As someone who has missed most of the real estate booms in his lifetime, I should hardly be qualified to write about this one’s coming collapse. Nor is there any law of averages or economics that says property prices should start to fall, just because the Federal Reserve is pushing short-term interest rates up. But I got interested in the real estate bubble on a trip last spring across the United States. In short, I made a long circle from New York to Los Angeles, by way of North Carolina, Alabama, Mississippi, and Texas, and all anyone wanted to talk about was how much their house was worth.
A friend of mine in LA, a school teacher, said his central-city ranch house was worth a million dollars, and my friends with New York apartments spoke like the late Senator Everett Dirkson, who remarked about the federal budget: “A billion here, a billion there, and pretty soon you are talking real money.” In between, the real estate market seemed neatly divided between tear-downs—houses on attractive lots that could be torn down and replaced—and MacMansions, Gatsby-like homes with turrets, columns, six bedrooms, endless family rooms, basements, Jacuzzis, weight rooms, and plasma-screen televisions, that are usually lived in by a couple, often thinking of getting divorced. In the Hamptons, on New York’s Long Island, I think a trailer—not even a doublewide—would sell for $5 million, provided the seller managed to throw in long-term parking. Needless to say, everyone I met agreed that they had become home millionaires.
Looking at the housing figures, I suppose many of them are right. In 2004 median prices of New York condos were $888,000, and since then prices have jumped another 25 percent. On either the East or West coasts, a million dollars buys what in Brooklyn we used to call a “shell” or what my sister called a “see-through.” According to Paul Krugman, the New York Times columnist and a Princeton economist, in the last five years housing prices in New York have increased 77 percent, those in Miami 96 percent, and those in San Diego 118 percent. At the same time, the stock market, where many people have their savings, has been either flat or lost money, and when many homeowners get their raise at work, it has been in the realm of 2 percent and a firm handshake for all those late nights and weekends answering e-mails. So where do people get the money to bid up prices in real estate?
Easy. They borrow from the equity they have in their existing houses, or will have in their houses. Home equity loans in the U.S., according to one published source, now amount to $398 billion, and 40 percent of this easy money (“Honey, where’s that checkbook on the house?”) is pegged to adjustable rates. Other houses are bought with nothing down or with so-called “no-doc” mortgages, where you don’t have to tell the bank that you got laid off six months ago, while drying-out, after all that bad luck in Vegas. As The Economist magazine once wrote: “When it comes to making mistakes, commercial bankers are hard to beat.” Now with fewer merger and acquisition deals out there, little commercial growth, and thin margins in trading, most big banks are betting their balance sheets on branch business—sending pre-approved credit cards to deadbeats and encouraging strangers to take out a mortgage. As Charles Ponzi found out, so long as your customer base is growing, or in this case real estate prices are rising, you can continue lending against invisible equity in houses. By the time interest rates rise, prices on housing fall, and panic selling sets in, it is usually too late to buy that plane ticket to Brazil.
I often wonder how the government publishes inflation figures, because in the last several years, we have had an explosion in the cost of housing, oil has gone through the roof, gold is selling up on the charts, and then, when some august body reports on inflation, they announce it is in line with low expectations. I think this is largely the effect of falling wages and salaries, as jobs ship overseas and big companies like General Motors decide to walk on their pension liabilities. (That will teach those union people to get old.) But one reality of the housing market is that real estate, over the course the last three or four hundred years, has only ever managed to keep abreast or slightly ahead of inflation. In his new book on the housing bubble, Robert J. Shiller reported that between 1628 and 1973, real estate had returned an average of 0.2 percent a year. So much for flipping condos in Newport Beach, at least if you did it for 350 years.
What will choke off the easy money in real estate speculation? I would bet my money on the large banks, which will suddenly find, in an economic downdraft, that their property portfolios are underwater. As they raise rates and call in bad loans, the forced collateral sales will drive down the markets, with vacation homes, cheap condos, and MacMansions in corn fields leading the way south. Independent of the banks, Fed rate increases will also increase the cost of carry on all the paper that is tied to housing: adjustable-rate mortgages, term mortgages, home-equity lines of credit, etc. In those cases, it will be easier for speculators to dump marginal properties, or properties bought on margin, than to sell shares or dip into other savings, especially as much of that money is already tied up in paying for the concierge over at Dolphin Bay.
The problem for most people is that, even when they believe the real estate market is headed for a dive, they find they have fallen in love with their properties and can’t imagine selling them as they would junk bonds or penny stocks. Plus everyone feels wonderful living in a house that has doubled in value: having your cake and watching television in it too. At that point the only strategy is to diversify the rest of your portfolio, buying investments that today look unromantic next to time-shares at Pebble Beach. That might be the shares of large companies, with solid cash flow, that the market is overlooking; that might be funds that will buy distressed securities after certain markets have tanked; or that might be short-dated bonds that you can roll-over as rates increase. I will explore some alternatives in a future column. But in the meantime I am open to ideas as to how to short the real estate market without calling the movers.
Wednesday, August 24, 2005
Wednesday, August 17, 2005
Touring in France with Lance and Sheryl
I still want to write about the coming real estate bubble, especially given the rise in short-term rates in the US. Many home-equity lines of credit are not fixed the way mortgages are, so any increase in rates will raise monthly payments, eventually weakening prices in the housing market. But before addressing these extraordinary popular delusions, I wanted to touch on the madness of crowds as seen from the sidelines of the Tour de France.
For those who know nothing about the race, it takes place during three weeks in July, makes a large, but not continuous circle around France, and features about 20 teams of nine riders each. The winner (for the past seven years it has been Lance Armstrong) is the rider who completes the 21 daily stages in the lowest cumulative amount of time. Mostly the race goes from one city to another, as a giant pack. But sometimes the riders race against the clock, instead of each other, on days known in the business as time trials. To win the Tour, you have to ride well in the mountains, which few do, and ride well against the clock, when no team tactics come into play.
The companies that sponsor professional cycling teams tend to be European industrial concerns that want their billboard, in the guise of team jerseys, broadcast around the world during the month of July. Nevertheless, not all sponsors are European. Armstrong won six of his seven Tours under the flag of the U.S. Postal Service, which, so far as I can judge, has absolutely no business in Europe aside from regularly losing the Christmas packages my mother sends to our children. Sponsoring a professional cycling team costs about $6 million, and no doubt companies that take to the road divide prime time minutes into the calculated length of breakaways.
Toward the end of this year’s tour, my nine-year old son Charles and I decided to join the mayhem of a Tour stage. This one, a time trial, was unrolling in St. Etienne, a provincial city southwest of Lyon. It took three hours to get there by train from Geneva, and then we walked to the Village du Tour, near the starting line. My friend, Sam Abt, who writes excellent books about professional cycling, had arranged for us to have Village badges, which gave us proximity to the team buses, the riders, and the hospitality wagons that precede the Tour around France, littering the landscape with small product samples. On Tour, B2B commerce means throwing candy to clusters of small roadside children.
We donned our bracelets to enter the Village and said a quick hello to Sam, who was under a deadline and could only see us briefly. (Off to the Races, his compendium, is available at www.amazon.com). Thus Charles and I were left to our own devices, something we had not planned. We had neither a camera nor an autograph pen, but decided our Village time was best spent collecting signatures of the rich and famous. Before long we were in business, and had the autograph of Laurent Jalabert, who during the course of his long career was at times ranked no. 1 in the world.
Anyone watching the Tour on television or wandering around the starting line at some point asks themselves the question: Is professional bike racing a drug sport? In the last several years, but well before that, all sorts of allegations have swirled around professional cycling, and many big-name stars, including Tour winners like Marco Pantani, have been accused of or judged to have taken illegal stimulants. In the old days, riders would take pep pills or drink a concoction called an atomic bomb, which consisted of things like espresso and Coca-Cola, which propelled more than a few riders toward the finish line. Now doping involves synthetic growth hormones, which can be difficult to trace, even in modern medical tests.
Actually while Charles and I were wandering the Village, we came across a celebrated doper, Richard Virenque, who is retired now but who regularly won the Tour climber’s jersey, for being the best in the mountains. Virenque was hobnobbing at the tent of a former sponsor, Champion, a supermarket chain. Charles ducked under the cordon and asked for his autograph. Virenque was with the sponsors’ clients, shaking hands and the like. But he stopped for the small boy, autographed his book, gave him a hat, and sat him briefly at the head table, obviously chatting him up. What can I say? Yes, Virenque may have doped, and then lied about it, as the world knows. But he was a gracious champion with my son, so, for now, anyway, “Allez Richard.”
You would think sponsor companies would have some reluctance to associate themselves with a sport under the cloud of scandal. Most of the big teams, at some point, have lost riders who have tested positive. Even the gold medal winner at the Athens Olympics, the personable Tyler Hamilton, was suspended for blood packing. But anecdotal evidence suggests otherwise. The watchmaker Festina, which lost nearly its entire team in a doping scandal in the late 1990s, reported sheepishly that sales had never been better than when the police were frog-marching their riders into station houses around France. I have always had my doubts about companies that try to build brand recognition on the backs of athletes, but a Tour team costs about the same as two Super Bowl commercials, and you get fame, for most of July, in good times and bad.
Yes, we tried to catch a glimpse of Lance Armstrong and his celebrity girlfriend, Sheryl Crow, the singer. There we had mixed success. We got shoved aside near the Discovery Channel team bus, and thought we were out of position until another van pulled up next to us, and let out Sheryl, Lance’s kids, and Lance’s mother, but not Lance, who remained inside, presumably resting. I have no idea if Lance has ever taken controlled substances. He has never failed a drug test, a point he and his handlers have made repeatedly when suspicions were raised. But I have to admire anybody who can win a Tour de France while traveling in a camper van that holds his mother, his singer girlfriend, and three little kids whose mother he divorced a few years ago. It looked like an out-take of “Racing with the Fockers.”
Needless to say, we did not get Sheryl’s autograph, or even her phone number, but we had a lovely brief encounter with Phil Ligett, who broadcasts the Tour to a large part of the English-speaking world. He saw Charles along a barrier, autograph book in hand, and graciously signed his name, when he just as easily could have breezed past. “Allez Phil.” In many ways, his mellifluous voice, describing the 1980s victories of Greg LeMond, are responsible for cycling’s emergence as a world-class sport, rather than something only done in Belgium in the rain.
Fresh from our Sheryl sighting, we were deciding what to do next. Watch a few riders start? Go out on the course? Then, as if produced by a conjurer, we found Senator John Kerry, the Democratic presidential candidate, standing in front of us. “Who does he ride for?” I whispered to Charles. I can only guess he was invited on Tour by Sheryl and Lance, although Armstrong is an Austin pal of President George W. Bush. To clarify their affiliations to the sport: Bush is a mountain biker, known on occasion to chew a little dirt, while Kerry campaigned with a Serrota, an Italian racing bike. Nevertheless, in the Village du Tour Kerry appeared as lost and overwhelmed as we were. He did not seem to have an aid or his wife in tow. Not even a nine-year old boy with a favor bag.
In person, Kerry, who is “taller than you think,” was wearing immaculate casual attire, what you would expect to find on a vacationing Yale man: khaki trousers, a checked shirt, and what looked to me like a $200 salt-and-pepper haircut. For a while Charles and I just stood there watching him. Like a nervous race horse, he would, out of nowhere, break into his senatorial stride and disappear around the Village—only to reappear several minutes later, as if he were a thoroughbred, making a second lap around the track.
On one of his trots, when he slowed to acknowledge the buzz of the crowd, Charles got his autograph. A proud father, I told the Senator that “this little boy knows Shaw McDermott,” a Boston lawyer and a friend of ours and also, for many years, of Senator Kerry. The candidate didn’t quite pick up on that conversation lateral, saying something like, “Is that right?” before moving on. Maybe I am making too much of a brief encounter at a bike race, but in that instant I could see how he lost the presidency, by his inability to respond naturally—be it to a little boy in an autograph line or to the Swift boat veterans.
Kerry did, however, connect with Eddy Merckx, the greatest cyclist in history, who was also footloose in the Village, greeting well-wishers. Merckx won five Tours, and about 500 races in his career during the 1960s and 70s. Truly, he was or is the Babe Ruth of cycling. I pointed him out to Charles, who was then swept up in a scrum of television reporters and journalists, who were no doubt eager to catch whatever electoral advice Kerry might be soliciting from The Cannibal, as he was sometimes known, given his distaste for finishing second. I had a slight moment of parental anxiety after Charles disappeared from view, but a few moments later I had the pleasure of seeing Merckx and Kerry in conversation, and then that familiar red Champion hat, and a burgeoning autograph book, bobbing by their side.
For those who know nothing about the race, it takes place during three weeks in July, makes a large, but not continuous circle around France, and features about 20 teams of nine riders each. The winner (for the past seven years it has been Lance Armstrong) is the rider who completes the 21 daily stages in the lowest cumulative amount of time. Mostly the race goes from one city to another, as a giant pack. But sometimes the riders race against the clock, instead of each other, on days known in the business as time trials. To win the Tour, you have to ride well in the mountains, which few do, and ride well against the clock, when no team tactics come into play.
The companies that sponsor professional cycling teams tend to be European industrial concerns that want their billboard, in the guise of team jerseys, broadcast around the world during the month of July. Nevertheless, not all sponsors are European. Armstrong won six of his seven Tours under the flag of the U.S. Postal Service, which, so far as I can judge, has absolutely no business in Europe aside from regularly losing the Christmas packages my mother sends to our children. Sponsoring a professional cycling team costs about $6 million, and no doubt companies that take to the road divide prime time minutes into the calculated length of breakaways.
Toward the end of this year’s tour, my nine-year old son Charles and I decided to join the mayhem of a Tour stage. This one, a time trial, was unrolling in St. Etienne, a provincial city southwest of Lyon. It took three hours to get there by train from Geneva, and then we walked to the Village du Tour, near the starting line. My friend, Sam Abt, who writes excellent books about professional cycling, had arranged for us to have Village badges, which gave us proximity to the team buses, the riders, and the hospitality wagons that precede the Tour around France, littering the landscape with small product samples. On Tour, B2B commerce means throwing candy to clusters of small roadside children.
We donned our bracelets to enter the Village and said a quick hello to Sam, who was under a deadline and could only see us briefly. (Off to the Races, his compendium, is available at www.amazon.com). Thus Charles and I were left to our own devices, something we had not planned. We had neither a camera nor an autograph pen, but decided our Village time was best spent collecting signatures of the rich and famous. Before long we were in business, and had the autograph of Laurent Jalabert, who during the course of his long career was at times ranked no. 1 in the world.
Anyone watching the Tour on television or wandering around the starting line at some point asks themselves the question: Is professional bike racing a drug sport? In the last several years, but well before that, all sorts of allegations have swirled around professional cycling, and many big-name stars, including Tour winners like Marco Pantani, have been accused of or judged to have taken illegal stimulants. In the old days, riders would take pep pills or drink a concoction called an atomic bomb, which consisted of things like espresso and Coca-Cola, which propelled more than a few riders toward the finish line. Now doping involves synthetic growth hormones, which can be difficult to trace, even in modern medical tests.
Actually while Charles and I were wandering the Village, we came across a celebrated doper, Richard Virenque, who is retired now but who regularly won the Tour climber’s jersey, for being the best in the mountains. Virenque was hobnobbing at the tent of a former sponsor, Champion, a supermarket chain. Charles ducked under the cordon and asked for his autograph. Virenque was with the sponsors’ clients, shaking hands and the like. But he stopped for the small boy, autographed his book, gave him a hat, and sat him briefly at the head table, obviously chatting him up. What can I say? Yes, Virenque may have doped, and then lied about it, as the world knows. But he was a gracious champion with my son, so, for now, anyway, “Allez Richard.”
You would think sponsor companies would have some reluctance to associate themselves with a sport under the cloud of scandal. Most of the big teams, at some point, have lost riders who have tested positive. Even the gold medal winner at the Athens Olympics, the personable Tyler Hamilton, was suspended for blood packing. But anecdotal evidence suggests otherwise. The watchmaker Festina, which lost nearly its entire team in a doping scandal in the late 1990s, reported sheepishly that sales had never been better than when the police were frog-marching their riders into station houses around France. I have always had my doubts about companies that try to build brand recognition on the backs of athletes, but a Tour team costs about the same as two Super Bowl commercials, and you get fame, for most of July, in good times and bad.
Yes, we tried to catch a glimpse of Lance Armstrong and his celebrity girlfriend, Sheryl Crow, the singer. There we had mixed success. We got shoved aside near the Discovery Channel team bus, and thought we were out of position until another van pulled up next to us, and let out Sheryl, Lance’s kids, and Lance’s mother, but not Lance, who remained inside, presumably resting. I have no idea if Lance has ever taken controlled substances. He has never failed a drug test, a point he and his handlers have made repeatedly when suspicions were raised. But I have to admire anybody who can win a Tour de France while traveling in a camper van that holds his mother, his singer girlfriend, and three little kids whose mother he divorced a few years ago. It looked like an out-take of “Racing with the Fockers.”
Needless to say, we did not get Sheryl’s autograph, or even her phone number, but we had a lovely brief encounter with Phil Ligett, who broadcasts the Tour to a large part of the English-speaking world. He saw Charles along a barrier, autograph book in hand, and graciously signed his name, when he just as easily could have breezed past. “Allez Phil.” In many ways, his mellifluous voice, describing the 1980s victories of Greg LeMond, are responsible for cycling’s emergence as a world-class sport, rather than something only done in Belgium in the rain.
Fresh from our Sheryl sighting, we were deciding what to do next. Watch a few riders start? Go out on the course? Then, as if produced by a conjurer, we found Senator John Kerry, the Democratic presidential candidate, standing in front of us. “Who does he ride for?” I whispered to Charles. I can only guess he was invited on Tour by Sheryl and Lance, although Armstrong is an Austin pal of President George W. Bush. To clarify their affiliations to the sport: Bush is a mountain biker, known on occasion to chew a little dirt, while Kerry campaigned with a Serrota, an Italian racing bike. Nevertheless, in the Village du Tour Kerry appeared as lost and overwhelmed as we were. He did not seem to have an aid or his wife in tow. Not even a nine-year old boy with a favor bag.
In person, Kerry, who is “taller than you think,” was wearing immaculate casual attire, what you would expect to find on a vacationing Yale man: khaki trousers, a checked shirt, and what looked to me like a $200 salt-and-pepper haircut. For a while Charles and I just stood there watching him. Like a nervous race horse, he would, out of nowhere, break into his senatorial stride and disappear around the Village—only to reappear several minutes later, as if he were a thoroughbred, making a second lap around the track.
On one of his trots, when he slowed to acknowledge the buzz of the crowd, Charles got his autograph. A proud father, I told the Senator that “this little boy knows Shaw McDermott,” a Boston lawyer and a friend of ours and also, for many years, of Senator Kerry. The candidate didn’t quite pick up on that conversation lateral, saying something like, “Is that right?” before moving on. Maybe I am making too much of a brief encounter at a bike race, but in that instant I could see how he lost the presidency, by his inability to respond naturally—be it to a little boy in an autograph line or to the Swift boat veterans.
Kerry did, however, connect with Eddy Merckx, the greatest cyclist in history, who was also footloose in the Village, greeting well-wishers. Merckx won five Tours, and about 500 races in his career during the 1960s and 70s. Truly, he was or is the Babe Ruth of cycling. I pointed him out to Charles, who was then swept up in a scrum of television reporters and journalists, who were no doubt eager to catch whatever electoral advice Kerry might be soliciting from The Cannibal, as he was sometimes known, given his distaste for finishing second. I had a slight moment of parental anxiety after Charles disappeared from view, but a few moments later I had the pleasure of seeing Merckx and Kerry in conversation, and then that familiar red Champion hat, and a burgeoning autograph book, bobbing by their side.
Tuesday, August 09, 2005
With Tiger at the British Open
I wanted to devote this update of the blog to the irrational exuberance of the US real estate market. For some time I have felt that the US economy is a pensioner of the home-equity market, which is to say that the last consumers left in the American mall are those refinancing their houses to pay for washers and dryers. At the same time, I realize it is August, that few people are at their desks, and that in these dog days, no one wants to think about depressed or depressing markets. If people are thinking about anything, it is about such pastimes as Harry Potter or how to improve their golf. As well they should—August only comes once a year.
Not wanting to buck any such trends, I thus am content to turn my own fancies to golf, as not long ago I spent an agreeable few days watching the British Open, known locally as The Open. I had never before watched a major golf championship, and thus did not want to turn down an invitation from a friend, Richard Wax, who set up his company’s hospitality suite in a house not far from the 18th green at St. Andrews, the Scottish town which was the host to this year’s Open Championship.
In sporting mythology, golf is thought to have started in or near St. Andrews, in perhaps the fifteenth century, and the Old Course there is thought to be the oldest in the world. Mary, Queen of Scots, is among those royals who are reported to have tried their hand with a mid-mashie, and she might well have played here, given the importance that the St. Andrews cathedral and castle played in Stuart history. Whether Mary had to pay $125 for a round and put her name in a lottery for a tee time has never been verified. But the game’s constitutional authority, the so-called Royal & Ancient, presides over the sport’s rulebook from an austere clubhouse next to the course. Such is its air of Scottish mysticism that one could also easily imagine finding in its vaults the rules to govern Harry Potter’s beloved quidditch.
Alas, watching a golf tournament is not as easy as it sounds. Great swarms of people follow the leaders, like Tiger Woods, and unless you gain entrance to one of the course grandstands, all you see at the Open is the golf cap of the person standing in front of you. Out on the course, the drama of shot-to-shot television golf is lost, as only in a few locations can you glimpse the leader board or follow the scores. In this instance, I walked the course with my nine-year old son, and we ended up stationing ourselves near the ninth hole and waiting for the golfers to come to us.
We missed Jack Nicklaus’s farewell round, but, yes, on a few occasions we saw Tiger Woods. He nearly drove the green on the par-four ninth, hitting the ball about 330 yards, and we got a good look at him while he chipped near the hole and then rolled in a birdie putt. I had never before seen Woods in person. He plays with the brooding elegance of a Greek god (Poseidon’s backswing comes to mind). He graciously acknowledges the crowd’s approval with a reflexive tip of his cap, and he walks purposefully from spot to spot on the course, rarely distracted by small talk with other players or chitchat with the fans. He seems a touch taller than the other players, although some of that may be his aura and the surrounding gallery. But there is grimness in his game-day expression, as if on every shot he were looking over a precipice into a dark world where there is no perfection.
In the evenings, we reconvened in the company of Richard Wax, and reviewed the state of play. After the first day in this year’s Open, the drama had left the course, as Woods had the tournament well in his determined grip. In effect we were watching two Opens: in the first was Woods v. Woods, for the championship, and in the other, the field was playing to be his runner-up. In the evenings we also spent a lot of time thinking about what makes a great golf course, and why some golf course resorts succeed, and others, well, play into the sand. My friend Richard is an expert at understanding what kind of hotel works well with particular golf courses.
Certainly nothing in St. Andrews resembles the opulent, Gatsby-like golf resorts in California or Florida. The hotel we stayed in could well have been an army barracks, and the food in St. Andrews is a variation on pub lunches, if you are lucky. The course may be still something of a cow pasture, and the town seems to dwell in a permanent November. But it remains the home of golf precisely because nothing there gives the sense that it can be bought or sold.
Which brings me back to irrational exuberance, and real estate dreams. One night in St. Andrews, I was invited to dinner by a real estate group that has purchased a Victorian dormitory that also overlooks the adjoining first and eighteenth fairways. In recent years the building has been part of the student housing at St. Andrews University. The dinner was held to introduce a real-estate project to be known as St. Andrews Grand, the redevelopment of the dorm into a kind of time-sharing club, in which members would purchase the use of an apartment for ten weeks a year, at prices ranging up to about $3.3 million. For that you get both a butler and a helicopter standing by.
Those assembled looked at floor plans for the renovated flats, each of which had a living room labeled “the Grand Hall.” It left the impression that Mary and some of her nobles might pop in for a banquet after a round at the Old Course. The promoters of the project were at pains to say this was not time-sharing in the sense of using a worn condo for two weeks in Malaga, but a club into which the world’s wealthiest families would buy ten weeks of membership. (Except for students and queens, most people tire of St. Andrews after about four days.) I liked the promoter backing the project, Bernie Wasserman, who clearly has made a fortune in US real estate from his base in Providence, Rhode Island. He cheerfully confessed to being better at stickball than golf. But are there 116 families out there with a spare $ 2 million or so ready buy 10 weeks of membership to use an apartment overlooking the hallowed grounds of St. Andrews? Maybe so, but for that you get neither membership in the Royal & Ancient nor guaranteed tee times on the Old Course. Nor do you actually take title to the apartment that comes with the Grand Hall. As Tom Wolfe wrote of other property disappointments in Bonfire of the Vanities: “Whadaya want for a million dollars?”
Not wanting to buck any such trends, I thus am content to turn my own fancies to golf, as not long ago I spent an agreeable few days watching the British Open, known locally as The Open. I had never before watched a major golf championship, and thus did not want to turn down an invitation from a friend, Richard Wax, who set up his company’s hospitality suite in a house not far from the 18th green at St. Andrews, the Scottish town which was the host to this year’s Open Championship.
In sporting mythology, golf is thought to have started in or near St. Andrews, in perhaps the fifteenth century, and the Old Course there is thought to be the oldest in the world. Mary, Queen of Scots, is among those royals who are reported to have tried their hand with a mid-mashie, and she might well have played here, given the importance that the St. Andrews cathedral and castle played in Stuart history. Whether Mary had to pay $125 for a round and put her name in a lottery for a tee time has never been verified. But the game’s constitutional authority, the so-called Royal & Ancient, presides over the sport’s rulebook from an austere clubhouse next to the course. Such is its air of Scottish mysticism that one could also easily imagine finding in its vaults the rules to govern Harry Potter’s beloved quidditch.
Alas, watching a golf tournament is not as easy as it sounds. Great swarms of people follow the leaders, like Tiger Woods, and unless you gain entrance to one of the course grandstands, all you see at the Open is the golf cap of the person standing in front of you. Out on the course, the drama of shot-to-shot television golf is lost, as only in a few locations can you glimpse the leader board or follow the scores. In this instance, I walked the course with my nine-year old son, and we ended up stationing ourselves near the ninth hole and waiting for the golfers to come to us.
We missed Jack Nicklaus’s farewell round, but, yes, on a few occasions we saw Tiger Woods. He nearly drove the green on the par-four ninth, hitting the ball about 330 yards, and we got a good look at him while he chipped near the hole and then rolled in a birdie putt. I had never before seen Woods in person. He plays with the brooding elegance of a Greek god (Poseidon’s backswing comes to mind). He graciously acknowledges the crowd’s approval with a reflexive tip of his cap, and he walks purposefully from spot to spot on the course, rarely distracted by small talk with other players or chitchat with the fans. He seems a touch taller than the other players, although some of that may be his aura and the surrounding gallery. But there is grimness in his game-day expression, as if on every shot he were looking over a precipice into a dark world where there is no perfection.
In the evenings, we reconvened in the company of Richard Wax, and reviewed the state of play. After the first day in this year’s Open, the drama had left the course, as Woods had the tournament well in his determined grip. In effect we were watching two Opens: in the first was Woods v. Woods, for the championship, and in the other, the field was playing to be his runner-up. In the evenings we also spent a lot of time thinking about what makes a great golf course, and why some golf course resorts succeed, and others, well, play into the sand. My friend Richard is an expert at understanding what kind of hotel works well with particular golf courses.
Certainly nothing in St. Andrews resembles the opulent, Gatsby-like golf resorts in California or Florida. The hotel we stayed in could well have been an army barracks, and the food in St. Andrews is a variation on pub lunches, if you are lucky. The course may be still something of a cow pasture, and the town seems to dwell in a permanent November. But it remains the home of golf precisely because nothing there gives the sense that it can be bought or sold.
Which brings me back to irrational exuberance, and real estate dreams. One night in St. Andrews, I was invited to dinner by a real estate group that has purchased a Victorian dormitory that also overlooks the adjoining first and eighteenth fairways. In recent years the building has been part of the student housing at St. Andrews University. The dinner was held to introduce a real-estate project to be known as St. Andrews Grand, the redevelopment of the dorm into a kind of time-sharing club, in which members would purchase the use of an apartment for ten weeks a year, at prices ranging up to about $3.3 million. For that you get both a butler and a helicopter standing by.
Those assembled looked at floor plans for the renovated flats, each of which had a living room labeled “the Grand Hall.” It left the impression that Mary and some of her nobles might pop in for a banquet after a round at the Old Course. The promoters of the project were at pains to say this was not time-sharing in the sense of using a worn condo for two weeks in Malaga, but a club into which the world’s wealthiest families would buy ten weeks of membership. (Except for students and queens, most people tire of St. Andrews after about four days.) I liked the promoter backing the project, Bernie Wasserman, who clearly has made a fortune in US real estate from his base in Providence, Rhode Island. He cheerfully confessed to being better at stickball than golf. But are there 116 families out there with a spare $ 2 million or so ready buy 10 weeks of membership to use an apartment overlooking the hallowed grounds of St. Andrews? Maybe so, but for that you get neither membership in the Royal & Ancient nor guaranteed tee times on the Old Course. Nor do you actually take title to the apartment that comes with the Grand Hall. As Tom Wolfe wrote of other property disappointments in Bonfire of the Vanities: “Whadaya want for a million dollars?”
Tuesday, August 02, 2005
Toxic Waste Debt
Just because I am choosing here to write about investments and money management, do not think that I have any special insight or knowledge of particular markets. Like many in business, however, I do spend a fair share of my time in the company of investment managers. I also visit companies, read annual reports, attend meetings, and meet with senior managers. In the course of such wanderings, I have come to a few conclusions. One is that no one can discuss investments unless you have a laptop computer that can show overhead slides. The second is that few people are really listening when the lights go down.
Hence what I want to do in this occasional blog (the Internet equivalent of a diary; the word comes from Web log) is to describe investments, companies, books, travel, people, and ideas that I find interesting. I will try to keep the entries to succinct, and I promise to you large type and few numbers.
The goal is to distill a life busy with memos and meetings into a few coherent suggestions for potential investments. Or to raise possibilities for investments that can be more thoroughly evaluated.
BAD MONEY:
In June, I had the good fortune to attend the annual meetings of the M.D. Sass Resurgence Funds. The meetings took place outside New York City at the Doral Arrowwood Hotel, notable for putting elevators where no guests can find them.
The Sass Resurgence Funds buy the debt, and other securities, of failed companies, hoping they can nurse them back to life. Generally, they buy a large enough position to run the creditors’ committee or to appoint new management.
Martin Sass, the chairman and chief executive officer, is notable for hiring strong-willed, investment managers, and letting them do their jobs. He is also smart about managing money, but he is probably better about judging people.
During the conference I tuned out during many of the company presentations, but came alive during Marty’s opening and closing remarks. What he foresees is the coming collapse of the junk bond market, calling the present environment a “major inflexion point”—what the rest of us call a fork in the road. The reason is that many investors, in recent months, have chased yield, in their investments, to the breaking point. In early 2005, high-yield debt returned less than 300 basis points over U.S. Treasuries. As a result of these narrow spreads, issuers flooded the market in 2004-05 with more than $200 billion in new junk bonds. According to Sass, some $50 billion of these bonds are rated CCC, and a study of that market indicates that CCC bonds, within five years, have a default rate of 47 percent. Hence Sass describes these high-yield bonds as “toxic waste.”
What is the best thing to do?
Avoid investing in high-yield debt at this stage.
Look at funds like Sass’s, which will take big positions, in distressed debt, once that market has collapsed.
If you have to invest in bonds, keep maturities short, and stick only to AA or AAA-rated paper.
Whatever you do, don’t chase yield in such a combustible market, as the junk you may be buying could turn out to be your own portfolio.
Hence what I want to do in this occasional blog (the Internet equivalent of a diary; the word comes from Web log) is to describe investments, companies, books, travel, people, and ideas that I find interesting. I will try to keep the entries to succinct, and I promise to you large type and few numbers.
The goal is to distill a life busy with memos and meetings into a few coherent suggestions for potential investments. Or to raise possibilities for investments that can be more thoroughly evaluated.
BAD MONEY:
In June, I had the good fortune to attend the annual meetings of the M.D. Sass Resurgence Funds. The meetings took place outside New York City at the Doral Arrowwood Hotel, notable for putting elevators where no guests can find them.
The Sass Resurgence Funds buy the debt, and other securities, of failed companies, hoping they can nurse them back to life. Generally, they buy a large enough position to run the creditors’ committee or to appoint new management.
Martin Sass, the chairman and chief executive officer, is notable for hiring strong-willed, investment managers, and letting them do their jobs. He is also smart about managing money, but he is probably better about judging people.
During the conference I tuned out during many of the company presentations, but came alive during Marty’s opening and closing remarks. What he foresees is the coming collapse of the junk bond market, calling the present environment a “major inflexion point”—what the rest of us call a fork in the road. The reason is that many investors, in recent months, have chased yield, in their investments, to the breaking point. In early 2005, high-yield debt returned less than 300 basis points over U.S. Treasuries. As a result of these narrow spreads, issuers flooded the market in 2004-05 with more than $200 billion in new junk bonds. According to Sass, some $50 billion of these bonds are rated CCC, and a study of that market indicates that CCC bonds, within five years, have a default rate of 47 percent. Hence Sass describes these high-yield bonds as “toxic waste.”
What is the best thing to do?
Avoid investing in high-yield debt at this stage.
Look at funds like Sass’s, which will take big positions, in distressed debt, once that market has collapsed.
If you have to invest in bonds, keep maturities short, and stick only to AA or AAA-rated paper.
Whatever you do, don’t chase yield in such a combustible market, as the junk you may be buying could turn out to be your own portfolio.
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