Investment Guide for the American Dystopia:
Go Long the 1%, Short the Middle Class
Featured in Zero Hedge
Daniel Drew, 1/11/2015
Would you short the Brady Bunch? I would.
Mike Brady is supporting nine people on one salary in a large two story house in an LA suburb. It would have been a difficult feat in 1970 and impossible in 2015. In 2006, he might have been able to pull it off with a subprime mortgage, but eventually, a modern version of Mike Brady would be utterly screwed.
The middle class is being wiped out as the 1% take control, aided by a Federal Reserve which supplies them with all the monetary ammunition they need to take over the world. The economy is like a Toyota with a jammed accelerator pedal. It will either collide with reality or the pedal will somehow disengage. Even if it disengages, it will become clear there is no one at the wheel to steer us to safety.
As long as the Fed's liquidity pedal is stuck, the 1% party is on. The middle class will continue to be decimated, and the ranks of the retail slaves will swell. The effects show up in the data, and the stock prices of particular companies show clear trends. When our Toyota hits the wall, or the Fed takes away the punch bowl, then all bets are off.
The Long/Short Strategy for the New Reality
1. Go long companies that cater to the 1%.
Rich Door, Poor Door
No, it's not a book about why it's your fault you're not rich. It's a real situation that's unfolding in Manhattan. It's exactly what it sounds like: a door for the rich and a door for the poor. If you're old enough, perhaps it will remind you of colored entrances and colored water fountains. The reason for these architectural gymnastics is money of course. If the developer provides affordable housing, they get to collect tax breaks and subsidies. But apparently, there's no requirement that there be a common entrance - probably because the lawmakers considered that kind of ridiculous behavior to be ancient American history. But as we all know, history has an irritating way of creeping up on us.
Rich Classifieds, Poor Classifieds
Want to sell your Maserati so you can move up to the next model? Post it on POSH - the rich man's Craigslist that exists inside Bloomberg.
The Craigslist for the average person looks a little different: old chairs and an old Nissan. And forget the discounted goods; it looks like there's an entire discount store for sale. Maybe someone got cancer and needs $85,000 as a down payment for treatment.
The top 10% control 86% of the nation's wealth, and they account for over 50% of all consumption. That's the definition of an exploitation society. It's the socially acceptable pillaging of the common person in a silent war on America.
Here are some current trends in conspicuous consumption for the elite.
I first saw this reported in June 2008 before the worst of the crash. In November 2013, this story resurfaced. Buy a Gulfstream jet for $66 million and sell it for $72 million. Obviously, this is bad news for Gulfstream. They don't want others profiting from their goods if they can help it. In an effort to discourage flipping, Gulfstream said customers are not allowed to sell jets until they have taken physical delivery of them. But the folks at Gulfstream underestimated the persistence of the 1% when it comes to violating the spirit of the law and upholding the letter. To get around the new rules, they created shell companies - basically a rite of passage for 1 percenters. The shell company would buy the jet. Then they would sell the entire fake company to the eager buyer. And it was legal. When Gulfstream discovered this, they adjusted their contract yet again to require the buyer to be involved in the final delivery. But the 1% will eventually get their way somehow. They always have, and they always will.
Luxury Car Sales
The United States remains the world's largest market for luxury cars. In 2014, Lamborghini announced an all-time high in V12 sales with 1,001 deliveries of Aventadors. A few days ago, Rolls-Royce announced a 12% gain in 2014 sales, a record 4,063 vehicles. The average Rolls-Royce sells for more than $250,000. In 2013, Maserati had sales growth of 145%. Mercedes-Benz sold a record 1.4 million cars. BMW also had a record-setting year with 1.6 million cars sold.
A New Southern California Housing Bubble
A record breaking number of homes were bought for $2 million or more in the last several months. Sales worth $10 million or more were 100% higher than from the heights of the 2007 housing bubble. Cindy Ambuehl, an agent with Partners Trust in Brentwood, said, "It's pretty mind-blowing." In 2010, Patrick Soon-Shiong, the billionaire doctor, bought 3 acres in Brentwood for $29 million. The LA Times called certain parts of the Westside a "playground for the rich." A record 1,436 homes worth $2 million or more were sold in the six-county Southland in the second quarter, according to CoreLogic DataQuick. Selma Hepp, senior economist at the California Association of Realtors, said the housing market moves at two speeds: "fast for the high end, sluggish for the rest."
Excess in the High End Art Market
Perhaps no other market depicts the Fed-induced desires of the rich as clearly as the high end art market. The stock of Sotheby's, the fine art auction house, is quite possibly one of the purest ultra beta plays in the stock market. The surges and crashes of the stock mirror the broader bubble economy almost perfectly.
One of the most speculative practices in the art market is when the auction house guarantees the seller a minimum price for the work in an effort to attract their business. If the art is eventually sold at a higher price, the auction house splits the difference with the seller. As you can already see, it's a dangerous game - yet quite alluring. David Kusin of Kusin & Company, a research firm that specializes in the economics of the art market, called it a "brutal business." The auction houses have become so enamored with their inventory that they have effectively assumed ownership of it and have become speculators themselves. The line between dealer and speculator has never been so blurry. Auction houses should study the practices of drug dealers. In Biggie Smalls' song "Ten Crack Commandments," rule #4 is "Never get high on your own supply." In this case, the supply is Impressionist and Modern art like Alberto Giacometti's sculpture "Chariot," which infamous hedge fund manager Steve Cohen bought for $101 million a few months ago. I call it "anorexic stick man."
In its November postwar and contemporary art sale, Christie's auction house directly guaranteed 23 works that accounted for 44% of the sale's $853 million in revenue. Sotheby’s covered minimum prices on works that made up 43% of the $422 million in revenue at its Impressionist and Modern art sale. Sotheby's CEO William Ruprecht said, “Auction guarantees have been meaningfully profitable to the company.”
The guarantees also create rigged markets with unequal information. Sometimes, the auction house will arrange for an outsider to guarantee the price. These outsiders are allowed to bid on a work they are guaranteeing, which is essentially a double bid. It creates a false sense of demand and is a simple way to bluff the rich art buyers. The double bidders know what the floor price is because they have set it. Meanwhile, the legitimate bidders have no idea who the guarantor is or what the floor price is. The auction houses attempt to defend themselves by disclosing which art is guaranteed and whether or not the guarantor is the house or an outside party. They are essentially saying, "Disclaimer: This is a rigged market" without telling them the necessary details. The legitimate bidders remain at a huge informational disadvantage in this high stakes game to prove who has the most money, ego, and artistic sensibility.
Lessons From Before the Crash
When you look back at what was going on before the crash and what is happening now, you'll see the lessons offered by the crash have already been forgotten. It was so ridiculous that the rich were flipping yachts in 2007. Billy Smith, a partner in Trinity Yachts, said, "The risk, I guess, is that the yacht market collapses, but with all the wealth that's being created, there are no signs that that will happen." Yep - no signs at all - unless you had the slightest involvement in the mortgage industry and could see the storm coming. It's too bad the bubble didn't last long enough for subprime yacht lending to emerge. And don't think it wouldn't happen.
The art auction houses are not immune from the infectious investment amnesia. In 2008, Sotheby's reported losses of $52 million from its guarantees. Christie's also reported millions of losses. They said they would cut back on client dinner parties, global art tours, and staff. The management was okay with gambling the shareholders' money on Warhols, but when it came time to deal with the fallout, the shareholders and the lower-level staff took the losses, while the managers stayed on. Like a bunch of duplicitous gangsters, the auction house managers created a classic game of "heads I win, tails you lose." Sotheby's CEO Ruprecht said they would stay out of the guarantee business for awhile because it's "too hard to predict what tomorrow looks like." And yet here we are - three quantitative easings later - and Sotheby's is up to its neck in nearly half of its art sales.
But maybe this is all part of the plan. From the 2009 low to 2015, Sotheby's stock has gone from $5 to $45, no doubt boosting the stock option compensation of the executives. Some analysts think there is "hidden turmoil" in the art market with "razor-thin" profit margins. The CEOs of Christie's and Sotheby's have both recently announced they will step down from their positions. They probably realize their businesses were just caught in the rushing rapids of Fed-induced liquidity, and with 2008 in the back of their minds, they decided to jump ship. Ruprecht gets a $4 million severance package. On December 15, he sold 15,000 shares of Sotheby's stock for $583,000. He still has 179,000 shares left at a value of $7.6 million. I can't help but wonder if he will completely bail out once the Fed music stops.
The S&P Global Luxury Index
You can see the tidal wave of liquidity in this chart. Forget the average stock. Look at the luxury stocks of companies that cater to the rich. The associated ETF is the Amundi S&P Global Luxury ETF, which trades in Paris.
Middle Class Malaise
Empty malls are probably the most iconic images of the downfall of the middle class. About 80% of the country’s 1,200 malls are considered healthy, with vacancy rates of 10% or less. In 2006, 94% of malls were considered healthy, according to CoStar Group, a data provider for the real estate industry. But which stores are leading the way? Steven Lowy, Co-CEO of Westfield, said, "Our business is more regional and high-end focused. Anything that's caught in the middle of the market is problematic." Lowy knows his stuff. If you look at the 5 year stock chart of Sears, JC Penney, Family Dollar, and Dollar Tree, you will see everything you need to know. Middle class focused Sears and JC Penney have been obliterated, despite the efforts of hedge fund managers Eddie Lampert and Bill Ackman, who each learned the meaning of "catching a falling knife." Family Dollar and Dollar Tree, where the poor buy their groceries, have seen huge gains in their stock, with Dollar Tree leading the way at 322%. All the middle class who used to shop at places like Sears and JC Penney have dropped down to dollar stores because that's all they can afford with their McJob wages.
Source: Yahoo Finance
The Middle Class Auto Market: In Over Their Heads
While the rich buy record amounts of Lamborghinis and Maseratis, the average American is taking on record amounts of debt to finance their Fords and Hondas. According to Experian Automotive, which tracks millions of auto loans, the average amount borrowed by car buyers in the fourth quarter of 2013 reached $27,000 for the first time. A record 20% of all new car loans were more than six years in length. Not surprisingly, nine months later in the third quarter of 2014, both Experian and Transunion showed an increase in the number of car buyers who are 60 days or more behind on their car loans. Transunion reported a 13% increase in delinquent loans, and Experian reported a 9% increase. Even worse, 36% of new car loans are now made to subprime borrowers.
Payday Loans: The Final Stop on the Road to Poverty
Payday loan businesses exemplify some of the worst of capitalism. It makes the Muslim case for a total ban on interest seem less ridiculous. In the mid-1990s, the payday loan industry consisted of a few hundred lenders. Today, 20,000 storefronts clutter the landscape of America's poorest neighborhoods.
No one loves a one-sided deal more than hedge fund managers, and it wasn't long before they made their way into this legalized loan-sharking. Attracted by interest rates as high as 700%, a company called American Web Loan funneled profits through a chain of entities: from American Web Loan to an Indian tribe called Otoe-Missouria to MacFarlane Group, which is owned by Mark Curry, who is backed by a New York hedge fund called the Medley Opportunity Fund II LP. The fund was founded by the late Richard Medley, who was an adviser to George Soros. Now the fund is run by twin brothers Brook and Seth Taube. Curry's loan shark business has allowed him to buy a mansion in a Las Vegas suburb. He later moved to Puerto Rico. Curry said his clients are making "very educated decisions." Joshua Wrenn, who was trying to make a car payment, said, "I didn't ever see a contract."
Department of Financial Services Superintendent Benjamin Lawsky is investigating Medley Opportunity to see if it violated any laws. This won't be the first time Medley has faced scrutiny. In 2012, Fintan Partners sued Medley to redeem its $45 million investment after Medley allegedly violated a side letter agreement. Jay Eisenhower and Matthew Morris of the shareholder rights law firm Grant & Eisenhofer said tens of billions of dollars remain locked up in illiquid "zombie hedge funds" that suspended redemptions. These funds sit on their assets and produce small returns while collecting management fees.
A Brady Bunch Divided
If the Brady Bunch represents the American middle class, then the modern Brady Bunch would be divided. They wouldn't even live in the same neighborhood. One half would drive across town to where the other half lives so they could mow their lawn, wash their Maserati, and clean their 10,000 square foot home. That's the way we became the Brady Bunch.