Daily Briefing: What’s the Message From Recent Price Action? LIVE From San Diego
Today marks 40 days since Russia invaded Ukraine. U.S. equity indexes hold solid gains as we near Monday’s close in New York, with Asian and European stocks having already ended normal trading sessions well in the green. Energy commodity prices continue to react to developments in Eastern Europe, with crude oil rising today on reports the European Union is planning to impose more sanctions on Moscow. A key section of the U.S. Treasury yield curve remains inverted after the two-year exceeded the 10-year last week. The issue of inflation and the question of recession loom ahead of Wednesday’s release of the minutes from the March meeting of the Federal Open Market Committee. Meanwhile, shares of Twitter soared 30% after Tesla CEO Elon Musk revealed in a regulatory filing that he’s taken a 9.2% stake in the social media company. Real Vision is in San Diego for this week’s Macro Experience event, where we’ll have a chance to meet face to face with some of our favorite guests. Thomas Thornton, founder of Hedge Fund Telemetry, joins Maggie Lake to talk markets and stocks on today’s Daily Briefing. Want to submit questions? Drop them right here on the Exchange: https://rvtv.io/3j6CBvI
Comparing Bitcoin to barbed wire from Timothy May’s “Crypto Anarchist Manifesto” can give insight into the gravity of this seemingly abstract invention…
Some of Bitcoin’s properties sound abstract. Properties like digital ownership, censorship resistance, decentralization and more. But the deeper you dig into the Bitcoin rabbit hole, the more you realize that Satoshi Nakamoto even implemented some mutually exclusive properties simultaneously: freedom of privacy and property rights. In fact, Bitcoin reconciles an uncensorable pseudonymous system and an extreme form of property rights. I would like to show why this combination was actually almost impossible by using an analogy based on the example of barbed wire in Timothy C. May’s “Crypto Anarchist Manifesto.”
We first find the “barbed wire” analogy in one of the shortest but most exciting texts of the cypherpunk movement, the aforementioned “Crypto Anarchist Manifesto.” While the common man had never heard of the internet at the time, the minds of the cypherpunks, who were only forming in the early 1990s, had already painted a clear picture of the information age and its promises and dangers. Those who find the thesis in “The Sovereign Individual” to be prophetic should definitely keep in mind what the cryptography anarchists were already discussing a decade earlier.
With works like “Security Without Identification: Transaction Systems To Make Big Brother Obsolete” by David Chaum in 1985, this once-nascent movement set a counterpoint to the tendencies of technology moving toward centralization and control, even if this actual danger was still a long way off. May was a libertarian-minded former Intel employee who had retired from the company at 35. He became a cofounder of the cypherpunks email list and wrote influential texts. Among them was the “Crypto Anarchist Manifesto,” which he distributed at a hacker conference in 1988.
In it, May points to the great future of cryptography, which would eventually realize the grand vision of anonymity and privacy in cyberspace. In what is an almost frighteningly visionary essay from today’s perspective, May shows what possibilities encrypted communication between people could offer. He not only compared encrypted communication to the invention of the printing press, but chose an analogy that had it all: the invention of barbed wire.
May wrote, “Just as a seemingly minor invention like barbed wire made possible the fencing-off of vast ranches and farms, thus altering forever the concepts of land and property rights in the frontier West, so too will the seemingly minor discovery out of an arcane branch of mathematics come to be the wire clippers which dismantle the barbed wire around intellectual property.”
Interestingly, it is clear from the comparison that the imminent (state) surveillance and restriction of the individual goes hand in hand with the invention of barbed wire. It is cryptography, however, that cuts the barbed wire around intellectual property.
From today’s perspective, the mental image May chose to paint can hardly be surpassed in terms of genius and ambivalence. After all, thanks to Bitcoin, the image even works in two directions.
Barbed wire is an often underestimated invention, and few people knew what implications it would hold. In the U.S., the so-called “frontier,” or the borderland between the settled or “civilized” and the undeveloped areas, had moved farther and farther west. It was seen as a divine mandate, a “Manifest Destiny,” to settle the whole country. To this end, President Abraham Lincoln had launched the Homestead Act in 1962. It stated that any “honest citizen” could take up land free of charge. All one had to do to claim his property was to make it his own through agricultural use.
(Source) An advertisement for Glidden’s barbed wire. The farmer had registered his patent in 1873.
But tilling the fields in the vast prairie was difficult, for the land was practically a single open space. It was inhospitable, overgrown with wild grasses, sometimes difficult to access and used by cowboys, ranchers or Native Americans, sometimes almost nomadically. Fencing off land was either expensive or ineffective because neither wooden fences nor planted hedges could keep out unwelcome visitors.
A single and, at first glance, tiny invention changed everything from the nature of agricultural use to the treatment of public lands and even the concept of ownership: the invention of barbed wire. The new type of fence was advertised in 1875 as the “Greatest Discovery of the Age.” Patented by Joseph Glidden of Illinois, it was “lighter than air, stronger than whiskey, cheaper than dust.” And indeed, it brought about a transformation of the American West. The double, twisted wire with spikes was used everywhere: by railroad companies demarcating their lines, by ranchers demarcating fields or raising cattle and by anyone else who used it to mark and protect what was “theirs.”
Barbed wire was a double-edged sword. Settlers loved it because it made property a fact. Cowboys, who used the free land extensively, hated the dangerous wire that led to injury and infection. Native Americans were driven farther and farther off their land because their concept of property was not to draw firm boundaries. No wonder they quickly referred to barbed wire as “the devil’s rope.” Old-time cowboys also lived by the principle that the great prairie was common property and cattle could run free under the law of “open range.”
Barbed wire was a disruptive invention and a fight quickly broke out over it. In the “fence-cutting years,” masked gangs like the Javelinas or Blue Devils cut fences and threatened settlers who put them up until lawmakers stepped in. The barbed wire was to remain.
It is interesting that cypherpunk Timothy C. May uses the analogy of barbed wire to counter-image the invention of cryptography. It was an equally underestimated and seemingly small invention, but one that successfully played “wire-cutter.” The ideal of the free “open range” was restored and unlike the gangs that ended up being taken down, mathematics was simply unstoppable.
(Source) Barbed wire versus the open range – a settler fencing off his plot.
The mental image is great because it turns the logic on its head. Barbed wire drew boundaries in freedom. But a tiny pair of wire cutters can undo them. And, as if with a battle cry, the “Crypto Anarchist Manifesto” ends, “Arise, you have nothing to lose but your barbed wire fences!”
Today, with Bitcoin, one of the cypherpunks’ visions has arrived in reality. In fact, we are exactly on the path that the “Crypto Anarchist Manifesto” had prophesied, in both cryptographic and economic terms. The text said that cryptographic methods would, “fundamentally alter the nature of corporations and of government interference in economic transactions.” We are well on our way to that reality, thanks to Bitcoin.
But despite how unappealing the image of the barbed wire that divided a vacant land into plots may seem to us, Satoshi Nakamoto’s mathematical-economic invention has a few similarities to the disruptive invention of barbed wire in the 19th century. At first glance, Bitcoin is also a small mathematical discovery that comes across as unassuming, but Bitcoin fundamentally changes a few things.
The ambivalence is that, on the one hand, it is indeed the vision of an “open range” that cuts through resistance, borders and (government) surveillance like wire cutters. On the other hand however, Bitcoin allows precisely the effortless demarcation of ownership. Bitcoin is a bit like “barbed wire” for property rights in the digital world. This is because it is the ingenuity of this invention, cryptographic encryption in conjunction with the timechain, that turns what was initially only a theoretical right to property into a reality.
This is because Bitcoin transactions, although pseudonymous, show many formal aspects of property rights as we know them from real estate. For example, ownership is publicly registered and shown without gaps across the interconnected blocks. This ownership is publicly accessible and verifiable for each individual. And it is ensured that no duplicate claims exist. The timechain becomes a kind of public land registry. Transferring these features and processes to a pseudonymous system is indeed unique — barbed wire and wire cutter at the same time.
While critics of the technology bother with superficial analogies like the tulip mania, Bitcoiners know that fundamental philosophical debates underlie all the issues at stake in Bitcoin. Philosophers like John Locke or Jean-Jacques Rousseau would write entire books about the fundamental questions of this digital commodity, if they were still alive.
After all, what do we actually own besides our bodies? That which we cultivate with our work? That which we transform? Or simply that which we can demarcate?
Hunter Biden’s Secret Service Detail Pays $30K A Month For Malibu Mansion
While Hunter Biden waits for his likely indictment on tax fraud charges (not to mention the possibility that he could face charges for failing to report his work on behalf of foreign governments), he and his new wife have been hanging out in a swanky Malibu mansion that they’re renting for $20,000/month.
But while Biden continues to spend money he doesn’t have on his California lifestyle, the Secret Service (which is legally required to provide protection for family members of the president) is being forced to do the same: according to a retired Secret Service agent, the agency has been paying a whopping $30K/month for their own market-rate pad practically next door.
Former Secret Service agent Don Mihalek told ABC News this arrangement is “the cost of doing business” for the Secret Service (since the younger Biden is entitled to ’round-the-clock’ security, like all other presidential family members).
“Typically, wherever a protectee sets up their residence, the Secret Service is forced to find someplace to rent nearby at market value,” Mihalek said, noting that the agency is also renting out properties to protect President Joe Biden’s residences in Wilmington and Rehoboth Beach, Delaware.
“This isn’t new,” Mihalek said. “The Service has had to do this in past administrations, and unfortunately, the housing market right now has driven the prices up substantially.”
Hunter Biden and the rest of Biden’s family started receiving their Secret Service detail starting in June 2020 after his father became the Democratic nominee.
While an entire generation of Americans (the long-suffering millennials) are being priced out of the housing market, Hunter’s Malibu digs include four bedrooms, three bathrooms, vaulted high ceilings and a chef’s kitchen.
The home also features a “spacious park-like yard” with a pool, a spa, a built-in barbecue bar, and alfresco dining. The property is situated on 0.7 acres on top of a hill, giving it “enchanting” 180-degree panoramic ocean views, according to the listing.
Already, the backlash among Republicans is brewing…
The Secret Service is spending over $30,000 per month to rent a mansion in Malibu to protect the First Crackhead, Hunter Biden.
…while Democrat-aligned journos are doing everything they can to put this information ‘in the right context’.
Secret Service protecting Hunter Biden pays over $30,000 a month to rent out a mansion
“This isn’t new, The Service has had to do this in past administrations, and unfortunately, the housing market right now has driven the prices up substantially.”https://t.co/CifXF0zqbz
We can’t help but wonder: how will the Secret Service protect the younger Biden should he receive a custodial sentence as a result of the ongoing investigation?
36:36: Weekly listener question: “With respect to the school curriculum debates, I can easily imagine various tradcons responding to Nick’s take (‘Let schools teach what they want’) in the following manner: ‘Teacher schools in America are, in effect, progressive indoctrination camps. So when you have a libertarian approach to curriculum, the de facto result is all these progressive teachers indoctrinating your kids with warmed-over Marxism. This is a perfect example of libertarianism being tantamount to surrender in the culture war. Putatively neutral policies, in fact, tilt heavily leftward.’ Given that some members of the panel have first-hand experience with their kids imbibing wokeism at their public schools, what say you to this critique?”
Send your questions to roundtable@reason.com. Be sure to include your social media handle and the correct pronunciation of your name.
Today’s sponsors:
We all want to make sure our family is protected in a medical emergency. What many of us don’t realize is that health insurance won’t always cover the full amount of an emergency medical flight. Even with comprehensive coverage, you could get hit with high deductibles and co-pays. That’s why an AirMedCare Network membership is so important. As a member, if an emergency arises, you won’t see a bill for air medical transport when flown by an AMCN provider. Best of all, a membership covers your entire household for as little as $85 a year. AMCN providers are called upon to transport more than 100,000 patients a year. This is coverage no family should be without. Now, as a listener of our show, you’ll get up to a $50 Visa or Amazon Gift Card with a new membership. Simply visit AirMedCare Network.com/reason and use offer code REASON.
People don’t always realize that physical symptoms like headaches, teeth-grinding, and even digestive issues can be indicators of stress. And let’s not forget about doom-scrolling, sleeping too little, sleeping too much, under-eating, and overeating. Stress shows up in all kinds of ways. And in a world that’s telling you to do more, sleep less, and grind all the time, here’s your reminder to take care of yourself, do less, and maybe try some therapy. BetterHelp is customized online therapy that offers video, phone,
and even live chat sessions with your therapist, so you don’t have to see anyone on camera if you don’t want to. It’s much more affordable than in-person therapy. Give it a try and see if online therapy can help lower your stress. This podcast is sponsored by BetterHelp, and The Reason Roundtable listeners get 10 percent off their first month at BetterHelp.com/roundtable.
Audio production by Ian Keyser Assistant production by Adam Czarnecki Music: “Angeline,” by The Brothers Steve
Republicans are taking aim at Disney over the media company’s opposition to a new Florida law that critics call the “don’t say gay” legislation.
“For Disney to come out and put a statement and say that the bill should have never passed and that they are going to actively work to repeal it, I think one was fundamentally dishonest, but two I think that crossed the line,” Florida Gov. Ron DeSantis said. “This state is governed by the interests of the people of the state of Florida. It is not based on the demands of California corporate executives. They do not run this state. They do not control this state.”
The governor told Fox News: “Disney has gotten over its skis on this.…When you are trying to impose a woke ideology on our state, we view that as a significant threat.”
“We will not back down to woke corporations,” Florida Lt. Gov. Jeanette Nuñez said.
Sen. Marsha Blackburn (R–Tenn.) complained to John Catsimatidis that “the woke left extremists are using corporations to push their agenda.” Blackburn’s comment to Catsimatidis, a politically active New York and Florida businessman who hosts an AM radio program, was reported by the New York Post.
It’s ironic to hear the complaints from Republicans about politically active corporations, because for most of the past decade-plus, those complaining the loudest about corporate participation in politics have been Democrats, or Democrat-leaning independent socialists, complaining about gun manufacturers, oil companies, and health insurance companies.
In his 2010 State of the Union address, former President Obama attacked the Supreme Court justices sitting in the audience for their ruling in Citizens United. “Last week the Supreme Court reversed a century of law that I believe will open the floodgates for special interests—including foreign corporations—to spend without limit in our elections,” Obama said. “I don’t think American elections should be bankrolled by America’s most powerful interests, or worse, by foreign entities.”
In July 2010, Obama expanded on the point. “Because of the Supreme Court’s decision earlier this year in the Citizens United case, big corporations—even foreign-controlled ones—are now allowed to spend unlimited amounts of money on American elections,” Obama said. “Imagine the power this will give special interests over politicians. Corporate lobbyists will be able to tell members of Congress if they don’t vote the right way, they will face an onslaught of negative ads in their next campaign.”
Sens. Chuck Schumer (D–N.Y.), Dick Durbin (D–Ill.), Sheldon Whitehouse (D–R.I.), and Bernie Sanders (I–Vt.) went so far as to introduce legislation to amend the First Amendment to give Congress the power to limit campaign speech.
All of a sudden now that the politician is Republican Gov. DeSantis and his allies in the Florida legislature, and the corporate lobbyists are from Disney and are defending teacher speech on sex and gender issues—well, maybe Democrats will look differently at the value of corporate speech, or the downside of restricting it.
Obama in 2010 said, “This should not be a Democratic issue or a Republican issue.”
Actually, it wasn’t. The unconstitutional law that Obama was defending—and that the Supreme Court correctly struck down in Citizens United—was the Bipartisan Campaign Reform Act of 2002. It was known as McCain-Feingold after the 2008 Republican presidential candidate, former Sen. John McCain (R–Ariz.), who was one of its prime champions. It was signed into law by former President George W. Bush, a Republican, even though Bush had sworn an oath to preserve, protect, and defend the Constitution that included the First Amendment.
Why are politicians so hostile to corporate political speech?
Because in an era of expanded government power, shareholders and employees and customers in the form of a corporation are one of the few remaining restraints on politicians. Even the rule of law is hardly an obstacle. As Citizens United shows, the politicians had no trouble enacting an unconstitutional statute. When the Supreme Court scrapped it, Obama denounced the Court with the justices sitting right there in the audience. Then the leading senators proposed to rewrite the Constitution to give themselves more power.
People may differ on the merits of the Florida law. It states, in part, that “classroom instruction by school personnel or third parties on sexual orientation or gender identity may not occur in kindergarten through grade 3 or in a manner that is not age-appropriate or developmentally appropriate for students in accordance with state standards.”
If that law reminds liberals that banning corporate speech doesn’t advance liberty, it may yet serve some constructive purpose. Politicians only have to face voters every two or four years. But businesses have to earn the confidence of customers, employees, and shareholders—with widely varying opinions—on an ongoing basis. More dangerous even than “woke” corporations are unconstrained politicians.
36:36: Weekly listener question: “With respect to the school curriculum debates, I can easily imagine various tradcons responding to Nick’s take (‘Let schools teach what they want’) in the following manner: ‘Teacher schools in America are, in effect, progressive indoctrination camps. So when you have a libertarian approach to curriculum, the de facto result is all these progressive teachers indoctrinating your kids with warmed-over Marxism. This is a perfect example of libertarianism being tantamount to surrender in the culture war. Putatively neutral policies, in fact, tilt heavily leftward.’ Given that some members of the panel have first-hand experience with their kids imbibing wokeism at their public schools, what say you to this critique?”
Send your questions to roundtable@reason.com. Be sure to include your social media handle and the correct pronunciation of your name.
Today’s sponsors:
We all want to make sure our family is protected in a medical emergency. What many of us don’t realize is that health insurance won’t always cover the full amount of an emergency medical flight. Even with comprehensive coverage, you could get hit with high deductibles and co-pays. That’s why an AirMedCare Network membership is so important. As a member, if an emergency arises, you won’t see a bill for air medical transport when flown by an AMCN provider. Best of all, a membership covers your entire household for as little as $85 a year. AMCN providers are called upon to transport more than 100,000 patients a year. This is coverage no family should be without. Now, as a listener of our show, you’ll get up to a $50 Visa or Amazon Gift Card with a new membership. Simply visit AirMedCare Network.com/reason and use offer code REASON.
People don’t always realize that physical symptoms like headaches, teeth-grinding, and even digestive issues can be indicators of stress. And let’s not forget about doom-scrolling, sleeping too little, sleeping too much, under-eating, and overeating. Stress shows up in all kinds of ways. And in a world that’s telling you to do more, sleep less, and grind all the time, here’s your reminder to take care of yourself, do less, and maybe try some therapy. BetterHelp is customized online therapy that offers video, phone,
and even live chat sessions with your therapist, so you don’t have to see anyone on camera if you don’t want to. It’s much more affordable than in-person therapy. Give it a try and see if online therapy can help lower your stress. This podcast is sponsored by BetterHelp, and The Reason Roundtable listeners get 10 percent off their first month at BetterHelp.com/roundtable.
Audio production by Ian Keyser Assistant production by Adam Czarnecki Music: “Angeline,” by The Brothers Steve
Republicans are taking aim at Disney over the media company’s opposition to a new Florida law that critics call the “don’t say gay” legislation.
“For Disney to come out and put a statement and say that the bill should have never passed and that they are going to actively work to repeal it, I think one was fundamentally dishonest, but two I think that crossed the line,” Florida Gov. Ron DeSantis said. “This state is governed by the interests of the people of the state of Florida. It is not based on the demands of California corporate executives. They do not run this state. They do not control this state.”
The governor told Fox News: “Disney has gotten over its skis on this.…When you are trying to impose a woke ideology on our state, we view that as a significant threat.”
“We will not back down to woke corporations,” Florida Lt. Gov. Jeanette Nuñez said.
Sen. Marsha Blackburn (R–Tenn.) complained to John Catsimatidis that “the woke left extremists are using corporations to push their agenda.” Blackburn’s comment to Catsimatidis, a politically active New York and Florida businessman who hosts an AM radio program, was reported by the New York Post.
It’s ironic to hear the complaints from Republicans about politically active corporations, because for most of the past decade-plus, those complaining the loudest about corporate participation in politics have been Democrats, or Democrat-leaning independent socialists, complaining about gun manufacturers, oil companies, and health insurance companies.
In his 2010 State of the Union address, former President Obama attacked the Supreme Court justices sitting in the audience for their ruling in Citizens United. “Last week the Supreme Court reversed a century of law that I believe will open the floodgates for special interests—including foreign corporations—to spend without limit in our elections,” Obama said. “I don’t think American elections should be bankrolled by America’s most powerful interests, or worse, by foreign entities.”
In July 2010, Obama expanded on the point. “Because of the Supreme Court’s decision earlier this year in the Citizens United case, big corporations—even foreign-controlled ones—are now allowed to spend unlimited amounts of money on American elections,” Obama said. “Imagine the power this will give special interests over politicians. Corporate lobbyists will be able to tell members of Congress if they don’t vote the right way, they will face an onslaught of negative ads in their next campaign.”
Sens. Chuck Schumer (D–N.Y.), Dick Durbin (D–Ill.), Sheldon Whitehouse (D–R.I.), and Bernie Sanders (I–Vt.) went so far as to introduce legislation to amend the First Amendment to give Congress the power to limit campaign speech.
All of a sudden now that the politician is Republican Gov. DeSantis and his allies in the Florida legislature, and the corporate lobbyists are from Disney and are defending teacher speech on sex and gender issues—well, maybe Democrats will look differently at the value of corporate speech, or the downside of restricting it.
Obama in 2010 said, “This should not be a Democratic issue or a Republican issue.”
Actually, it wasn’t. The unconstitutional law that Obama was defending—and that the Supreme Court correctly struck down in Citizens United—was the Bipartisan Campaign Reform Act of 2002. It was known as McCain-Feingold after the 2008 Republican presidential candidate, former Sen. John McCain (R–Ariz.), who was one of its prime champions. It was signed into law by former President George W. Bush, a Republican, even though Bush had sworn an oath to preserve, protect, and defend the Constitution that included the First Amendment.
Why are politicians so hostile to corporate political speech?
Because in an era of expanded government power, shareholders and employees and customers in the form of a corporation are one of the few remaining restraints on politicians. Even the rule of law is hardly an obstacle. As Citizens United shows, the politicians had no trouble enacting an unconstitutional statute. When the Supreme Court scrapped it, Obama denounced the Court with the justices sitting right there in the audience. Then the leading senators proposed to rewrite the Constitution to give themselves more power.
People may differ on the merits of the Florida law. It states, in part, that “classroom instruction by school personnel or third parties on sexual orientation or gender identity may not occur in kindergarten through grade 3 or in a manner that is not age-appropriate or developmentally appropriate for students in accordance with state standards.”
If that law reminds liberals that banning corporate speech doesn’t advance liberty, it may yet serve some constructive purpose. Politicians only have to face voters every two or four years. But businesses have to earn the confidence of customers, employees, and shareholders—with widely varying opinions—on an ongoing basis. More dangerous even than “woke” corporations are unconstrained politicians.
Today, news surfaced via a regulatory filing that Tesla CEO Elon Musk had recently become Twitter’s largest shareholder, buying a 9.2 percent stake in the company as of March 14, worth about $3 billion at the time of purchase. This tracks with cryptic tweets he sent a little more than a week later, gauging users’ sense of the company’s commitment to free speech:
The consequences of this poll will be important. Please vote carefully.
It’s not clear at present what type of involvement Musk will have in Twitter’s decision making processes, or whether he will be asked to join the company’s board. (Twitter’s former CEO and co-founder Jack Dorsey will be leaving the board next month.)
Given that Twitter serves as the de facto public town square, failing to adhere to free speech principles fundamentally undermines democracy.
For free speech supporters who have panned Twitter’s content moderation practices, like removing former President Donald Trump from the platform following the January 6 Capitol riots and suppressing sharing of the New York Post‘s accurately reported story on Hunter Biden’s laptop—some of which Dorsey has admitted were errors—Musk’s possibly greater involvement is a welcome change. Musk has long considered starting an open-source social media platform to serve as a rival to Twitter. Today’s news indicates his interest in fixing what’s already there. Or his interest in performance art. Or in making money and sending stock prices soaring with his every move.
“Twitter is particularly vulnerable to outside pressure because, unlike Google, Facebook, Amazon, and Snap, the company’s founders don’t have special voting control over its future,” report Giles Turner and Craig Trudell at Bloomberg. But, “the type of form used [in the Securities and Exchange Commission filing] often indicates the investor isn’t seeking to acquire control of a company, or to influence who controls it.” Musk has taken a passive stake in the company (though that could change in the future).
“I don’t think we should be the arbiters of truth,” said Dorsey in response to a farcical March 2021 congressional hearing in which members of Congress hectored tech CEOs about how (ill-defined) misinformation spreads on their platforms, “and I don’t think the government should be either.” From everything Musk has said publicly, it appears he aligns with Dorsey’s ethos. It remains to be seen whether Musk will exercise his newfound influence for good or maintain a more understated, behind-the-scenes presence at Twitter (while continuing to roil normies with memes, of course).
After two years of pandemic uncertainty, many questions around the return to office and its impact on commercial real estate have yet to be answered. But as migration patterns from high-cost markets to the Sun Belt have entrenched alongside attitudes around remote work, familiar, ominous music is playing for owners of older office buildings in Chicago and New York City.
In the last two weeks, owners of Class-B office properties in both cities have handed the keys to their buildings over to their lenders, much as owners of Class-B malls have elected to do in recent years.
“Office in what you’ll call the northern, the colder climates, the high-tax [cities] — that feels like the new retail, right?” Origin Investments co-CEO Michael Episcope told Bisnow. “Where retail was 15 years ago and its slow demise.”
About a year later, big-name borrowers are doing the same with their office properties in two of the three biggest U.S. office markets.
In Chicago, a lender reportedly took control of the 1.4M SF 175 West Jackson Blvd. building where Brookfield had fallen into delinquency on a $258M loan, according to Trepp, which maintains a database of securitized mortgages. Just a day later, Trepp reported that the special servicer on a $100M loan backed by 135 South LaSalle St. said the most likely resolution for the loan was the owner handing over the deed in lieu of foreclosure.
While those figures could be interpreted as reflective of the local politics of public health, they align with U.S. population shifts: higher-cost markets like New York, Los Angeles, Chicago and San Francisco lost a combined 700,000 residents between July 2020 and July 2021, according to the U.S. Census Bureau. By contrast, Houston, Dallas, Phoenix, Atlanta and Austin gained a combined 300,000 residents.
The Windy City’s office market is a microcosm of the concerns around cold-weather, higher-cost office markets that lost population during the pandemic. Nearly 11% of its $8.28B office CMBS balance was in special servicing in February, according to data Jellinek analyzed, compared to the national average of 3.1% in February, according to Trepp.
As additional loans mature on office properties, lenders are getting more cautious along geographic lines.
“You have more conservative underwriting, from what we’ve seen, in some of those cities that are taking a little bit longer to come back,” said JLL Senior Managing Director Sean Ryan, who sources and executes loan, distressed debt and real estate-owned portfolio sales.
“You’re going to see continued investment, but there’s going to be a higher cost of capital looking at those deals, unless it’s truly a newly stabilized, Class-A product with phenomenal loan service in place,” Ryan said.
Confidence in the office market is following the population, and with some of the biggest office-using sectors decentralizing because their talent is moving, developers are looking west and south.
“What’s certainly been driving the Sun Belt markets for investment have been people and the talent, and the companies have been following,” said Nuveen Managing Director Nadir Settles, adding that gateway cities’ reopening have begun to mitigate the migration trends.
New York and Chicago are at a unique disadvantage — combined, the two markets have more than 720M SF of office inventory, according to JLL, much of which is decades old and at risk of obsolescence with modern tenant demands.
“There’s just a tremendous amount of space that’s coming online that’s truly — people would call it second-gen space, but it’s older than that,” Ryan said. “A bank has been in that building for 15, 20 years, and even if it was redone five, seven years ago, to try to re-lease it at a quality rate today is going to cost you significant capital.”
“I don’t see anybody coming from their home and going to a Class-B building just because of price anymore,” Settles said.
Office leasing demand had its sharpest dip in February since the beginning of the pandemic, according to CBRE’s U.S. Leasing Index. Even in office markets that have recovered relatively well, companies aren’t taking huge chunks of space off the market.
“There’s companies that are looking for space, but they’re not looking for 400K SF of space,” Ryan said of Houston. “They’re looking for 25K SF, maybe 50K SF. That’s a tough ask, to fill a 400K SF building or larger with 25K SF leases.”
As the pandemic recedes, Episcope said he expects the office market to get a natural lift. Coronavirus cases were down 12% over the two weeks prior to Monday, and Covid-19 hospitalizations were down 36% over those last 14 days, according to New York Times data.
But even as Americans get more comfortable or more mandated to return to offices, landlords in cities facing cost-of-living and inventory disadvantages are going to have to compete that much harder for tenants.
“I can no longer just buy office and expect just natural lift because I’m in that area,” said Settles, who oversees Nuveen’s New York office investments. “I have to be able to buy it and execute the business plan where I can put the right amenities, I can put the right ESG factors to future-proof that office building and make it more attractive.”
Nuveen’s 730 Third Ave. in the Midtown East area of Manhattan pulls out all the stops in the so-called amenities arms race. In addition to the 6K SF sky lounge, 8K SF fitness center and 9K SF for rotating food vendors the renovated 27-story tower boasts, Settles said the Gensler-designed, LEED Gold-certified building has a golf simulator, providing all the amenities an employee may need throughout a day.
Part of Settles’ optimism for New York stems from the same logic of CRE following residential: New York City rents have reached all-time highs. Indeed, tenant demand for office has responded similarly, with a record number of leases for at least $100 per SF signed in Manhattan in 2021.
“I think there’s definitely still opportunity in cities,” Settles said. “You just have to be cautious and you have to be able to effectuate the business plan where tenants are attracted, and that is having assets in transit-rich-oriented neighborhoods, that will offer work-live-play.”
He pointed to Related Cos.’ Hudson Yards and L&L Holding Co.’s 425 Park Ave. as examples of the sustainability-forward, amenity-rich properties that are attracting modern tenants.
“The tenant of tomorrow, the ones who are out there looking for office space, it’s not just about price,” Episcope said. “It’s about location, building amenities … It’s just more important for these buildings to have all the bells and whistles, and those who don’t, [who] are just kind of trying to sell space into a market and have more urban location are going to be losing out, and we’ve seen that in Chicago, too.”
Experts aren’t ready to declare New York, Chicago, LA and other large metro office markets dead. Instead, they see opportunity. For example, the lender that was handed the keys to Epic’s building on 42nd Street was Yellowstone Real Estate Capital, PincusCo reported. It acquired the note on the property from M&T Bank in November.
“The really savvy investors who have the time and the expertise are going to continue to lend in the office space because I think there’s an ability to get paid maybe a slight premium today in that market,” Ryan said. “So office offers that opportunity, retail offers that opportunity, some others. There’s a little more price differentiation from those two assets, which I think is where people are going to start moving to, migrating to and figuring out.”
Today, news surfaced via a regulatory filing that Tesla CEO Elon Musk had recently become Twitter’s largest shareholder, buying a 9.2 percent stake in the company as of March 14, worth about $3 billion at the time of purchase. This tracks with cryptic tweets he sent a little more than a week later, gauging users’ sense of the company’s commitment to free speech:
The consequences of this poll will be important. Please vote carefully.
It’s not clear at present what type of involvement Musk will have in Twitter’s decision making processes, or whether he will be asked to join the company’s board. (Twitter’s former CEO and co-founder Jack Dorsey will be leaving the board next month.)
Given that Twitter serves as the de facto public town square, failing to adhere to free speech principles fundamentally undermines democracy.
For free speech supporters who have panned Twitter’s content moderation practices, like removing former President Donald Trump from the platform following the January 6 Capitol riots and suppressing sharing of the New York Post‘s accurately reported story on Hunter Biden’s laptop—some of which Dorsey has admitted were errors—Musk’s possibly greater involvement is a welcome change. Musk has long considered starting an open-source social media platform to serve as a rival to Twitter. Today’s news indicates his interest in fixing what’s already there. Or his interest in performance art. Or in making money and sending stock prices soaring with his every move.
“Twitter is particularly vulnerable to outside pressure because, unlike Google, Facebook, Amazon, and Snap, the company’s founders don’t have special voting control over its future,” report Giles Turner and Craig Trudell at Bloomberg. But, “the type of form used [in the Securities and Exchange Commission filing] often indicates the investor isn’t seeking to acquire control of a company, or to influence who controls it.” Musk has taken a passive stake in the company (though that could change in the future).
“I don’t think we should be the arbiters of truth,” said Dorsey in response to a farcical March 2021 congressional hearing in which members of Congress hectored tech CEOs about how (ill-defined) misinformation spreads on their platforms, “and I don’t think the government should be either.” From everything Musk has said publicly, it appears he aligns with Dorsey’s ethos. It remains to be seen whether Musk will exercise his newfound influence for good or maintain a more understated, behind-the-scenes presence at Twitter (while continuing to roil normies with memes, of course).
