Argument for 'staid corporates' as the 'world's best investors'; The frustrating housing market; Case study on rents in Austin; Day trip to Lucerne
1) The title of this recent article in The Economist caught my eye: Who are the world's best investors?
The answer, it argues, is "staid corporates" – in other words, big companies, which routinely issue and buy back stock and bonds.
And they're very good at timing, as the article notes:
[A] growing body of work suggests that corporations, far from being passive observers, are some of the market's most effective arbitrageurs. In 2000 Malcolm Baker of Harvard University and Jeffrey Wurgler, then of Yale University, found a tight connection between firms' net equity issuance and subsequent stockmarket returns. Years in which companies issued relatively more stock were typically followed by weaker market performance. More tellingly, companies seemed to issue precisely when valuations were rich, and especially when other frothy signals, such as buoyant consumer sentiment, were drawing attention.
Timing the market is impressive; out-trading the professionals is even more so. Yet firms that issue or retire their own shares routinely do exactly that. In 2022 David McLean of Georgetown University and co-authors showed that corporate-share sales and buy-backs forecast future returns more accurately than the trades of banks, hedge funds, mutual funds and wealth managers.
As the article continues, companies' access to "private information" is part of the advantage:
Few are better placed to forecast a company's future cashflows than insiders. When a company begins buying back its own shares – or employees convert their options into stockholdings – investors should pay attention.
The article correctly notes that companies have a number of advantages over investors:
Companies also operate across markets. Almost every business finances itself with some combination of debt and equity. If one becomes unusually expensive, it can easily switch to the other. Yueran Ma of the University of Chicago finds that firms routinely move towards whichever market looks cheap. Such flexibility is rarely available to institutional investors, which are constrained by benchmarks and mandates. Only 28 of Vanguard's 267 funds can trade both bonds and stocks, for instance.
Last, businesses benefit from insulation. They may face unhappy shareholders, but they do not face redemptions. When institutional investors mess up, their own investors pull out, forcing them to sell at just the wrong time.
I would argue that individual investors have similar advantages...
They can buy and sell across asset classes, and don't face redemptions. But they need the wisdom and discipline to use them – which is easier said than done!
2) If you only looked at this chart (courtesy of a recent State of the Markets blog post from Charlie Bilello), which shows that hourly earnings have outpaced inflation year over year for 25 consecutive months, you might think that Americans would be feeling good about their financial situation:
But instead, they're hurting and angry – something I heard a lot of on the campaign trail during my mayoral bid in New York City.
To understand why, look no further than the cost of housing. It has become increasingly unaffordable – putting the dream of home ownership out of reach for more and more people.
There are two primary reasons for this: First, home prices have far outpaced incomes, as this chart (also courtesy of the same blog post) shows:
Compounding buyers' misery, interest/mortgage rates have risen sharply. Take a look at this chart from the Federal Reserve Bank of St. Louis:
The result is that median monthly payments have nearly doubled over the past five years – as this chart from Bilello's recent State of the Markets post shows:
Expressed as a percentage of average household income, it's even worse...
This recent post on social platform X caught my eye. It's from journalist Lance Lambert – as he notes, the monthly mortgage payment skyrocketed from 11.9% in 2020 to a staggering 26.1% only four years later:
No wonder Americans are upset...
3) So, what can be done about this?
Well, interest rates might come down (hopefully without a recession!). But many states and cities could do much more to spur the construction of new housing.
A good case study is Austin, Texas, which saw rents and housing prices soar in 2021. In response, as this Bloomberg article from February (Austin Rents Tumble 22% From Peak on Massive Home Building Spree – this post on X has a summary) notes, the mayor focused on:
[Slashing] delays in the permitting process, and the city scaled back rules that limited the height of buildings within 540 feet (165 meters) of single-family homes. Austin also became the largest city in the US to end parking mandates.
More recently, Austin has focused on boosting the supply of single-family homes by allowing developers to build as many as three units on lots that were previously restricted to one home and slashing the minimum lot size to 1,800 square feet from 5,750.
As the article also says, rents in the city fell as a result:
Nowhere in the country have rents declined as much as they have in Austin – now 22% off the peak reached in August 2023, according to Redfin. The median asking rent is $1,399 per month, down $400 in less than three years...
Home prices have also dropped from pandemic heights, down 23% since May 2022.
Other cities – starting with my own – take note! I cited this case study many times on the campaign trail.
4) Yesterday, my wife Susan and I (with a young friend who just graduated from college) took a day trip to Lucerne in Switzerland, which is a one-hour train ride from Zurich.
It's gorgeous! I especially enjoyed the magnificent Lion Monument, which is carved into a rock wall. Writer Mark Twain called it "the most mournful and moving piece of stone in the world."
Here are some pictures from the trip:
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.