Commerical Real Estate: The Catalyst For The Next Crisis?

Plus, what is really happening at Kazatomprom?

Video

Hybrid work leaves offices empty and building owners reeling | 60 Minutes

Comments from Stan Druckenmiller May 2023 Sohn’s Conference:

“As I just described, now we have a big hike in interest rates. It’s hard to look at that constellation of factors, know that we’ve only had a few soft landings since 1950 and all of them were preceded by what I would call proactive rather than reactive Fed policy, and believe we’re going to have a soft landing. One never knows. But if you’re just looking at the odds, they’re very tough. In terms of the timing, I have much less certainty on that than I do on whether we’re going to have a hard landing or a soft landing. 

“Given what I’ve already described, there were going to be bodies out there. When you have free money, people do stupid things. When you have free money for 11 years, people do really stupid things. So, the stuff under the hood is starting to emerge—obviously, the regional banks recently, [and] we had Bed Bath & Beyond. But I would assume there’s a lot more bodies coming. The median regional bank has 43% of their loans in commercial real estate—about 40% of that in office. We’ve had this huge change in lifestyle due to COVID. Number one, the great resignation, and number two, people aren’t going to the office. So, we have actually a higher vacancy rate than we had in 2008. 

“I put all that together, and I look also at the inverted yield curve. The timing is sort of third, probably fourth, quarter of this year [or] first quarter of 2024. I wouldn’t be surprised if the bean counters a year from now—as they tend to do backward-looking—that things started (to go bad) sometime in the second quarter.” 

H/T to Steve Blumnethal “On My Radar” website

I had always thought that commercial real estate could catalyze another financial crisis. We will have to wait and see, but this could lead to a big banking crisis if CRE is this bad off. A banking crisis was dodged last year, but we may see a revisit this year. That would undoubtedly lead to massive rate cuts and a return to QE.

EMA Garp Fund Q4 Letter

Link to EMA site

2024, the year gold pays off?

Lots of problems on the horizon. In the end, I think all paths lead back to money printing. Timing, as always, is the key. The amount of money they will have to print to get us out of this mess and the size of the FED’s balance sheet are going to astound people. Gold and other hard assets are going to soar.

Uranium

Trader Ferg: What I'm Seeing With Uranium

It's a paid article, but the intro is free and worth a look.

Lots of speculation in the market this week about what is happening at Kazatomprom. Did they overproduce their assets, and are they now facing massive declines? Is there really an acid supply issue? A few facts stand out: they have under-produced the sub-soil agreements since 2017. A bunch of “C” suite folks have bailed like a meteor will hit the headquarters building next week. Kazatomprom is controlled by and for the benefit of the Kazakh state. I don’t think we will ever know what is happening inside the company.

Somebody knows something

The bottom line is that neither Kazatomprom nor Cameco are hitting their production targets. That is hurricane winds in our bullish uranium sails. We await management discussion from both companies.

Educational

Warren Buffett: The first rule of investing is don’t lose money

Something to keep in mind when you have losses. One way to mitigate this is proper position sizing—small positions in highly asymmetric ideas. We play in high-volatility sectors (we are speculators), and we will strike out a lot. However, our slugging percentage is going to be high. When we do get a hit, it will likely be a home run, which cures a lot of strikeouts.

Dave Kingman: The patron saint of the AIA newsletter

In the past, I have talked about Strat-o-matic Baseball and how I was addicted to this game in high school. Dave Kingman was a three outcome hitter when he batted. He would either strike out or hit a home run. He struck out a lot, but he also hit many home runs. I won many Strat-o-matic games on a three-run bomb by “King Kong” Kingman.

I have made a ton of money (and covered a lot of losses) on multi-bagger home run speculations.

To your investing success,

John Polomny