Landmark Links October 26th – Nailed It


Must Read: Over the past summer, there was a debate raging in the investment community as to whether or not massive pension fund buying to take advantage of a lucrative tax break was suppressing yields on the 10-Year Treasury.  When tax reform passed last year, pension funds were permitted to deduct their contributions based on last year’s corporate tax rate up until mid September, when all contributions would be deducted at this year’s lower rate.  The logic went something like this:

“There is a tax advantage for most plans to make a contribution prior to Sept. 15 of this year…saving 14 cents on the dollar,” said Matt McDaniel, a partner with consulting firm Mercer, who leads the U.S. financial strategy group. “Unsurprisingly, a lot of corporations are looking at that and saying: ‘Gee our pension plan is underfunded. Why wouldn’t we accelerate that cash and fund it on a cheaper basis.’ This in turn generates dollars into the pension system that has to go to work.”

I point this out now to illustrate how good a call Michael Schumacher, director of strategy at Wells Fargo made back in August.

“They’re not going going to jump out, but they are going to climb out,” said Michael Schumacher, director rates strategy at Wells Fargo. Private pensions hold about $3 trillion in assets. Schumacher said the pre-tax deadline buying was so strong, it likely had a short-term impact of holding long-term rates lower. Those yields could now move higher later in September, as fund buying slows.


“It’s a powerful argument,” said Schumacher. “If you think about the changes since May, we had definite increases in Treasury supply, and it’s been more skewed toward the long end, and yet yields are down…Overseas buyers have been absent, and still yields are down.”


Schumacher estimates the 10-year Treasury yield could move up as much as 20 basis points when the funds step back from buying next month.

In August, the 10-year yield was in the mid 2.80% range and hit the high 2.90% range by mid September.  It topped out at 3.25% in October and has now settled down a bit to 3.10%.   The compression between equity returns and debt yields has been a very real, if somewhat under-the-radar story in commercial real estate this year.  I have to wonder how many other artificial distortions are impacting the market that may be mitigating this compression or making it worse.  Either way, that was one hell of a call.


Downward Spiral: The next generation of college graduates will include more borrowers who will likely never be able to repay their debts.  Reminder: there is an incredibly straight forward fix for this and it is to require colleges to finance tuition in exchange for a percentage of future salary rather than having loans issued by the Federal Government as they are today.  This problem will not subside until colleges have some level of accountability.

Draining: Annual defaults on loans taken against investors’ 401(k)s threaten to reduce the wealth in US retirement accounts by about $210 billion when the lost savings are compounded over employees’ careers, according to an analysis by Deloitte Consulting LLP.  Remember kids, when it comes to debt, it takes $2 in income to repay $1 borrowed once taxes are taken into account.

Ballooning: Corporate debt growth has exploded upwards, especially among lower rated companies.  At some point this will have an ending and it will not be a happy one:

The overall effect of more leverage is that the next time there is a macro shock both equity and debt will be more sensitive to a downturn. Investors may not feel any impact today, but when it comes the effect on markets will demonstrable.


Survivor: A few short years ago, Best Buy was nearly left for dead.  However, in contrast to doomed Toys R Us, the electronics giant focused on paying down debt and focusing on customer experience.  Now Best Buy is firing on all cylinders and offers a road map on how a legacy big box retailer can survive in the age of disruption.

Out of Balance: There is a ton of new office space getting built in the Bay Area but not very much housing for all of the workers it attracts.

The Only Constant is Change: This info-graphic showing the evolution of NYC’s skyline over the past 100 years is really cool.


Exodus: High cost of living is California’s loss and Boise and Reno‘s gain.

Deep Discount: Property tax exemptions saved Californians $30 billion in 2018 (but were a primary driver of spiraling development impact fees).

Warning Sign?  New home sales were down sharply in September but have not yet reached the level of decline that typically precedes a recessionSee Also: Yes, September housing reports were terrible but the yield curve is probably a more reliable recessionary indicator and it has not yet inverted.


At What Cost?  CBD – the lesser known compound in marijuana than THC that won’t get you high – is showing up everywhere.  However, no one really knows how to properly dose it and the compound can get incredibly expensive.

A (Townie) Sucker Born Every Minute: Per capital lottery spending has doubled since 1995, led by Massachusetts where an astonishing $767 is spent on the lottery per person, per year.

Chart of the Day



And chaser



Gotta Hear Both Sides: A Denver Broncos backup QB was arrested when he wandered into a random house wearing a cowboy costume and mumbling incoherently after attending the team’s (allegedly) drug-themed Halloween party.  He was also allegedly beaten with a vacuum hose by the homeowner who found him sitting in their living room.

Last Wish: Adults are asking their families to scatter their ashes at Disney World which is probably the saddest (and grossest) thing that I read this week.

Udderly Weird: A woman who was busted for shoplifting from a Walmart while wearing a cow costume told police that they could “suck a pink cow udder” because Arkansas.

Public Servant: A local politician has resigned after being charged with murder because Florida.

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