‘Follow the Money’ and Brace for Recession
‘Follow the Money’ and Brace for Recession

By Thomas McArdle


“Rich-people problems aren’t going to tank the economy,” Wall Street Journal reporters recently assured us. Lest anyone forget, for decades there has been a Great Wall at the Journal, which Rupert Murdoch never demolished when he added the paper to his massive media empire in 2007. While there’s no denying the talent and scope found within its army of reporters, the Journal’s news pages are as liberal, if not more so, as what is found in the rest of the powerful establishment, mainstream media.

Its editorial page, on the other hand, one of the most reportorial anywhere, is a beacon of free-market thought and laid much of the groundwork for the tax-cutting Reagan Revolution four decades ago.

So it smells like a rat when you read in the Journal that although “Americans have been hearing the ‘R’-word a lot”—meaning “recession”—in truth, “it’s the wrong one”; the right word is “richcession,” and since you’re not rich, don’t worry your poor little head. You know what’s behind such assertions—the class warfare ideology that most establishment reporters have swallowed hook, line, and sinker. And it’s there, even among reporters whose beat is advising investors.

The Journal rattles through a whole series of facts strongly suggesting that big-money investors are battening down the hatches—not to be confused with the other meaning of “batten”: growing fat at the expense of the poor; most mainstream reporters are convinced that big investors and entrepreneurs engage in battening every hour of every day.

After cheerily relating how the gap between rich and poor is narrowing because of the federal government’s COVID handouts, we read of inscrutable swings in real estate investing. They may not resemble the run-up to the 2008 financial crisis, but in the years preceding that disaster, few read the poisonous condition of the real estate market right. The mortgage interest deduction; Bill Clinton’s $500,000 exclusion on capital gains taxes on real estate; Fannie Mae and Freddie Mac’s governmental intrusion and distortion of the consumer mortgage market with implicit guarantees against default; the politicized intensification of the Community Reinvestment Act in 1995, which artificially gave advantage on mortgages based on race and neighborhood and thus weakened scrutiny of borrowers’ creditworthiness; the widespread elimination of down payments on mortgages; the mutating of such dubious mortgages into new, exotic investment interests—all these factors led to a perfect economic storm so harmful that Marxists could be found crowing about a Time magazine cover asking if capitalism was dead. (Nothing new: Time’s cover asked if capitalism was working back in 1980 before Ronald Reagan saved the economy by recognizing that “government is the problem.”)

Those with sizable wealth invested in the economy have been spooked by record-setting inflation, market drops, and the Federal Reserve’s significant-but-inadequate interest rate hikes. Sales of the most expensive homes were down 25 percent during the latter half of 2022, sales of luxury goods are falling, and affluent consumers are increasingly shopping at stores like Walmart. Some 35 percent of those earning an annual $150,000 or more told the L.E.K. corporate strategy consulting firm that they were being affected significantly by the Biden administration’s 1970s-like inflation; fewer of the well-to-do are dining at Cheesecake Factory, with its encyclopedia-like menu, and more are turning to the simplicity and comparative cheapness of Chipotle.

Gains in sales for luxury cruise lines relative to cheaper companies in the floating vacation business are another indicator that the more affluent are seeking cheaper ways of luxuriating. Short-term vacation rentals are expected to decline this year after years of expansion. Securities-based lending is dropping too. And the Journal told its readers to look out for those at higher income levels possibly shifting their investments from equities to money markets and fixed-income funds—in other words withdrawing from the business sector into the equivalent of cash in a bank account.

Investors are seeking to liquefy their holdings, which isn’t a vote of confidence in the economy. Of great note is the fact that Blackstone, KKR & Co., and Starwood Capital Group have recently limited their clients’ ability to make withdrawals from their investments in real estate trusts. In Blackstone’s case, a robust six-year average annual return of 12.5 percent in its Breit commercial real estate fund didn’t stop investors and U.S. pension funds from wanting out of such illiquid commitments in recent months. In Starwood’s case, those holding 4.2 percent of its Breit-like fund undertook redemption requests, but the firm acted on only 20 percent of them as of last month.

Again, an exact comparison with 2008 isn’t appropriate, but the value of the specific real estate holdings in such innovative funds is now being questioned, and it’s worth recalling that the botching of the valuation of real estate instruments was at the heart of the 2008 debacle. Last month, Blackstone announced a $4 billion investment from the state-owned University of California, which may or may not be a disguised government bailout but contained an unusual $1 billion guarantee by Blackstone to give the state university system a hefty return of at least 11.25 percent.

Something may once again be rotten in the state of high-end real estate investment in America, and the notion that it isn’t an indication of economic peril because it only concerns the wealthy is ludicrous. Few people in this country are employed by someone who doesn’t have more money than they do.

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