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The BAN Report: Inflation Easing? / Fed Unwinds / Musk Shades Remote Work / From Star to Liquidation / Lifeguard Millionaires

Inflation Easing?

While inflation is still much too high, there is evidence that is beginning to ease. Paul Krugman, economist for the New York Times, argued that inflation has peaked.

Inflation in the United States has probably peaked.

I realize in saying that I risk coming across as the boy who cried “no wolf.” I called inflation wrong last year. Much of current inflation reflects huge price increases in sectors strongly affected either by pandemic distortions or, lately, by Russia’s invasion of Ukraine, but at this point measures that try to exclude these exceptional factors are also running high, suggesting that the U.S. economy as a whole is overheated:

But the economy is probably cooling off as the Federal Reserve’s monetary tightening gains traction. And the news flow on inflation has changed character. For most of the past year, just about every report on prices surprised on the upside. These days many, though not all, reports are surprising on the downside. Measures that attempt to gauge underlying inflation, like the “core” consumption deflator released this morning, are mostly, although not all, drifting down.

Furthermore, there is no hint in the data that inflation is becoming entrenched. Consumers expect a lot of inflation in the short run, but much less in the medium term:

Workers expect to see raises of only about 3 percent over the next year, barely above historical norms:

Markets have noticed the relatively good news on inflation. We can more or less directly calculate market expectations of inflation by looking at the “breakeven rate,” the interest rate spread between ordinary United States bonds and bonds that are indexed to protect investors against inflation. And breakeven rates have come down a lot over the past month or two.

A few other positive sides exist. Lumber prices have fallen 50% since March. US mortgage rates have declined slightly for three straight weeks. And our economic leadership is committed to changing course. Janet Yellen, for example admitted she was wrong about inflation:

“I was wrong about the path inflation would take,” Yellen said in an interview that aired Tuesday on CNN. “There have been unanticipated and large shocks to the economy that have boosted energy and food prices and supply bottlenecks that have affected our economy badly that at the time I didn’t fully understand.”

While many called for her resignation, isn’t it refreshing that someone in Washington admitted they were wrong? Doesn’t happen often! The bullish case is inflation is moderating and the Fed and policymakers have changed course soon enough to avert a recession. But, as Larry Summers said a couple of months ago, “there has never been a moment when inflation was above 4% and unemployment was below 5% when we did not have a recession with in the next two years.”

Jamie Dimon is clearly in the bearish camp, warning of an economic hurricane this week.

“That hurricane is right out there down the road coming our way,” the JPMorgan Chase & Co. chief executive officer said at a conference sponsored by AllianceBernstein Holdings Wednesday. “We don’t know if it’s a minor one or Superstorm Sandy. You better brace yourself.” 

Of course, inflation could be easing while the economy is headed toward a recession. We believe that a recession appears inevitable, given that the rate hikes are still in the early innings. A credit officer for a super-regional bank told me “I’m amazed how much 75 basis points is causing stress to some of our borrowers.”   

Fed Unwinds

This week, the Fed officially began to unwind its $8.9 trillion asset portfolio. Here’s how this is going to work:

Starting June 1, the Fed will allow up to $30 billion in Treasurys and $17.5 billion in mortgage bonds to mature every month without investing the proceeds. The central bank is shrinking its holdings passively, or by attrition. (Because none of the Fed’s Treasury holdings mature until June 15, this process for Treasurys doesn’t actually take effect for two more weeks). In September, the Fed will allow twice as many securities—$60 billion in Treasurys and $35 billion in mortgage bonds—to run off its portfolio.

This design is similar to how the Fed allowed its holdings to shrink between October 2017 and July 2019, though the amounts of securities that are running off the Fed’s holdings are larger now than they were then.

There is no consensus on the effects of the Fed’s asset purchases, sometimes called quantitative easing, and the portfolio runoff, sometimes called quantitative tightening. Several analysts have suggested that the runoff could be equivalent to one or two quarter-percentage point increases in its benchmark short-term interest rate.

In theory, the Fed’s purchases should reduce long-term yields by pushing down the so-called term premium, or the extra yield that investors receive for holding longer-dated assets. Analysts at JPMorgan Chase & Co. have estimated that each $1 trillion in Fed bond purchases during and after the 2008 financial crisis reduced the term premium on a 10-year Treasury note by 0.15 to 0.2 percentage point. Runoff should boost the term premium by increasing the supply of bonds that private investors must now absorb, pushing their prices down and raising bond yields, which move in an inverse relationship to prices.

Treasury debt issuance decisions also matter. In late 2018, some investors grew concerned about the effects of the Fed’s portfolio runoff, but back then, the amount of debt being issued by the Treasury was increasing sharply as tax revenues declined following tax cuts approved by then-President Donald Trump. Right now, tax revenues are surging, which could require the Treasury to issue less debt than would otherwise be the case.

So, the yield curve should curve more as the term premium increases. However, predicting how the liquidation of trillions of dollars in Fed assets will impact the economy is highly speculative. The Fed has never liquidated a portfolio of this size before. Back in 2008, the Fed’s balance sheet was under a trillion.

Musk Shades Remote Work

On Tuesday Elon Musk sent the following email to his employees:

From: Elon Musk

Subject: To be super clear

Everyone at Tesla is required to spend a minimum of 40 hours in the office per week. Moreover, the office must be where your actual colleagues are located, not some remote pseudo office.   If you don’t show up, we will assume you have resigned.

The more senior you are, the more visible must be your presence. That is why I lived in the factory so much – so that those on the line could see me working alongside them.If I had not done that, Tesla would long ago have gone bankrupt.

There are of course companies that don’t require this, but when was the last time they shipped a great new product? It’s been a while.

Tesla has and will create and actually manufacture the most exciting and meaningful products of any company on Earth. This will not happen by phoning it in.



When he was asked to address people who think going to a physical work is antiquated, he replied, “They should pretend to work somewhere else.” Musk’s decision is bold and runs against the grain of tech companies that have largely embraced remote work. While we think remote work will be a necessary and important component of the future of work, we think most employees benefit from physical interaction with their colleagues. It is especially problematic for management teams.

Obviously, for manufacturers like Tesla, remote work is not possible for its factory employees, and this sets an example for the whole company. It remains to be seen whether firms like Tesla lose out on talent due to their position on remote work.

From Star to Liquidation

The demise of Gabe Plotkin’s hedge fund, Melvin Capital, is a cautionary tale on how star traders can end up swimming in losses.

Melvin was the envy of the hedge fund world for a half-decade, posting annualized returns of 30% that let it charge some of the most expensive performance fees in the industry, sometimes up to 30%. As the years passed, more investors tried in vain to get in. 

Plotkin increased his philanthropic giving to support Jewish causes and veterans, for whom he has at times opened his home. He also splurged on big houses and bought a stake in the National Basketball Association’s Charlotte Hornets.

But his fortunes changed when Melvin -- then managing about $12.5 billion -- was ambushed around the start of 2021. An army of amateur investors gathered in online forums and set out to boost meme stocks, including GameStop Corp., that had been beaten down by Wall Street firms such as Melvin. With its short positions brutally squeezed, the firm lost more than 50% that January.

Despite the surprise attack, Plotkin’s investors were heartened by signs he was committed to winning their money back, and that big names believed he could do it. In a matter of hours late that month, Plotkin stitched together a deal for $2.75 billion in fresh capital from Ken Griffin, his partners and Citadel funds, as well as Cohen’s Point72 Asset Management in exchange for a three-year minority piece of Melvin’s revenue. 

It was a particularly striking move for Cohen, who is generally reluctant to play the role of investor in an external fund, ceding control of risk management, asset growth and other business decisions that can hurt performance.

As Plotkin reassured investors, one said he promised to stick to the strategy that had worked for so long, which included shorting equities. But the meme-stock disaster made him more cautious, not only causing him to structure bearish trades more discreetly, but limiting their size. By year-end, he had undone some of the damage, yet was still down 39%.

The lengthy push to earn it all back wore on publicity-shy Plotkin. He had never suffered losses so steep before. When Melvin sustained its first-ever down year -- a 7% decline in 2018 -- it rebounded in just one month, people said. One client said that meant Plotkin had never faced the kind of major setback that forces a firm to mature.

Once a hedge fund takes losses like this, shutting down becomes inevitable. Hedge funds make most of their money from performance fees, in which they receive a percentage of the profits (often 20% or so). After a huge drawdown, it could take a fund years before they can receive their performance fees again due to high-water marks. So, rather than work for investors at reduced compensation, they cowardly quit and start over again.

Lifeguard Millionaires

Who knew that being a lifeguard could be so lucrative? In Los Angeles, some lifeguards are making over $500K a year.

Daniel Douglas was the most highly paid and earned $510,283, an increase from $442,712 in 2020. As the “lifeguard captain,” he out-earned 1,000 of his peers: salary ($150,054), perks ($28,661), benefits ($85,508), and a whopping $246,060 in overtime pay.

The second highest paid, lifeguard chief Fernando Boiteux, pulled down $463,517 – up from $393,137 last year.

Our auditors at found 98 LA lifeguards earned at least $200,000 including benefits last year, and 20 made between $300,000 and $510,283. Thirty-seven lifeguards made between $50,000 and $247,000 in overtime alone.

And it’s not only about the cash compensation. After 30 years of service, LA lifeguards can retire as young as 55 on 79-percent of their pay.

It’s not hard to see why taxes are so high in California! For those interested, the only prerequisites are a valid CA drivers license, a high school diploma, 18 years of age, and attendance of Ocean Lifeguard Training Academy.

The BAN Report: The 15MM Bluegrass Hotel Portfolio / Higher Rates Matter / Inventory Levels Rise / Midtown Manhattan is Back / LIV Golf Challenges PGA

The $15MM Bluegrass Hotel Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $15 Bluegrass Hotel Portfolio.” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

  • A total outstanding balance of $15,043,278 comprised of seven loans and five relationships

  • The loans are secured by first mortgages on six hotels located in Kentucky

  • The weighted average coupon is 4.38% and a weighted average LTV of 69%

  • The weighted average seasoning is 54 months

  • 58% of the loans are floating based on WSJ Prime

  • All loans are performing and only one loan has been 30-days delinquent

  • 76% of the properties are major hotel franchises

  • All loans include personal guarantees

Files are scanned and available in a secure deal room and organized by credit, collateral, legal, and correspondence with an Asset Summary Report, financial statements, and collateral information. Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely. 


  • Sale Announcement: Thursday, June 9, 2022

  • Due Diligence Materials Available Online: Monday, June 13, 2022

  • Indicative Bid Date: Thursday, June 30, 2022

  • Closing Date: Thursday, July 21, 2022

Please click here for more information on the portfolio. You will be able to execute the confidentiality agreement electronically.

Higher Rates Matter

The recent rate increases, and the expectation of further rate increases are certainly making an impact. US car sales, for example, may be already at recessionary levels, according to RBC.

U.S. new-car sales dipped below an annualized 13 million vehicles in May, prompting analysts at RBC to say they are at “recessionary levels,” although demand is still heated and auto makers offer few if any incentives to those looking to buy a new vehicle.

By RBC’s reckoning, the May U.S. light-vehicle seasonally adjusted annualized rate (SAAR) of sales came in at 12.8 million vehicles, below RBC’s forecast of 13.4 million vehicles and down from April’s 14.6 million.

It’s one month, but May is usually a good month for new car sales. Meanwhile, commercial property sales fell in April after 13 months of increases.

Commercial real estate is showing the first signs of cooling in more than a year, disrupted by rising interest rates that are already causing some deals to collapse.

Property sales were $39.4 billion in April, which was down 16% compared with the same month a year ago, according to MSCI Real Assets. The decline followed 13 consecutive months of increases.

Other investors are walking away from large deals already in contract. Innovo Property Group recently backed out of an agreement to buy a Midtown Manhattan office tower for $855 million after surging interest rates made it harder to find a mortgage, according to a person familiar with the matter. The about-face meant the investor lost its $35 million deposit, according to another person involved in the deal.

Sales that were going to close in April were probably under contract when rates were lower, and now buyers need to renegotiate or walk away. Finally, residential mortgage demand has fallen to its lowest level in 22 years.

Total mortgage application volume fell 6.5% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Demand hit the lowest level in 22 years.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 5.40% from 5.33%, with points rising to 0.60 from 0.51 (including the origination fee) for loans with a 20% down payment.

Refinance demand, which is most sensitive to weekly rate moves, fell another 6% for the week and was 75% lower than the same week one year ago. The vast majority of mortgage holders now have rates considerably lower than the current one, and even those who would like to pull cash out of their homes are choosing second mortgages, rather than refinancing their first liens.

All of this is both good and bad news. We need to reduce demand to tame inflation. Higher rates are doing the job and demand is falling. 

Inventory Levels Rise

Many retailers are experiencing higher inventory levels. Target announced a plan to shed excess inventory levels earlier this week.

Mr. Cornell, who joined Target as CEO in 2014, surprised some investors on Tuesday when he said the retailer would report lower profits this quarter because it will move to quickly shed excess inventory due to shifting buying patterns. The news came less than three weeks after Target reported lower-than-expected profits, in part due to the cost of managing bloated inventory. Now the company will quickly cancel orders or sell products at a discount during the current quarter, eating further into profits, Mr. Cornell said.

Other retailers with too much inventory on hand—including Walmart Inc., Macy’s Inc., and Gap Inc.—have said they would discount some items and hold on to others to sell at a seasonally appropriate moment.

“We have to be decisive and get out in front of this to make sure this doesn’t linger through the back half of the year,” Mr. Cornell said in an interview earlier this week. Target’s stock sank 7% when the market opened Tuesday, then recovered some value throughout the day, eventually closing down 2.3%.

During its annual shareholder meeting Wednesday, Target executives were asked why the company cut profit forecasts so quickly after its earnings announcement.

“While we’ve continued to see strong traffic and sales growth since we reported our first-quarter results we’ve watched as many competitors have reported elevated inventory levels,” said Michael Fiddelke, Target’s chief financial officer. “As such we announced yesterday that we are taking a number of actions to further right-size our inventory.”

Shoppers aren’t buying as many pandemic favorites such as patio furniture and small kitchen appliances, instead spending on food and entertainment. Some items arrived late after shipping delays, Mr. Cornell said. “Now that it is here, the demand signal has changed.”

Managing inventory levels has been difficult the last couple of years. In my view, we are in the 8th inning of Phase II of Post-COVID consumer spending. Phase 1 was the lockdown economy, in which consumers bought bigger ticket durable goods. Phase II is the experience phase, in which people are catching up on lost entertainment, dining out, and travel. So, what happens next? If prices are soaring for experiences and falling for durable goods, will demand shift again?   

Midtown Manhattan is Back

The buzz is back in Midtown Manhattan.     

A familiar lunchtime sport has returned to Bryant Park: chair stalking. Once again, afternoon crowds are swarming the six-acre Midtown oasis, and its 2,000 forest-green chairs have become hot commodities.

“We’re waiting for a shipment from France,” said Dan Biederman, the president of the Bryant Park Corporation, which has ordered 2,500 additional chairs this year to keep up with demand.

A few blocks away, Times Square is buzzing with more than 330,000 pedestrians on the busiest days, or nearly 80 percent of the foot traffic there prepandemic.

And over in Rockefeller Center, there are lines — even with no Christmas tree — at its new trendy bars, shops, and cafes, not to mention its roller rink with weekly D.J.s.


Midtown Manhattan, though not as jam-packed as it was before Covid, is starting to thrive again. Not even the resurging virus in recent weeks and fears about crime on the subway have kept the crowds away from its parks, plazas, and public spaces. Sidewalks are gridlocked. Lunch counters and happy hours are elbow to elbow, especially on Tuesdays, Wednesdays, and Thursdays, as office workers adjust to hybrid schedules.

Occupancy rates at Midtown hotels rose to 78 percent in May compared with 90 percent for the same time in 2019, according to STR, a global hospitality data and analytics company.

I had a long-delayed closing dinner in NYC two months ago. Bryant Park was packed with people, and the restaurants and bars in the East Village were crowded as well. While downtown wasn’t exactly bustling, the neighborhoods where people play and live seemed vibrant.

LIV Golf Challenges PGA

LIV Golf, a rebel golf Tour backed by the Saudi Government, is starting its first event today in London today, threatening the dominance of the PGA Tour. Several PGA Tour players, including Dustin Johnson, Phil Mickelson, Louis Oosthuizen, and Bryson DeChambeau have defected and several more are rumored to be waiting in the wings. Phil Mickelson, for one, is getting $200MM to take the plunge.  

But in staging some of the most lucrative tournaments in golf history — the winner’s share this week is $4 million, and the last place finished in each event is guaranteed $120,000 — Saudi Arabia is also relying on a proven strategy of using its wealth to open doors and to enlist, or in a cynic’s view, buy, some of the world’s best players as its partners.

Some of the touches at its debut on Thursday might have felt kitschy — red phone boxes, sentries dressed like British palace guards and a fleet of black cabs to deliver the players and their caddies to their opening holes — but there was no hiding what was at play: In its huge payouts and significant investment, the series’ Saudi backers have taken direct aim at the structures and organizations that have governed professional golf for nearly a century.

While the Saudi plan’s potential for success is far from clear — the series does not yet have a major television rights deal, nor the array of corporate sponsors who typically line up to bankroll PGA Tour events — its direct appeal to players and its seemingly bottomless financial resources could eventually have repercussions for the 93-year-old PGA Tour, as well as the corporations and broadcasters who have built professional golf into a multibillion-dollar business.

Today, the PGA Tour suspended all 17 players, even those who previously resigned their memberships. A key battleground will be the four major championships, and whether these players will be able to play in them. The US Open already announced they would allow these players, if they qualified, to compete next week. Another front is the Official World Golf Rankings, which determine eligibility towards the Majors and other events. The OWGR is controlled by the PGA Tour and its allies. Most likely, this battle will be settled in a courtroom near you.

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