. Patrick Henry’s famous quote, “Give me liberty or give me death!” was uttered in 1775. The Bill of Rights, clearly outlining the freedoms upon which this great nation would be built, were approved fourteen years later and then ratified by the states into the Constitution in 1791. These rights, and thanks in large part to the three distinct branches of government, have largely kept the government in check in the times since.
At the risk of falling into a Begs the Question fallacy, I don’t think there are many that would disagree with me that even as we celebrated Memorial Day this past week, everything we have come to understand about American freedoms are now being held in question. To varying degrees, State and local governments have shut down citizen’s rights to run their businesses, free exercise of their religion, and even restricted their right to leave their homes. Life has changed.
The push pull between liberties and safety is not new. Many would posit that there is no circumstance that should allow the government to infringe upon our constitutional rights, and the guidance from the Federal Government that turned into State frameworks and Local government edicts were completely out of line. Others would argue that such actions saved the lives of many, and the saving of even one life is worth the loss of freedom that was required to do so.
Everyone, myself included, has opinions as such. Some of those opinions are far more educated and well-reasoned than others, but regardless of how educated or well-reasoned, the truth of the matter is we are unable to go back in time and determine outcomes if different decisions had been made. We will never know for sure if the decisions made by the varying levels of government thus far were the right decisions, and only with intellectual honesty can we admit as such.
Here is the real truth of the matter. When wearing our investor hats: whether or not the decisions made were right or wrong, whether or not we agree with the decisions made, and whether or not the freedom/security pendulum is swinging beyond where we think it should…It. Does. Not. Matter. Wearing our investor hats, all that matters is that the pendulum has swung. This swinging of the pendulum is not new, just accelerated over the past few months. Case in point is the rent control being put in place in many areas of the country. Historically, the US has had strong property rights and contract law. Rent control eliminates or reduces a property owner’s freedom to do what they choose to do with their property. These rent control provisions were in place prior to COVID-19.
As the pendulum continues to swing, there is both increased risk and opportunity to investors. As examples:
- Many places throughout the country have eliminated the ability of landlords to evict non-paying tenants. While it is Altus’s opinion that landlords should work with tenants that are being impacted by the economic shutdown as best as we are able (and assuming good intentions on the part of the tenant), the reality on the ground is there are tenants completely taking advantage of the situation. These tenants are both residential and commercial. The inability for landlords to execute on their contractual rights not only impacts returns, it also increases the risk of the investment. In this instance, risk can be looked at in two ways: 1. The risk of losing a stable return on investment, 2. The risk of losing investment capital because of an insufficient ability to pay mortgage obligations (or even operating costs). Higher risk should result in higher investor return expectations.
- Along the same lines, the government has put a halt on foreclosures for certain categories of loans. Residential loans have been written at very low interest rates due to the dependability of the cash flow and the collateral behind those loans. Per a Mortgage News Daily survey, almost 70% of the forbearance recipients could have paid their mortgage but “admitted they just wanted a break on their normal payments,” yet the lender was forced to comply. As with point number one above, if cashflow volatility increases, so does the expected returns. And if the collateral behind the loan is harder to obtain, the risk also increases. (As an aside, this also likely leads to a negative impact on the housing market as rising rates decrease affordability and the potential buyer pool.)
- The Shelter in Place orders have significantly impacted the viability of millions of businesses, both privately and publicly held. How many investors in Hyatt Hotels Corporation (NYSE: H) could have conceived in January that two months later the government would restrict travel to the point that hotel occupancy in Hawaii would drop to just 9% for the month of April (per the Hawaii Hotel Performance Report)? Or which investors in Cheesecake Factory (CAKE) would have believed it possible that all the store locations could be shut down at the same time, causing the stock to plummet 65%? It isn’t just hospitality that has been hit of course. Homebuilders, janitorial services, rideshares…the list goes on and on. Small and/or private companies with less access to capital, are likely to be hit even harder. At Altus our new project pipeline was bustling full on March 1, and as a result of the shutdown it went to essentially zero. None of this reduction is due to the disease itself. All of it is due to the response by the government to the disease.
- Additional laws/edicts in the pipeline continue the trend, greatly increasing uncertainty:
- California legislators trying to pass a law requiring all residential landlords to immediately drop their rents by 25% (You can’t make this stuff up folks – luckily it seems the pushback on this law has been forceful enough that it doesn’t appear likely to pass)
- Legislators trying to get a law through that negates existing commercial leases between landlords and businesses, and eliminates any guarantees tied to said leases.
- Forced COVID compliance regulations onto businesses, irrespective if those items are in direct conflict with laws already in existence (like HIPAA), or at great cost to the employer.
- The list goes on…
In investing there is risk. Our job as investors is to as best as possible reduce or understand the risks associated with an investment so that we can appropriately price our return expectations. Risk can be “things we know”, “things we know we don’t know”, or “things we don’t know we don’t know”. The less freedom in any market or economy (especially if that lack of freedom is not clearly defined), the greater the levels of risk, and hence a required change to investment paradigms, underwriting, and how we execute upon the investments themselves.
This consideration of risk and unknowns is different than the historical standard investment decisions that we made, and still have to make. Which companies have products that will benefit from people’s fear of infection? Which regions of the country are likely to have reduced long-term impact? Which neighborhoods will win and lose as people adjust their living habits, etc.?
The economy of a country moving from capitalism to crony capitalism will experience a slowdown in growth (all other things being equal). As mentioned earlier, this isn’t new, it is just acceleration. This shift in economic underpinnings doesn’t mean there aren’t investment returns to be had, it is just that those returns will be more and more consolidated around a smaller group of winners as opposed to spread throughout society (which likely explains at least a portion of the growing rich/poor divide). The trick is to either be one of the winners and/or be able to identify said winners when making investments. A third option, which is more available in non-publicly traded markets, is to simply adjust purchase prices to offset the increased risk and wait for the market to come to you. It may not happen overnight, but it will eventually occur.
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There is another area of liberty reduction that is potentially more concerning to me, as it is related to access to information and the ability to make sound investment decisions based on such information. It seems there has been a spike in censorship during this pandemic, and I am not talking just about China.
In January twitter started deleting accounts of people linking articles of a potential China cover up or incomplete accounting of the virus. Then, I read an article that included a video interview of two doctors done by the Bakersfield Californian, the main local paper. The two doctors own several urgent care facilities which were doing COVID 19 testing. In the interview they referenced data from their locations and shared their opinion of how the health system should be handling the pandemic. After receiving pressure, the video was removed (censored) by YouTube. Later, Forbes detailed that YouTube was also censoring a video done by well-known Chinese blogger Jennifer Zang who detailed various Coronavirus origin stories. These were but two of the many instances in which social media sites are controlling information. The CEO of YouTube stated that they were removing items contrary to WHO guidance. Facebook also censured users.
In the case of the deleted twitter accounts, the theories in the articles they were reposting became mainstream enough that the government of several countries spent considerable resources investigating (outcomes still pending). The doctors from Bakersfield pushed back against wearing masks. WHO no longer includes wearing a face mask on their “Advice for the Public Page” and instead says only “Wear a mask, if you are coughing or sneezing”. Jennifer Zang has been a well-respected source of information from within China throughout the pandemic. All were silenced. Whether or not the people in these examples were accurate or not is really beside the point. One of the most important aspects of being American is the freedom of speech. As Evelyn Beatrice Hall wrote, “I disapprove of what you say, but I will defend to the death your right to say it.” And even if there are a lot of unfounded conspiracies out there, there have also been many so-called conspiracies in the past that have been proven to be true.
Facebook, Twitter, and YouTube are private companies. As private companies they have, and should have, the ability to make determinations as to what is allowed on their platforms. The difficulty arises in that they have become gate keepers of information, are well connected to government entities, and have taken on the mantle purveyors of truth. This is a concern to me.
From an investment standpoint, access to information is absolutely key to making sound decisions. Information is so important that publicly traded markets 100% restrict (or at least try to) investments made using non-publicly available information. Conversely, private market investing has long provided substantial benefits to those with more or better information than the competition. Whether information is ubiquitous (public markets) or private (non-public markets), having that information is still key to making good decisions.
We have long known that more traditional news sources are highly biased, but as a news company they are reporting what they find important, not restricting others from reporting information. As such, by making sure we get news from traditional media companies across the bias spectrum we can hopefully have a more complete picture of what is really going on. The restriction and control of information by a platform (social or otherwise) is a completely different matter because the information is no longer available equally for all parties to consider. Maybe I am too far down a slippery slope on this, but if platforms can censure and remove information that doesn’t match the “company line” on the Coronavirus, what keeps platforms from restricting information on crime, population, and commodity use statistics? All of which are taken into account as part of any real estate investment we would consider.
As the impacts of the virus and the response to the virus unfolds before us, we will continually have to adjust how we underwrite risk. This is only the beginning.
Before signing off this month I want to leave you with one statistic that leaves me completely unable to comprehend current stock market valuations. In the US alone, close to 40 Million people have applied for unemployment since the second week in March. FORTY MILLION. To put that in perspective, that is roughly the population of California. California happens to be the 5th largest economy in the world. Of course, in California, only 19.5 Mil people are part of the workforce, so the new unemployment claims are 2x the workforce of the 5th largest economy in the world. This speaks nothing to economic challenges being faced outside the United States. And yet the stock market (S&P) is within 10% of its February (all time) high.
Happy Investing.
