"The Build Back Better Agenda costs $0… it increases the national debt by $0."
- The White House, The Senate, The House of Representatives, the MSM… pretty much every Democrat last week
"There is a 0% chance this is true, +/- 0%... and we are being called stupid to our faces."
- REITRob on Twitter
Someone take my Twitter machine away!
This is not (and never will be) a "political" Early Look on my part, the lying and spin on both sides of the aisle has reached epic and nonsensical levels. Personally, I don’t associate with any party anymore, and candidly my “hurdle rate” to vote is moving in the opposite direction of the “cost of capital” in financial markets. I guess I am a Millennial, Neil! But not because of apathy, rather it is losing its utility for me. I view my time better spent on higher-value areas - my family, my job… the things I can control. More on that shortly.
But when I heard that line above for the third or fourth time a week ago, my bullsh*t detector got turned up to 11, borrowing from the great Nigel Tufnel. I took to Twitter and called out the nonsense because that’s what it is… COMPLETE NONSENSE. And it was nice to see that grinders across "Hedgeye Nation" were just as disturbed.
Back to the REITS Grind…
I think that’s why I love Hedgeye so much (and hopefully fit in) – my makeup just doesn’t allow me to allow ridiculous/outright false narratives go unchallenged. After all, I am an analyst! We are supposed to call it like we see it objectively and based on the observable facts and MATH, regardless of how it may be received by the influencers trying to move the needle.
Saying a $3.5 TRILLION spending bill will not add to the national debt, a year removed from TRIPLING the federal deficit to over $3 TRILLION from $1 TRILLION the year before amidst still record federal tax receipts, to me is equivalent to the real estate narrative that “de-densification” in the office sector will save it. This is the absurd idea that leasing more space per employee to increase social distancing will offset the 15%+ or so reduction in tenant space demand over time from work-from-home, etc. It makes no sense.
Taking it a step further, the MATH tells me that it also doesn’t matter, even though we know that the bill will still add to the national debt. When you realize that (1) we are at record nominal federal tax receipts, and (2) “true” interest expense is running about ~115-120% of those tax receipts versus ~85-90% pre-COVID, you also realize that we have just crossed the Rubicon where we are now likely borrowing to finance that interest for the first time.
I think of “true” interest as just the portions of federal spending that never go down – interest on the debt + transfer payments + military spending. Layer on top that ~70% of GDP (which helps determine tax receipts) is consumer spending, and 30% of that 70% (!!!) is from the above transfer payments.
And then add another layer that Russia and China are de-dollarizing, increasing the probability that the Fed becomes an even larger marginal buyer of Treasury issuance. All of the above is likely inflationary, at least from a monetary perspective.
But wait, I did it again! I fell into the trap! Focus on what you can control, Rob!
We are obviously long inflation in #Quad2. This will change at some point as the cycle turns, but where I need to focus are the areas in my space that will perform the best (or worst) amidst inflation. This naturally lends itself to the shorter-lease duration REIT subsectors with the highest underlying market rent growth, where a landlord can more quickly “roll” its leases up to a higher rate and capture that inflation in revenue. Hence the focus on self-storage (monthly leases), certain residential names (~12 months), etc.
And then within subsectors, focus on individual securities that are best positioned from a duration perspective. For example, take a look at today’s "Chart of the Day" to see the Industrial REIT Lease Duration.
If you would like to learn more about my research team's in-depth investing research please reach out to .
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.51-1.68% (bullish)
UST 2yr Yield 0.31-0.46% (bullish)
SPX 4 (bullish)
RUT 2 (bullish)
NASDAQ 14,626-15,298 (bullish)
Tech (XLK) 151.34-160.77 (bullish)
Utilities (XLU) 63.44-67.25 (bearish)
Energy (XLE) 55.15-59.56 (bullish)
Financials (XLF) 38.38-40.92 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 27,412-29,686 (neutral)
DAX 15,043-15,704 (bullish)
VIX 14.02-19.89 (bearish)
USD 92.99-94.21 (bearish)
EUR/USD 1.153-1.169 (neutral)
Oil (WTI) 79.01-83.66 (bullish)
Nat Gas 4.90-5.93 (bullish)
Gold 1 (bearish)
Copper 4.34-4.93 (bullish)
Stay on target,
Rob Simone, CFA
REITS Analyst
