C'mon Man!
NEWS FLASH: I am currently scheduled to be one of several guest speakers in a new X (Twitter) Spaces next month around the June FOMC announcement. Stay tuned for more details.
Back in earlier days of ESPN, they had a segment called “C’Mon Man!” where they went over recent “low”lights (the opposite of “high”lights). It’s surprising how many poorly thought-out narratives and analyses there are in the markets. I was especially appalled at what passed for analysis during COVID. I’m not complaining – having the markets look at something incorrectly is a great way to make money.
I’m going to start keeping a list of bad market narratives and present them from time to time. For now, I’m going to present the two that seem the timeliest:
1. Rents will eventually come down, based on current yoy rent changes
The analyst community absolutely loves yoy (Year-Over-Year) charts. However, I don’t think people realize that these “second derivative” analyses don’t work very well when we are not coming off of a “normal” year. The years post-COVID have been anything but normal. I’ve heard a couple of research shops who are highly dependent on such models “apologize” for not getting things right. But they didn’t adequately explain why – so it’s not clear to me if these errors couldn’t persist in the future. The path of rents provides a prime example of how looking at the rate of change in unusual times leads to wrong conclusions.
We’ve all seen some version of the above yoy rent chart – that current rent signings are roughly flat in terms of price. Therefore, future CPI rent will eventually be roughly flat. This is somewhat true on a LONG enough time horizon AOTBE and/or if we are coming off a very stable time frame. The latter criteria does not currently hold, as we are coming off of COVID. You CANNOT look the current divergence (green circle) without addressing the massive past divergence (red circle)!
The clearest explanation is by Jim Bianco from earlier in the year. Unfortunately, it was buried deep within an 11-post tweet, so I don’t know if everyone saw it.