.... the gathering gloom.

Plenty of people -- including obviously the stock market and its commentators -- believe everything will be ok.

Deficits don't matter.

The government cannot go broke.

There will never be a loss of confidence.

I travel quite a bit.  Like most people I have my habits -- places I like, things I go to do and if I enjoy them I'll go back and do them again.  This means I see patterns and, unlike many, I tend to notice them immediately.  Perhaps its a blessing -- or perhaps a curse.

I just got back after one such trip; one I've made before and Sarah and her boyfriend both came as well (her boyfriend has not been on this trip before, but she certainly has.)  They traveled separately but we met up and had a good time.

If you're in the market you ought to be making up a big fat list of things to be short -- or at least be out of the things you've had and are long of, particularly when you can get a 5%+ risk free return in the short end (the 13 week bill, for example) of the Treasury market.  I was stunned at the deterioration I saw in consumer behavior from just a month or so ago on my prior trip, and gob-smacked at the change over three months or so back when Sarah and I were out at Wolf Creek, also a place I like to go on a repetitive basis (for skiing, of course.)

There was evidence of it then on our travels which were over a large part of the same path we took back in September for our trip out to the Grand Canyon.  That which was jammed full was not, and yet there wasn't a serious price delta between those two trips; that is, while there had been lots of inflation over the previous couple of years (and it was obvious) there wasn't anything that was a sort-of "trigger moment" associated with the change, and being winter .vs. late summer, ok, maybe it was seasonal and frankly, the delta was small.

This time it wasn't small and in addition there were serious price hikes that were attempted -- and appear to have had an instant impact.

I'm talking about sit-down fast-casual places I like when traveling and lots of others do too in that they're always slammed to the point that if you want to eat there during the dinner hours I hope you like their "get a sort of reservation on their app" thing or sit at the bar if its just one of you -- because if not you might be waiting an hour.

Well, that was gone.  And not a little gone either.  The place had plenty of tables with no wait and the parking lot had lots of spaces too.  But it wasn't one place -- on the way home I stopped at another I've been in a dozen times over the last five or so years, again, at dinner time, and a third of the tables were empty.

But what else was shocking?  A roughly 40% total price increase over a couple of years ago and of that 10+% that just got tacked on with all the menus having just been reprinted in the last couple of weeks.  It appears that last grab for cash finally hit people's pain points and they stopped showing up.

I also saw "fast food" style places co-located with fueling stations on the highway shuttered and boarded up -- and that's entirely new, and of other chains I pay some attention to during the same times in the afternoon and evening their parking lots are half-full or less.

Yes, this is "shoulder season" -- or is it?  Not really.  Its graduation season and a lot of people are in fact traveling for precisely that reason; in another few weeks it will be the start of "traditional summer" with Memorial Day.

Folks, there are no rate cuts coming because there can't be into this government spending level without an explosion in inflation.  Without taking on the place in the federal spending game where all the money is going (that's health care) there is no fix.  Attempting to work around it with more offshoring, more robots, more data centers (and "ai" in them) and similar won't work either because you can't print money -- you can only print credit and to obtain money someone has to do something of value for someone else in excess of its costs.

When costs ramp that excess closes and eventually goes negative -- and at the point it does that activity becomes uneconomic.  If you continue to do it through various machinations such as the government playing handout games you run the risk of an exponential runaway and collapse.

But what you should keep in mind is that never in reasonably-modern history do markets let you get to that endpoint.  They didn't in 2000 or in 2008 either.  All the hollering about "subprime being contained" proved to be nonsense; the underlying bubble that "supported" the charade was seen through before the endpoint and the market imposed its own view of things whether policy makers liked it or not.

Mature fast casual dining and chip companies selling for 70x earnings are fantasy-land nonsense and yet both are the case right here, right now.

I get it that nobody likes the implications of prices having to collapse by a third to come roughly into line with incomes, but its fact.  Further its at least double that in the capital markets because common stock always has an element of leverage in it (otherwise why would it sell at a "multiple" of earnings at all -- and yet it always does, does it not?)

The believe that The Fed "must" or "will" step in and prevent such a reversion to the mean is absurdly common -- after all, they have stepped in through the last two decades (or even more) but in doing so each time they've made the imbalance worse and now the exponential nature of such deficit spending and debt load are here rather than a future problem.

For those who believe that it will "never fail" or worse, that you'll get plenty of warning before something serious breaks I have three words for you:

SOLD TO YOU.

In short if you expect rental income flows to remain stable and yet you also think valuations should go up rather than down you're dead wrong.

Here's the simple fact of it: "Cap rate" expresses the return on invested capital as a percentage.  A $500,000 property that has net operating income (that is, income minus operating expenses) of $25,000 has a "Cap Rate" of 5%.

What is a reasonable "cap rate"?  It is always higher than the short-term interest rate on Treasuries because there is risk in a real estate transaction but there is no risk in short-term Treasuries.  That is, if I get a 5% payout on $500,000 worth of 13 week T-bills rolled over every 13 weeks for a year (that is, the IRX is at 5%) for a real estate transaction to make sense it must pay materially higher than that cap rate because I cannot control for the risk that the value of the property may decline, there is significant expense in disposing of the property if I choose to do so and real estate is illiquid (that is, I cannot call someone or get online and get rid of it in a day or three.)

My view has always been that a reasonable minimum cap rate is around 7-8% and I am personally not interested in anything under roughly 10% in real estate because the illiquidity is always there yet it is frequently ignored in terms of the risk profile yet it is in fact the most-extreme problem since it can and does come up at the worst possible and can prevent an exit for six months or more!

There are two ways for cap rate to go up -- the rental can increase or the price of the property can go down.  Of course if the latter happens and I already own it I'm the one who is now sitting on a large capital loss -- that's bad.  If someone else is sitting on it and I want to buy it that's good.

My general rule for any business transaction is that you don't make money when you sell things -- you always make money when you buy them.  This sounds backward but it is not; buying at a good price is always preferrable to trying to figure out how to claw your way out of the hole when you go to sell whatever that thing might be.

People have gotten seriously-intoxicated on the formerly-suppressed rate environment, especially during the 2020-2023 time period.  Those days are gone and they're very unlikely to come back in my remaining lifetime.  If you expect to see that again within a decade or two I believe you're going to be disappointed at best and are quite-likely to be ruined financially, especially if you are in any way reliant on that.

Buying property to live on is not the same thing as buying property for commercial purpose, whether long-term or short rental or, for that matter, to set up a business on the land itself.  Those are very different calculations and one has nothing to do with the other; a home is a consumer durable good, not an investment despite the claims otherwise by many over the last couple of decades.  There are a huge number of external factors that can ruin it from an investment perspective (e.g. property taxes shooting the moon) which happen often enough over long periods of time that counting on such is a very bad idea.

Never mind that the "30 year mortgage" never made sense in a world where the average holding time is seven years -- and that latter has been true for decades.  Why?  Go look at an amortization table; you only pay down 10% of the principal during that seven years.  All of the rest of the money went to the bank!  It was the insane view over the last two+ decades of price appreciation that made people think this "worked" when in fact it never did because permanent price appreciation in excess of actual realized inflation is mathematically impossible -- the only question is when that will end, not if it will.  But the securitizers and security holders (e.g. MBS) all banked on that same seven year duration and now, with rates much higher all the older securitized loans are not prepaying (I wouldn't either if I had one when I have a 3% mortgage but can get 5% in short-term Treasuries with no risk!) so now the worm has turned against said holders.  Oops.

In the investment world, including both longer-term "conventional" rental properties and especially the short-term rental world, along with commercial real estate, all this applies and the shorter the term of the rental the greater the risk and thus the greater the cap rate you should and skilled persons will expect because those who overpaid and want to or must sell are sitting on huge capital losses!

Right now there is a severe imbalance in this regard in that cap rates are in many cases below the short-term Treasury rate.

IMHO you'd have to be out of your mind to accept that sort of alleged "return" and thus, at those prices, to be anywhere near that space.

Not in AI on a general sense, but in the "deep fake / generated identity" sense, yes it is.

There are a lot of people who have the belief that the fact that Microsoft has demonstrated this can be done with one PC-grade card (albeit one that costs about $2,000) that in turn means demand will be driven higher and firms like Nvidia will go (further) toward the moon.

Nope.

Why not?

Because this is demonstration that commoditization of the space is now in the final stages.  Remember that a 3060 can be had for under $300 and has about 1/3 of the performance.  That means that three of them are about $1,000 (assuming you have the supporting CPU power to drive them) and about half the 4090 price.

Do you see the gradient there?  Those two cards are about 18 months apart in terms of time which means in another 18 months the 4090 will probably be $300 and there will be a new "king of the hill" that is $2,000 and three times faster.

Maybe.

Here's the rub with that: I had a 1080TI in my desktop machine because I do some video editing.  That is, the editing and rendering required a dedicated video processor.  I bought the 3060 (which is what I have now) because the price for the performance improvement was reasonable.

Today I'd buy the 4060 which is about half the speed of that 4090 and is the same $300!  In other words for the same money I am now at one-half instead of 1/3d of the 4090s price which means I can buy two of them and for $600 have that $2,000 card's performance, assuming what I'm doing can be partitioned up across both cards.

Note also that the 4090 has a TDP (power dissipation) of 450W while the 4060 only requires 115W, so if you need two of them you're also saving half the power budget at the same time!

This is what always happens with technology and the wall comes when it does for the companies in the space.  I can buy a newer PC or laptop today that is "spec-faster" than what I have now.  But unless I have a use for the other machine I'd be crazy to do it as there's nothing wrong with the current one and from a user perspective I will not get any more productivity out of it; in the PC space the marginal gains for each new generation have dropped to near-zero with the exception of some niche uses.

In fact the last such upgrade I did on my desktop motherboard was several years ago.  I just did a "step" upgrade on the server processor here which gave me 50% more cores at the same speed for $100, in other words 50% more processing for almost no more money, other than the fact that I had to buy a better heat sink as the original, while perfectly-adequate for an 80W TDP at full power was marginal at 120W so there was another $50 involved to do that (although I still have the other one and its perfectly-suitable for another machine with a CPU in the sub-100W TDP range, should I ever need it.)  I did the same thing with the previous generation of board in that server (which had dual Xeons from a far-earlier era) in that as newer versions came out I was able to get two much faster ones in the older generation for almost no money and the cost of swapping them out was $20 for some CPU heat paste to re-apply to the top of each (which I still have, and is enough to do another half-dozen CPUs.)

Look at Intel's price chart all the way back to 2000.  During the peak crazy of "more-more-more!" they hit $75; where do they trade now?

Remember, this was "all Internet, all the time, everywhere and everything" which is a whole lot more penetration than "AI anything."

If you believed Intel was going to $500 your backside is quite sore, especially adjusted for inflation over that 25 years.

Now look at Nvidia at $850 and tell me what you think after it more than tripled in the last year.

I'm not saying they're a bad company -- they aren't, and I both like their products and use them.

But if you think they are not likely to trade sub-$100 in the next few years you are betting that somehow unlike every other commoditization cycle in the technology space this one will be different.

There's a lot of misinformation and worse flying around -- and given that after doing things that destroy your health errors here are the second-most difficult to recover from and can ruin you financially, this is truly sad.

First, interest rates on loans are not historically high, nor unreasonable.  In fact they're bog-standard up-the-middle from a historical point of view in an economy with an actual 1-2% inflation rate.  The rate of short-term (that is, less than one year) borrowing in a 2% inflation economy with a 2-3% productivity improvement (historically about average) should be about 5%, and that for longer-term money about 7%.  Why?  Because time has value; go ask any 60 year old how much they'd pay to have the last 20 years back.

In a normal market the average ownership period is about 7 years.  You have a 30 year loan as the "usual" but the average ownership is 7 years; this is why most mortgages are based on the TNX, or 10 year Treasury rate -- its the closest large-liquidity government bond issue.

So spare me the whining driven by the industry and, I might add, the belief of many cultivated by the press and government that time has not only no value but negative value, just like the fantasy land world they cultivate where as long as your credit card still works all is well.

Thus it is a false statement that rates are "high" right now.  Rates would in fact be normal in a 2% inflation and 3% productivity economy but we currently have inflation above that -- and wildly so in several mandatory purchase items such as car and homeowner's insurance, so in point of fact they're "a bit below where they should be" -- not "high."

Second, these policies and beliefs have directly driven up costs of home ownership that you have little or no control over -- specifically, property taxes and insurance.  You can insulate yourself somewhat from the tax problem by where you buy and live in that some governments are more-crazed with the premise of "no cost to spend without limit" than others, but the insurance problem is not so-easily avoided.  Simply put as prices go up for materials and labor, never mind the price of a given house so does insurance because every time there is a loss it has to be paid and that is recovered in premiums, otherwise there's no insurance at all.  Further, said price ramps are doubled into insurance and the reason is that if there is a loss that prohibits you from living in the house (e.g. a fire) for a period of time the policy covers your replacement lodging, unlike renters insurance that only covers your personal property, since if a rental is destroyed you don't have to pay rent for the destroyed property and can go rent something else.

Do not underestimate the tax problem -- the insurance problem is somewhat new, but the tax problem is not and I have seen it my own family.  My parents' home had two decades worth of potential appreciation destroyed by a rough tripling of the property tax bill over that period of time.  I warned them when it started that this was going to happen because it goes into the PITI amount someone has to pay to buy it (principal, interest, taxes and insurance) so if you take that tax increase and, for example, put it and the escalation rate into a calculation over, say, 20 years that increase is the imputed decrease in the value of the house!  That's exactly what happened and it destroyed all value add over two decades of time.

It can be worse if that ramp causes you to be unable to afford routine maintenance and a sinking fund for all the ordinary things that can and do go wrong in any house.  HVAC systems wear out as do water heaters, refrigerators, washers and dryers, roofs and similar, and that ignores the "oh crap!" surprises which occur too -- sewer or water service line problems, septic or well problems if you have them and similar.  The latter two are especially nasty if you're on private water and if they occur you need to spend that money right now or you might not be able to flush the toilet -- for real.

The basic issue is that a decade-long repression of interest rates, which was foolish and especially when Covid hit along with all the handouts into the economy has driven prices to outrageously-ridiculous levels, and for a financed transaction this compounds the damage.  But even for those who laugh because they owned a house before that and now have an alleged "big gain" the problem is that tax and insurance exposure goes up as fast (in one case) and faster in the other, so existing owners are not exempt.

In addition there is a huge fraud problem in certain markets with insurance, particularly (but not limited to) Florida, never mind places that are casualty-rich (e.g. mountainsides and similar where fire exposure is serious) but builders and planning commissions have done nothing to enforce constraints that significantly mitigate risk and buyers who continue to think said risk isn't real and drive up price, and at the same time they refuse to permit insurance companies to price said risk as it really is without making others who are not exposed to that risk eat it.  Nowhere in Florida was this more in evidence than at Mexico Beach where the homes on the beach were originally built as cinderblock disposable places as everyone who built them knew darn well a hurricane would eventually come and destroy it.  When they were literal vacation shacks nobody cared; if the interior got flooded you took the stuff out, got out a shovel and pressure washer, dried it out and there you go -- and if the storm was really bad you put up more cinderblock and a new roof on top of the poured slab which was all that remained after the storm but then the craze began and people took what were $100,000 cinderblock places where $50,000 of that was the nice sand beach you had and tarted them all up into very nice and expensive places that someone was willing to pay a million dollars for yet had the same risk of being destroyed by said storm as the base risk to that structure had not changed at all!  Then the storm comes and...... they're gone.

How can this be addressed?  Realistically there is only one way: Prices have to crash, meaning down by half or more, and remain there.  That will of course cause insurance costs to crash as well, although on the property tax side the resistance of state and local governments to cutting their budgets back will remain severe.