Juggling Dynamite

Last week, the entire US yield curve inverted (a diffusion index of all spreads is shown below via ISABELNET.com since 1981), with the one-month Treasury yield rising above the 30-year Treasury yield.

The spread on two and 10-year Treasury bonds widened to -71bp–the most negative since before the double dip recession of the early 1980s (shown below courtesy of The Daily Shot).

At the same time, the spread between three-month and 10-year Treasury bonds (below via Jay Kaeppel from 1960 to November 15) ended Friday at -52bp, approaching the -64bp peak spread in February 2007 before the Great Recession began in December 2007.

EPB Macro’s latest economic update offers further insight into incoming data.

This weekly update will cover the economic data that was recently released, including industrial production, retail sales, and some leading indicators of inflation. Here is a direct video link.

Private equity firms and funds have doubled down on the realty space during the low-rate boondoggle of the last decade. As usual, this led to a massive surge in supply and leverage as most forgot (or never realized?) that real estate is a cycle. Now pounds of flesh are due.

In 2021, the tech sector accounted for 20.5% of U.S. office leasing activity, while the finance and business services sectors accounted for 16%.

In 2022, tech companies have announced some 120,000 layoffs, already more than the 100,000 people they let go during the dot-com bust and placed some 30 million square feet of office space up for sublease, more than three times the 9.5 million square feet they sublet in the last quarter of 2019 (CBRE data).

The national office vacancy rate in America at 12.5% is the highest since 2011 (CoStar Group Inc), with 212 million square feet of sublease space on the market (a record since 2005). See WSJ Tech firms dump space as they downsize:

The big technology companies that drove U.S. office demand for years as they expanded their empires are now canceling leases and flooding business districts with office space as they downsize. 

…Now, with the prospect of a recession looming and companies slashing payroll, tech firms find they have too many floors of office space and want to unload big chunks of it.

…The turnabout in office demand could mark the end of a long cycle where tech firms were often the biggest presence in new office towers. Even during the pandemic, when many businesses shifted to hybrid-work strategies, many tech companies kept leasing space because they were on a hiring spree.

Layoffs in the finance sector–the second-largest office leasing sector in 2021–are now following tech’s lead, as the deal flow on equity, debt and initial public offerings has plunged year to date, see: Wall Street Layoffs pick up steam as Citigroup and Barclays cut hundreds of Workers.

Meanwhile, office buildings are backed by $1.2 trillion of the $5.4 trillion in total commercial real–estate debt that was outstanding at the end of the second quarter—more debt than any other asset type other than apartment buildings (Trepp Inc data).

With rental income in retreat and mortgage costs soaring, defaults and distressed sales are the next part of the cycle.

After 26 years with a front-row seat in the revolving door, wild-west finance sector, I am not surprised at the unfolding crypto-doom; neither am I confident that better public protection policies will follow, nor the disgorging of ill-gotten gains from those who promoted and perpetrated the carnage. I have also long noted that people can be hard to help, and many play a leading role in their financial suicide through wilfully blind choices and behaviours. That said, the discussion below is cathartic in its unvarnished assessments–foul language alert.

One month after warning investors about the shady dealings going on at FTX on the Hedgeye Investing Summit, legendary short-seller Marc Cohodes returns to HedgeyeTV to discuss the company’s recent fallout with Hedgeye CEO Keith McCullough. Here is a direct video link.