Frank and Ian dive into compelling stories driving the news cycle.

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News Vs. Noise: October

Googlers Rail Against CEO’s Austerity, The Fed Doesn’t Care If You Lose Your Job, Input Costs, And The Danger Of Talking To An Influencer With An iPhone

Frankie, we’re talking about the news.

We’ve been on the phone for two hours, talking about everything but the news. We’ve been talking about baseball cards, all kinds of other things.

If I were to hit record on this Zoom call, we’d have had three episodes by now, but yet we’re going to be scrambling to finish this episode because we’re jackasses.

That is news. We are jackasses.

Frank and I, we’ve been brainstorming different episodes that we could do. One thing that Frank and I typically do before we start recording is he and I will talk about all the stuff we’ve been reading in the paper or that we saw on tv or things that we’re experiencing in our own businesses. We share almost none of it. We share maybe 10% of it if it somehow applies to an episode because we get specific on topics.

One thing we’ve been chewing around is why don’t we make an episode based on items of interest that we saw in the news or things that we’re experiencing that are changes in the market that are impacting the different businesses that we’re involved in? This new format, and for our regular readers, we would love it if you sent us a text message, an email, a message on LinkedIn. Tell us if you like the format or what you’d like to see more or less of if there is anyone reading this episode. That’s always the caveat we have to put here.

There are two things I want to say here. I always have things in twos. I’m not smart. I can’t get the three that require commas. I’m not good at commas. Right now, we’re in a unique part of the news cycle. There are a lot of things happening that are bad. What I come down to is this. There are three camps. There are people who are 100% wrapped up in the news and that’s all they deal with. Like my mom was in town and CNN was on and she watched the news. That’s what she does. She’s old and retired. She watches the news.

There are people who are incredibly informed that do follow the news but produce a significant amount in society. That’s a rare number of people. There are most people who are in Ian and mine’s camp where we are insanely selective on what we put in our heads through the news. I listen to a handful of sources. It’s hard nowadays not to be biased and to not get sucked in. When you go to your Google feed, they’re smart enough to fill your head with stuff.

The problem with the Google feed and for everyone reading this is it quickly realizes what you’ve hovered over.

It’s biased to you. It tells you what you want to know.

It’s all confirmation bias. It will put more stuff in front of you that does not ever change your mind. That’s not helpful if you’re running a business or investing. You should be seeking out other opinions. Things that force cognitive dissonance, you should be seeking that stuff.

 

The news cycle is such now and your phone is such now that you need peer groups. You need people to talk to, people who see things from a slightly different perspective than you. That’s why masterminds online or otherwise are important nowadays and are popular because people are looking for another point. With news, there’s something else that is critical before we launch into this. This is something we’ve talked about in our business now, going back two quarters. What qualifies as news and what qualifies as noise? Most of it is noise. Most of America is emotional and is drawn into the noise. What we want to be able to do as people that work at our company, and what Ian and I try to do is look at the difference between the noise and what is news that affects us, and then how do you take action off of the news.

Others are going to react to the noise. If you’re controlling the narrative properly, you will allow the noise to affect others and you capitalize based on news. These are the things that you can make good decisions on. I do real estate. We make all kinds of decisions based upon news inside of real estate, while others are affected by the noise.

Ian knows bonds and stocks way better than me. He sees patterns. We were talking about baseball cards for an hour and a half because we’re seeing how people are emotional. That is what we want to do in this segment. Let’s talk about things that are out there. How do you whittle it down and take action based upon what’s happening? Not everyone’s great at it. Ian and I maybe aren’t great at it, but we’re pretty good at making sure it helps us in our life and the wind is at our back and it’s not a headwind that we have to fight.

A story that I’ve been tracking is the big tech companies. First and foremost, I’ll pat ourselves on the backs. In July 2022, we did an episode that all but said the recession’s already here, just no one’s reporting on it. We’re doing this in October 2022. By now, few people would argue that we’re in a recession. We were pretty early on it.

One of the reasons that we were strongly in favor of us being in a recession were the reports of the big companies who were coming out and saying their operating expenses were out of control and they had missed earnings because of expense overruns. Since that’s happened, some of the big tech companies, on September 30th, 2022, Meta came out and said, “We’re freezing all hiring.”

Advertising’s one of the first things that get hit when a recession comes, marketing dollars, advertising dollars. It’s foolish. What happens is the small companies run out of money so they can’t advertise and it’s a death cycle they go into. The smaller companies start to go. The big companies that weren’t tracking how well those marketing dollars were spent started to hurt.

 

Google CEO Sundar Pichai came out and said, “We’re going to have a simplicity sprint.” What he meant by that is we got 174,000 employees. We’re not going to cut people. We’re not doing layoffs. Everyone wants to make sure you know we’re not doing layoffs because they don’t want to lose the good talent they have. No one’s going to use that word anytime soon. That will change. We’ll get to that later.

He came out and said, “I’m going to push everyone for your ideas. We’re not looking to reduce workforce, but it’s a challenging market. I have real concerns as the CEO about our productivity.” Truthfully, Google’s productivity has always been shit. I’ve always joked that they’re like the Dominique Wilkins of companies. All they do is score. They don’t play any defense. They’ve always scored enough where they won.

Stop there. Define that. Ian and I have had this conversation. Ian will often say that Google is the Dominique Wilkins of businesses. All offense, no defense.

There are two ways to make a profit. You can make more sales, more revenue, or you can tighten up and spend less. Google is notorious for beating on the top line, meaning we got more sales and revenue than everyone predicted we were going to do, and missing dramatically on the bottom line because they’re a monopoly. They don’t want to admit they’re a monopoly, so they spend money on all these stupid moonshots. Part of it is because they don’t want to make so much profit margin that the government breaks them up. They’ve always been horrendously bad at running the actual operating expense part of the business.

Let me weigh in for a second on this. This is critical. Amazon is similar. Amazon went through a period early where they need to get the profitability. Google was profitable right off the bat because they had a better mouse trap than everybody else. If you’ve never read an annual report of Google, it is fascinating because it literally tells you all the stuff we’re talking about. Ian, I don’t read them every year, but I read probably 3 out of 4. Ian reads some yearly. They’re an incredible way to see what’s happening in the economy because they touch everything. Small companies don’t have the ability to do this.

You know it in medical through R&D. What people like Google do is when Ian says moonshots, if you don’t speak like this, what that means is they spend tens of billions, hundreds of billions of dollars on things that may or may not work. If they do work, it turns into a lottery ticket. Blue Origins is the space arm of Jeff Bezos’ empire. It started as a way not to pay the government taxes and to hide under the radar. What these companies do is they have these incredibly audacious departments because they make so much freaking money. For normal people and normal businesses, you don’t have that ability. You have to look at how much do I sell and how much do I spend. Where they don’t, it’s the opposite.

Google’s search engine is 70%, 80% of the market. It has been forever, which is one of the most profitable businesses in the history of mankind.

If you’re scoring at home, 70% is a monopoly.

It’s an incredible monopoly. I don’t know the last time you typed in Ask Jeeves to go do a search. You probably didn’t. Everyone googles everything. They have 174,000. To let you know how much of these moonshots, they expect everyone spends 20% of their time on a pet project. Five days a week, one of your days should be spent working on some project of something without revenue.

Interestingly enough, the CEO is saying, “I would like to improve our productivity by 20%,” which my initial estimate was quit letting everyone spend 20% of their time on stupid pet projects that’ll never make any money. He’s going out. First off, it’s commendable. The job of a manager is to go out and seek ideas from their people on how you can be more efficient, how you can be more productive. He did get feedback from employees that had said, “We’re not a real efficient company. We don’t make decisions quickly.”

He’s looking for more efficiency. They’ve been working on this for a couple of months now. You can imagine you’re an employee at Google. You’ve been there twenty years. They pretty much spend however the hell they want. They got these lavish cafeterias. They’re Hulu from the Silicon Valley show that makes fun of big tech. That’s who they are. They spend on huge trips. There are no expenses spared. Now you got a CEO coming in and saying, “Party’s over.” Now the CFO comes in behind. He’s like, “No discretionary travel. By the way, the Christmas parties this year, you have to submit a request for what you plan to spend. By the way, you’re getting capped.” All these little things are now perceived by 174,000 Googlers who are used to spending freely whenever they want are being perceived as taken away from them.

The CEO had a town hall meeting, which are all digital, where he was in New York. It got out that this thing got completely out of control. People are saying, “How come you’re still making record amounts of money and yet you’re nickeling and diming us? You’ve got people complaining about why is travel being cut. We had record profits last year.” The key word being last year.

A lot of people aren’t embracing the fact that no one gives a damn what happened in 2021. If you can’t realize this is a different environment, which we’re going to get into why you are not reading enough of the newspaper. You’re not paying enough attention to what’s happening underneath the economy. I can see where employees would be a little confused. You have job openings everywhere.

You have people getting raises everywhere. People are dying to find employees out in the market, yet this whole other side of the economy is starting to crumble and break down. Smart guys like Sundar, Google’s CEO, he sees it. He knows there’s a tough couple of years coming. He’s trying to get his company to embrace it.

He’s saying, “Fun shouldn’t always equate with money. Some of the funnest startups in the world to work in don’t have a pot to piss in. They’re bootstrapping everything. They’re figuring it out in someone’s garage.” I can’t imagine the challenge it is trying to convince Googlers that are highly paid, that are now used to milking this big, fat cow, trying to convince them that austerity is the way going forward. He’s struggling. His people attacked him.

Let me weigh in. A few things. First of all, Sundar is a smart guy, grossest understatement of the year. If you’re CEO of Google, you are not just smart, you’re fucking brilliant. You’re generationally smart. That’s one. There was something that Ian talked about the people who are freaking out and they’re comparing everything to last year. This is why most people are unfit to lead. Most people are lead with emotion. They don’t lead with rationality or things that matter. Last year’s over. It’s in the book. It’s history. It’s getting written.

What’s important for leaders is to look forward, not backward. Live your life through the windshield, not the rearview mirror. That’s what most employees are bad at. That’s why CEOs get paid a lot more because they’re great at having the discipline to look forward. This is a commentary on employment and how you start. Ian and I talk about this a lot. We do interview type of shows. We do things on the onboarding process. Ian teaches executives. He’s got a course that he sells for a premium. That’s good. It talks about what the experience is like for an employee. What’s the most important thing with the employee experience?

Most people are unfit to be leaders because they lead with emotion instead of rationality. CEOs get paid a lot more because they are great at having the discipline to look forward. Click To Tweet

First 90 days.

It’s the start. How you start is critical. These people at Google have been conditioned to think there is no bottom. If there’s no bottom, it’s hard to introduce a bottom later. You’re better to be harsh in parenting or in employment in the first 90 days and then loosen up than to be loose and try and tighten. There is a study. It’s a famous study about gorillas. I’m sure you’ve heard of it. There were gorillas broken into two test groups. One test group of gorillas was given one banana. Those gorillas were happy as could be and insanely excited.

There was a test group of gorillas that was given two bananas. They took away one of the bananas from the gorilla and the gorillas went ballistic off the chain like crazy because they were having something taken away from them. At our core, we’re the same way. If something is conditioned, and I think it’s mine, if you take it away from me, I pout. That’s what’s happening with these insanely smart Google people because Google has not had to have any rules and now, they’re being brought back to Earth because of the economy.

It’s why 90% of Americans are employees and not owners because the human condition, we fear loss more than we get excited about the possibility of gains. Most people would rather be an employee because it’s less risky going in. To give you an idea, Google’s revenue only rose by 13% in the second quarter, which is a small number for them. Revenue rose 13%, but their headcount in the same quarter rose 21% and their op expenses rose 24%. Their expenses rose by double what their revenue rose by. These employees are still crushing the CEO of, “How could you ask us to reduce costs?” The takeaway for me, companies are still hiring unless you got way too out ahead of it, which Google did.

90% of Americans are employees and not business owners. The human condition fears loss more than getting excited about the possibility of gains. Click To Tweet

Clearly, Google, Amazon, Meta, some of them got way out ahead of themselves in the way they hired because they thought it was going to be up 40%, 50% forever. Most companies are still chasing. They weren’t able to attract people the way Google did. Frank, part of the reason why Google felt like they were overstaffed or fully staffed is because they spend so much. They pay at the absolute top. They got the best benefits. They got the most lavish stuff. Now they’re going to go through trouble because that’s how they recruited people in.

They didn’t recruit people in by being anything other than who they are, which is a lavish spender. The average company is still looking to hire. They’ve got a lot of turnovers. Turnover is still atrocious in the market. A lot of people are going through these period effects. It was in the paper in Wall Street Journal, companies are still hiring just as aggressively as they were even at the end of 2020 when people were rehiring everything.

You got these period effects where companies have been chasing staff for five years. This first level of the recession, you’re not going to see major layoffs because people are still hiring to replace turnover. We talked about quiet quitting and disengaged employees. People are leaving at high rates. You won’t hear about big layoffs until sometime in 2023. First, people are going to try to survive by not hiring.

I completely agree with you on that. The fun thing about the news is you can pull stuff up as we’re talking. There’s a story in the journal. What it talks about is exactly what Ian is talking about with the need to hire. Google is Dominique Wilkins because they’re ahead. No shit, they’re ahead on hiring. They got ahead of it. They have more money and they’re smarter than everybody else, so they’re ahead on hiring. They need to lay off first.

This is like looking at macro trends. This is my favorite thing about doing this segment. What are the takeaways? What can you learn from Google? What I’m going to tell you is this, follow smart companies, companies that are well-funded and companies that are brands that you must go to. Apple, Google, Berkshire Hathaways, these are companies that are smarter than all of us.

They are forced to share with us, read their annual reports. Ian and I read them every year. What that shows you is how smart people think. It gives you a look into the brain of smart people. They tell us everything? Hell no, but they think smarter than us. They’re better educated than us and they’re more informed. They have lobbyists, we don’t. Look at these things and then say, “Google is tightening their belt. I’m going to giggle and say they’re dumb.” They’re not dumb. They’re smarter than us. If they’re tightening their belt, maybe that’s a shot to me to say, “I should start tightening my belt. I should start thinking about this. If it’s affecting Google, how far down the chain am I?”

Something else, too, Frank. I love something you said when you say they’re more educated than us. Think about the unique advantage Google has. Google knows more about Americans. They know more about me and you. They know everything we’ve ever searched for. They know the words that are being searched for, a recession. I’m worried about my pay. They know so much about Americans and this economy. Why would they not be six months ahead of everyone? When you’re Google, you know what all 330 million Americans are googling on a daily basis. They have incredible data on the health of companies, the mindset of Americans going into it. It should make you pause when they freak out.

There’s a book called Everybody Lies. Have you ever read it?

Yeah.

It’s a book written by people who have data like Google. They talk about what people search for versus what people talk about. Google’s smarter than all of us because they’re the company that we go to to search. They know what we’re worried about, what we’re thinking, what we’re feeling. They’re able to sift the data better than us. That’s why they’re smarter than us.

That’s why they can charge anything they want forever advertising because they know exactly who your customer is the second you type in a few keywords.

This is the first time we’ve done this segment. I wanted to bell so we would shut Ian up faster. We ran long. Let’s move to topic two. Let’s talk about why Google is needing to shrink.

Frank wants to talk about the ‘70s all the time. He thinks you’re all going to be super excited about talking about Paul Volcker and the Fed strategy of the ‘70s. I was talking long to try to avoid getting to this next segment, but Frank, go ahead and kick us off.

You’re in charge of the agenda to kick off. I’m color.

Why is this market falling apart? Why is the economy falling apart? We have a Fed that is completely reversed case. Our Fed throughout the entire pandemic and a year after that was all about stimulus. Quantitative easing, keep rates as low as possible, poor stimulus in, give checks out to people, make lending as easy as possible. They did it long after they should have. The economy started to get healthy by the end of 2020, and yet they kept pouring money all over it, 2021, way too long, completely overheated, every kind of asset you could think about. That’s why crypto and NFTs went crazy. Real estate went nuts, commercial real estate.

I can’t think of an asset that wasn’t going up. Oil started to go up because you had all of this demand and not enough supply. Now all of a sudden, our Fed chairman, Powell, has completely reversed course. This started at the beginning of 2022, around February, March, where we started raising rates aggressively. The last two raises have been 75 basis points.

Which is big, historically.

What Powell even admitted to when he gave his last speech when he got interviewed after, he admitted to reading the autobiography of Paul Volcker. He gushed about how much conviction that man had and how much courage he had. If you do some studying on Paul Volcker, when he was Fed chairman, and it was the late ‘70s, early ‘70s, he was of the mindset that you had to crush inflation.

When he resided over it, because he raised so hard, mortgage rates went as high as 18.6%. I’m going to let that sink in. People are freaking out because mortgage rates went from 3% to 7% now, which that’s no small feat and we’ll get into that in a second. It has not been that high since 2007. People are freaking out. Imagine mortgage rates of 18.6%. While he was doing this, raising rates so aggressively, unemployment peaked at 11% in 1982. Right now, what’s the unemployment rate, about 3.5%, 3.7%?

Under 4%. It’s like 3.7%, 3.8%.

The Fed, they have a dual mandate as everyone talks about, full employment, which we have. We have where 3.7% is full employment and a 2% inflation target. We’re not even close to that. We’re closer to 8% on inflation right now. What the Fed has said is, “We’re happy with employment. In fact, we’re probably more employed than we care about. We’re going to sacrifice that and we are going to go break the back of inflation the way Paul Volcker did in the early ‘80s. There’s going to be a lot of parallels with that.”

I want to interject something quickly. Ian tells a better story than me. He’s right on everything he said. The two mandates are full employment and 2% inflation target. Those are the two major mandates. Ian, as long as I can remember, for a very long time, 2% has been the norm with inflation. We wanted GDP to grow from 3% to 4% and hoping to keep inflation at 2%. That way, there’s a delta where the country’s getting richer over time. If you look at it going all the way back to Reagan, which parallels with Volcker, the point of the matter is Americans are getting richer because the GDP is growing at a rate greater than inflation so there’s more money supply.

 

Inflation’s not been an issue since the ‘80s, in pretty much our lifetime.

Since you and I were tuning into the news, this hasn’t been the thing.

Inflation’s not been in the news. Maybe a few bits of gas prices going up, a war here or something, but not everything. Now, it’s real inflation. It’s core, food. You’re right on that.

I’m a housing guy. I’m a real estate guy. This is what I do. When I have a stock question, I call Ian because he’s better at it than me. He’s better with bonds and mortgages. He understands it. I do think this is critical and this is something to talk through. Ian and I were talking a while ago that his dad called him and said, “Gas prices are going up.” I pay attention, but it’s not something I worry about because of my company card. I’m usually on the phone. When it was over $100 to fill up my car, I was like, “That seems like a lot.” I’m in a fortunate spot where I don’t have to look at every nickel.

I don’t know what every diaper costs. I don’t know what every gallon of milk costs. I have a sense when the grocery bill goes up, like, “It’s starting to tick up.” I’m in a fortunate spot where I don’t look at every nickel. It’s a good spot. The point with this is there’s a squeeze, but I look at real estate. Interest rates on real estate, this is fascinating. When interest rates were at 3.5% for 30-year fixed mortgage, February, March, beginning of that timeframe, by April, it was changing, but there were 350 basis points or a 3.5% market. This is granular, but I want to go into it because it makes sense. I’ve never talked to Ian about this. The economist that I talked to, you say for every 50 basis points, the pricing must drop by 9%.

Let’s look at this now. I’ve heard 7% and 9%. I’m going to use 9%. At 4%, a $100,000 house is now a $91,000 house. At 4.5%, it goes down another 7% down to $84,000. At 5%, it’s down another 7%. What happens quickly is if you’re a real estate person, you need to look and say, “We’re near the top because of affordability.” Is this a universal panacea that fixes everything? No. San Diego costs a ton more than Richmond. You have to look at market by market specific, but you have to go back to affordability and interest rates. What Volcker did, which Powell is following, Powell came out and said housing needs a bit of a reset. That means there’s been euphoria in the market and we’re going to get smashed on pricing and you need to be prepared for this.

 

That’s exactly what Greenspan didn’t do. Greenspan saw a bubble coming. Maybe he did, maybe he didn’t, but we all saw it. He saw it enough and did nothing about it.

Bernanke was like Greenspan. Bernanke based everything he did on Greenspan. That’s why the ‘90s and 2008 were a blood bath.

Do you remember when Greenspan said irrational exuberance in his speech?

Yes.

He did almost nothing after that. After that speech, he raised it by 25 basis points and then he had a few other 25 basis point moves right away. He knew it was a huge problem. What our guy now, Powell, is saying, “I see a huge bubble. I see massive inflation. I’m raising 75 basis points two times in a row, so 150 basis points.”

It’s not an insignificant number.

In two meetings. That fast it went to close to 3% now. A lot of people are saying he’s going to go to 5%. Greenspan did nothing of the kind. That turned into a financial crisis. Another thing Powell was trying to do is keep this from becoming a banking financial crisis as it goes through. That’s important, the difference. Why investors are freaking out right now is this is a hard 180 by the Fed, what they’re doing right now.

News doesn’t matter. It’s mostly noise. If you own nothing and live under a bridge, none of this shit matters to you. If you’re participating in the capitalist society, this matters. What do you do with it? If you’re a real estate person, you should probably have cash and be prepared because pricing is going to come down. If you’re a speculator like I am, you need to be ahead of the curve and you need to say, “Where do things go?” We are selling a $1.2 million house, which is an expensive house for us. It’s one of the top ten most expensive houses that we’ve done. In Richmond, that’s a lot of money. The median is $400,000. It’s three times median. What needs to be said here is pay attention to that.

This is what Ian and I want to drive out in this segment. For us, anything that we’ve sold over $900,000, we’ve done it ten times. Eight of them have been now within the last several months. You realize the market has shifted. What you need to do is you need to adjust. We talked about Google and how they’re adjusting. I was walking through one of our more expensive houses. It’s sold. I bumped into the homeowners. What they told me is, “We bought this when rates pulled back.” Rates had gone up over 6% and they dipped to below 4.5%, into the low fours. They gobbled the house up because I put it on the market for four days. As soon as that happened, I put the house on the market and it wasn’t finished.

My reasoning, and I talked to my realtor about this, I said, “We should list this house now because there was a pullback in rates. If rates go up, it’s going to be unaffordable.” There are a lot of moving pieces and levers that you need to pull, but you need to be mindful of people don’t buy houses. They buy payments. You need to be mindful of what’s happening in the market and you need to give yourself the best opportunity to succeed. That’s where noise, interest rates turns, into news that you need to take action on.

A term that you’re going to start hearing more in the news, whether you’re paying attention enough is stagflation, which is what happened under Volcker. Suppose we got a Fed chairman who now idolizes what Paul Volcker did. During that crisis, it was stagflation, which means you have the worst of inflation shocks, which is what we’re going through, and you have the worst of a financial crisis, meaning people are losing their jobs, unemployment’s high. Stagflation is high unemployment plus high inflation.

If that happens, that’s a dangerous place to be in as a country. Also, say, I’m going to go right out there and say gas prices are a little lower they came in from when you saw that $100-plus. A lot of that is bogus because what the government’s been doing is drawing down on our strategic oil reserves. Right now, this is something not a lot of people are paying attention to.

The US strategic oil reserves, we’ve drawn down half of it. It is now down as low as it’s been since the early ‘80s, which is a dangerous place. Go ask Europe what it’s like to not have oil reserves and have to rely on Russia right now. The reason we’re doing that is political because we’ve got an election coming up in November 2022. We’re using all of those oil reserves to keep gas prices low. Watch, this winter, Frank. I’m here to say gas prices are going to spike big time. Not just because of we won’t have any more oil reserves to spend on it after the election.

Europe right now is going to go through this nasty winter where Russia’s playing games with them and they don’t have enough oil. You’re going to have a big shock. A big supply shock is going to happen and it’s going to impact the whole world. There’s no way it doesn’t impact Americans. When that happens, our inflation’s going to take off again. The stock market is reacting to all of that right now.

The stock market is smarter. The stock market reacted to COVID 3 or 4 weeks before it hit us. The stock market’s smarter than us, just like Google is smarter than us. They know how to analyze data better, faster, and quicker than we do. That’s why they’re in those jobs. There are a couple of things that I want to add here. One of them is this. There was a Nord Stream pipeline damage reported. Did you see this?

The stock market is smarter than anyone else. It reacted to COVID-19 four weeks before it hit everyone else. Click To Tweet

Yes.

NATO is blaming someone.

It smells like Russia.

If somebody did something, what they’re doing is they’re damaging the supply chain and they’re trying to put a squeeze.

It’s like boiling the sea out there.

It’s insane. I saw the picture of it. It looks like a freaking whirlpool bath. The point of this is these are the things that are starting to come and they’re starting to happen. I have been on a kick lately. I’ve been reading a lot about World War II. Ian and I have both gone through phases where we do this. I’m reading about Nazi Germany. I’m reading a ton about it. I’m on my fourth book. The point of it is this, when people in the populace get desperate, bad things happen.

The rise of Nazi Germany happened because Germany lost World War I. There were a ton of sanctions and runaway inflation, and German people didn’t think they could afford to live. What happened is someone came and said, “Screw this, we are going to prioritize Germany and we are going to say screw it to the rest of the world and we’re going to worry about us. If you’re worried about feeding your family, that sounds pretty good. I can get behind that.”

That is what happened. You can see the devastation that took place after. What the Fed is trying to do now is they’re trying to make sure it doesn’t get to that point. They’re trying to take steps and they’re trying to deliver to us some medicine. Volcker did it several years ago and Reaganomics and a boom economy came after it. What our Fed is trying to do is trying to prevent something as crazy as Nazi Germany. They’re trying to lead us to a point where we can have runaway growth, but it’s hard in the middle. That’s what we’re living through right now.

There have been two big stock market downturns. There have been lots of little ones coming and going. In the time since Frank and I graduated college, the two big ones were the tech bubble and financial crisis of 2007. It’s worth giving these stats. It’s pretty fascinating. The tech bubble peak of the stock market was March of 2000. It took 30 months to get to the trough.

The trough was September of 2002. In that time, over 30 months from the peak to the trough, the stock market dropped 46% and it took seven years from that point to reach a new high to reach a new high. That downturn was ugly. The next big one was the financial crisis, which had to do with the housing market and mortgages. The stock market peaked in May of 2007 and it hit bottom 23 months later.

That time, it dropped almost the exact same amount. The first one was 46%. The second one, the financial crisis, dropped 48%. That one got all the way back to a 1997 low. It wiped out a massive amount of gains. It didn’t hit a new high for six years after that trough. Now we peaked in November of 2021. So far, we’re down 25%. For everyone saying, “We’re close to a bottom,” the last two big stock market collapses we’re 46% and 48%.

They didn’t hit a bottom for 23 and 30 months. So far, we’re only about ten months into this. For everyone who’s got this, “Let’s get this stock market out of the way.” Historically, if this is a big one, which feels like a big one, we’re about halfway through what they normally take to get through and about halfway down a typical stock market. Does that mean it’s going to go down 46% and 48%? Hell, if I know, but history would say, Frank, we got months to go on the stock market dropping and we’ve got a lot more value to drop.

Everybody in the real estate game is out there screaming and yelling, “It’s a buyer’s market.” Hell, if it is. In 2008, Ian talked about the real estate market dropping. Prices in real estate didn’t drop until 2010, 2011 and 2012. 2013 and 2014 is when the market started to move up. That’s a long time after 2008. It’s early. Stock market adjusts faster because it’s more liquid. People don’t live there. People get stubborn and say, “I’m not going to sell,” but you lose your job, you have to sell. That’s what happens later in the cycle, but it takes more time.

I’m glad you said that. It’s worth saying that for another second. Real estate always lags the economy and the stock market. Bond market is the earliest. We talked about rates. Bond market’s the smartest money. Stock market is second. That’s also 6 to 9 months ahead. That’s not always great at predicting. Normally if the stock market is predicting a big recession, real estate comes along two years later.

If you look at that, you’re saying 2010, you saw big drops in real estate, 2009 even a little bit. That was 2, 3 years after the peak of the stock market hit. For us, when we look at what’s going on in the bond market, stock market economy, real estate is just about to start cresting. It probably already has. We probably already reached a peak in pricing, but you’re going to see 2023, 2024, a lot of those inflated gains are going to be given up.

Let’s go through this quickly. I want to unpack this my way. There are three markets we talked about, Bonds, stocks or equities, and real estate. Those are your three markets. Bonds are only touched by institutions and incredibly smart people. It’s hard for us to go buy treasuries. As a regular person, it’s hard to buy a treasury. You need a broker to trade a treasury. That is your smartest, most sophisticated money. It stands the reason it’s first. It’s ahead. It’s the smartest. It’s the least emotional. It’s all about tactics, smarts, and charts. There is no emotion. Stocks have a little bit more emotion because most people have an equities account. Your more sophisticated citizen has an ability to trade a stock, but a stock can be done while you’re sitting on a toilet with your phone through an e-trade account.

It’s not quite as smart as bonds, but it’s a lot more liquid than a house because you can literally do this with it. Nobody lives in a stock. Someone came up to me and talked to me about the metaverse and how incredible the metaverse is going to be. I’m like, “Can you live in there?” They’re like, “Yeah.” I’m like, “No, you need an Oculus. You can’t physically live there, can you?” They go, “No.” I was like, “I’m going to own things, shelter, which goes back 100,000 years. We need that.” That’s equities and stocks.

The metaverse isn’t helping people in Florida right now with Hurricane Ian coming and rolling through.

The other thing that’s important here to talk about is real estate. This is not a finger-pointing exercise of smarts, but people buy houses before they buy stocks. It happens in almost every instance. Shelter is important. If you can buy a home, that’s the American dream. Having a stock trade account is not the American dream. Owning a house is. That is, in a lot of instances, someone who owns one house does not think about a house or piece of real estate the way Ian and I do that trade them. We look at it with a more sophisticated view. Plus, your kids live in that house and go to school. You don’t want to disrupt them. The reason that bonds move fast is it’s not personal and can do through professional outfits and it’s done quickly.

People buy houses before they buy stocks. Having a Scottrade account is not the American Dream, but becoming a homeowner is. Click To Tweet

Stocks work a lot the same way, but the public is in there, so it’s not as smart as the bond money. Housing is something that people literally celebrate Christmas in. They look at it at a different thing and not an asset. It’s the reason it moves slower. People don’t want to admit, “I made a mistake. I have to sell.” It goes slower. If you are a real estate professional, looking at bonds, looking at stocks, and then saying, “Will it happen?” No. “Does it typically follow?” Yes. These are the things that is important about the news that this is how you can filter it. You can go back hundreds of years and see a similar pattern.

Frank and I have a real estate project. It consists of three assets. One of them requires significant investment. It’s an old church. We want to convert it into fifteen condos. We have a dozen investors that we brought in on the deal. Two of our deals are doing well that we were not rushing to do anything with the church.

The truth is our construction costs almost doubled because of inflation. I’m always looking at things some trends. One thing that caught my eye, Frank, was a report in the Wall Street Journal about lumber. Lumber is down right now. The cost per 1,000 board feet is $430. That’s down 70% from the peak in March 2022. In the last few months, massive drop in lumber.

Let me weigh in for a second. Here’s what happened. There was a price of lumber. The pandemic happens March, April 2020, and demand plummets. The cost of lumber goes way down. Somewhere around July, August of 2020, it went bananas. What are the macrotrends? Macrotrends are people are scared shitless. They want to hunker down at home. They want to have nicer places to live. They start doing things like home improvement projects. The mass of the market is the homeowners, not new construction. It’s the people who are living in homes. The market goes bananas. Pricing spikes and there’s this enormous spike.

Folks renovated instead of moving and building a new house because of the pandemic. They were scared and bored. Everyone’s sitting around their ass. It’s like, “I’m going to buy some things.” Contractors shifted to renovation, so the demand went up.

There are roughly 2 million new construction starts annually. We’ve looked at this chart over time. It was as low as 1.5%. It’s as high as 2.5%. Call it 2 million new construction starts. There are 150 million rooftops in America. The 150 million rooftops decided to renovate 10%, 20% of those. You start to see it’s a non-sophisticated person willing to overpay because now their wife and their kids are home, “I need to build a shed in the back, so I don’t get foreclosed on. I’m going to run to Home Depot and I’m going to build a huge extension on my house.” That’s what happened.

That just explains the demand, but there were two things that crushed lumber, too. You also had all these lumber yards and lumber companies couldn’t find people. Same thing. They didn’t have staff. They couldn’t go cut down the trees. They didn’t have truck drivers that could get it. You had the same supply chain disruptions you had everywhere else in the world. Right when the demand spiked, the lumber companies couldn’t deliver on the orders they were getting. You had problems on both sides of supply and demand.

There are two things that factor into price increases. There’s material and labor. Ian called me and he said, “Is this boding well for the church?” I said, “Maybe.” He is like, “Why not?” This is why not. Right now, construction is a low-margin business. What would you guess, Ian, commercial construction runs on as a profit margin? What percentage?

On a project?

As a project is fine. What would you say the commercial construction margin is on an average project?

The commercial stuff I’m in on, you’re happy to get a 6%, 7% cap rate.

That’s a cap rate. That’s not the construction company. That’s once the asset is stabilized.

I would say it’s still single digits.

It’s low. It’s 2% to 4%.

I would never think it was double-digit. Those guys are too competitive.

What does that mean? Do you build a hundred-million-dollar structure? It’s a one-of-a-kind building. Even the Wynn Hotel, which there are now several of them in the world, they’re not the same footprint. They’re in different municipalities on different type of sands. These are one-of-a-kind buildings. They’re running on a 2% margin. 2% to 3% is what the construction industry is. That’s why I don’t fucking build competitively. I want to own. Owning things over time, inflating it 3% annually and every once in a while, we get a bonanza, it goes boom like a hockey stick. That’s why I’m on this side of the business and I’m not cutthroat on construction. I’m not detail-oriented enough to live in that lane.

I live in this lane because I can be slightly smarter than most of the people in my market and I can hold. Holding is the piece. To the church specifically and what we’re talking about, material price is part. The other part is labor. Labor right now is still in short supply. We talked about this with Google a minute ago. They’re ahead. Construction is never ahead. Construction is always a laggard because it’s tied to real estate.

Right now, it’s still a frosty market. Let me tell you some crazy shit that I saw in 2021. Construction people like construction managers, it’s a hard job. It’s hard to find good people, but these people get the snot beat out of them because it’s such a small-margin business. People were showing up, interviewing with us, and they’re like, “I’m getting unlimited vacation. I’m getting this type of a salary.”

It was the one period of time where construction was in such demand that people could demand incredible things. I called Ian and I said, “What’s out there right now isn’t sustainable. This is a bubble that will burst, but it hasn’t popped completely yet.” Plywood has come down, but what hasn’t happened is the supply hasn’t come down. The reason for that is simple. Permits are already there, jobs are going, so it will continue. This is another reason that real estate lags the market because permits lag the market. These things will work their way through, but on the back end of it, that’s when the price degradation will happen.

How much does a shortage and land play into real estate prices staying elevated? For the average person, at 7% mortgage rate, it’s not sustainable how much out of whack it’s got.

Land shortages have a factor. There’s also an article that you and I texted back and forth in the last couple of hours about rents finally coming down. In macro, these things matter, but in a micro, what will happen in a recession is people are going to hunker down and stay where they’re at. That’s what happened in Covid. It’s what’s going to happen here. Does it matter long term? Yes. Does it matter right this minute? No. The broader economy and the fact that things are unaffordable because interest rates are going up, it’s not going to matter with land.

Land is a speculative play. It’s something to be mindful of now. You and I are having a conversation about someone we know who works in the land business and they’re going back and having to talk to developers and say, “I may have overpaid.” If a house was worth $1 million and now it’s worth $750,000, which interest rates are causing that, that land isn’t worth what it was worth 180 days ago. That’s how these things all work in unison.

We are going to wrap this up with another piece of news that is probably less heavy than this. An executive at Apple found himself in hot water. Tony Blevins, the Vice President of Procurement. He was summarily shit-canned after doing a little amateur TikToking. There’s an influencer on TikTok who has a big account. I had never heard of him before, but I went and looked at it for this story.

This Daniel Mac, what his shtick is on to is he goes around and he interviews people in expensive cars. He’ll go up to someone in a Lamborghini and say, “What do you do for a living?” and gets a little hot take and puts it up on TikTok because, obviously, you’re rich. He walks up to Tony Blevins, the Vice President of Procurement, and asks him what he does because he was driving a McLaren, a crazy expensive car. This is his response.

“Sir, your car’s awesome. What do you do for a living?”

“I play golf and fondle big-breasted women. Weekends are major holidays off.”

“That is quite the career. I’m looking to get into that.”

“If you’re interested, I got a hell of a dental plan.”

“You do it all. You participate in this activity. Thank you so much.”

In the ‘80s, that would’ve gotten you promoted. Nowadays, you’re going to get canned.

Little known fact, what he said, as blustery and gross as it is, it’s a quote from a Dudley Moore movie, Arthur, from the ‘80s. His attempt at humor cost him a seven-figure job. That sucks. He probably thought this was some dumb ass kid asking him a question. “I’m making an offhanded joke and quote from an ‘80s movie.” It’s been seen by 6 million people on TikTok. Apple found out about it. I don’t think Apple had a choice once something like that is out by that much and you get that many angry people about what he said. In today’s culture, I don’t know that they had a choice in that situation.

Why the fuck did we lose our sense of humor? What happened? Who did that hurt? I get it, the guy’s got a distribution channel. He quoted something that’s funny. It could be called offensive.

What sucks about this whole thing? This is an older guy. This guy’s in his ‘50s.

Which is not that much older than us.

He didn’t go post this video on his TikTok. It was like gotcha journalism. A kid came over. The kid wasn’t trying to hang him. He said, “You drive an awesome car.” He ripped a joke line from an ‘80s movie and he did it in front of his girlfriends. Girlfriend’s there, she’s laughing. She thought it was funny. I don’t know. I feel terrible for this guy.

The lesson learned for anyone reading is when you have tens of millions of dollars of unvested Apple stock options, be wary of some kid walking up with an iPhone camera and asking you a question. It could be an influencer who gets you in front of 6 million people. I look at it as this is a sign of the world we live in and the times we live in. It blows for that guy. It’s a boorish attempt at humor, but I’m a little with you on this of who did it hurt? Who did he offend and hurt by quoting an ‘80s movie that is clearly a boorish quote?

There’s probably a deeper conversation here at some point. For now, it’s time to rip it and call it a day. What I’ll say to close is this, the news can be your friend. Do not get mired in the details of the noise. The news can dictate good and bad decisions. It can help steer you through life, through business, through whatever you’re doing, career choices, investment choices if you pay attention to the news and you know how to distinguish the difference between news and noise. Noise is headwind and news can be a tailwind. We all want a tailwind to push us through. If you pay attention to it properly and synthesize it properly, it could help you.

What I’ll say to wrap up is if you want to know the future, look at the past. That’s why history is important. It’s important to look back at different periods. I’ve always done that. Nothing we’re going through is new. If you look at it, the news will try to convince you that we’re going through unprecedented times, bullshit. We’ve had inflation, unemployment, and recessions before. The stock market has dropped 30% in a year before. We’ve had shortages of housing before.

Russia’s invaded a country before.

Russia has invaded some country. There’s nothing new going on. If you go back and look at what happened when these things happened before and what happened the five years following, you normally have a pretty good idea. Normally, things don’t change too much. There are some unprecedented things that happen, but everything we talked about, there is a roadmap and we’ve seen what’s happened after these things have happened. Behave accordingly and pay attention to history because it will inform you in the future. Thank you for reading our first shot at talking about the news. It was fascinating. If you liked it, give us a five-star review. If you didn’t or you want us to change it, send us a text or an email and tell us what you think. Frankie, it’s good hanging with you.

It’s always a pleasure, Ian. The only thing that would’ve been more fascinating than this is if we could talk for another hour about baseball cards.

Next episode, let’s talk about baseball cards some more because that was pretty fascinating. See you.

 

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