Webcast transcript
Peter Linneman (PL): The question is: what’s the price that society is willing to pay in terms of unemployment, lost income et cetera? I know we could solve all traffic deaths by just not letting people use motor vehicles, but society has decided we are willing to suffer more or less 1,000 deaths because of the benefits it brings to have motor vehicles. So, we found ways like seat belts and laws to help keep more people safe. It is not an exact analogy but every day we live with risk. A complete shut down cannot be the answer for very long.
What’s the tipping point? You’ve laid out a very compelling case where the economic damage may be more severe due to further implications and to our health. What’s the point you get to when you say we can’t keep going down this path?
WW: That’s why I bring up the testing issue – the only way I assume people would get back to any type of normalcy is if they have some kind of confidence that the people, they are interacting with, are not sick.
PL: It makes sense. There are other ways too. I think testing is important but there are some other, simpler ways too. This is coming off conversations I’ve had with other immunologists and I’ll just list off some examples. You want to go to work? You could say you have to be under the age of 65, you have to wear a mask, you have to get sprayed, you have to wear gloves, you have to be in an office that has to be disinfected thoroughly every day, et cetera. Again, I am just giving examples.
There are steps and if you don’t want to do these things then you don’t get to go to work. We have people in the essential sections that are doing these types of steps. Do you shut down people or sequester those who are in the 75-age range or have lung problems or have serious heart problems? Yes, I think that is very possible. But I do not think you can say everyone. You need to find a way, in an odd way, to get more people safely infected.
I’ll give a silly example: want to go to an NBA game? Great. You will get sprayed. Everyone including the attendees and the workers. Everyone will have to wear gloves. That will cost some money, so your tickets are going to be more expensive. You need to wear a mask. If you are wearing a mask there will be no beer sales and there will be no popcorn sales. The players will have to wear a mask. Some people will say they are not going to wear a mask, but they are getting paid 10 million dollars a year. They will wear a mask.
So, relating to the bounce back, a lot of people are wondering if whether this is a V, a Nike swoosh or an L? What’s your thought for how long it will take for us to get back up and running when we are on the other side of this?
PL: Every day that goes by, it will become much more elongated. It’s hard to answer that, Willy, until you know how long it will go on. I would say three more weeks of lockdown, meaning 2-3 more quarters before it rebounds.
If you were to look ahead at the end of the year, the Dow is going to be at X and the 10-year treasury is going to be at Y, what are your bands there?
PL: If I were to bet, I would have to bet on some type of consensus of the medical, some type of belief on political climate. A whole lot of countries face identical challenges to us. I say by the end of the year the Dow will be 10% down from where it started, which would be notably up. Spreads are about uncertainty and about risk. We just don’t know. As a path is known, the uncertainty will recede a bit and that’s what has pushed things down a bit. It is going to take a while for confidence to be rebuilt. On the 10-year treasury it is going to be under 1.5 by year end.
So, it’s going to sell off from here to year end? Because everyone has been going for the risk-free investments. It went from 80 basis points to 110 basis points. People are buying ten years again. People are buying cash and going back to a risk-free investment. Is that a fair analysis?
PL: Yeah, I think that’s basically right. I think people will slowly get back into the market. It’s a lot easier to pick up a knife from the floor than to catch it while it’s falling. It’s better to get more certainty out there before you start investing again.
During your teaching career, you advised lots of smart people at Wharton. Right now are you in a capital preservation mode or when do people deploy capital again? Let’s say there is some clarity in the next few weeks and we can figure out when this will go down. The moment we have that clarity, it may be too late. How do you counsel people?
PL: No one knows. It could get a lot worse; it could get a lot better. I think a lot of us wouldn’t want to take the risk. You say by the time we see; it could be too late. But, if tomorrow we wake up and the last two weeks had never happened, and some people made a lot of money buying at the bottom. I would not feel like I missed out. Most people don’t need that. Most people are dealing with more existential problems like do I lay people off, do I pay my rent, et cetera. My general advice is cash is a good thing in times of uncertainty. Liquidity is a good thing during times of uncertainty. Assume your rental receipts will run low, assume that you will not get that construction opportunity, because if it doesn’t turn out you’ll live with it.
WW: We had a pretty large transaction recently; we had fifteen bidders and the fifteen went to eight and we picked a winner last week. The winner backed out of the deal last minute. The asset was trading at a 3.9 cap rate. You look at the public trader assets and they are all trading north of 6. Why would you take down an asset of 3.9 cap rate when the publicly traded assets have a cap rate north of 6? Multi still has liquidity.
What’s your thought as it comes to cap rates and price discovery in the next few months?
PL: Hopefully we go through a period where we don’t have to go through price discovery. Hopefully the forbearance situation will avoid having a lot of price discovery. If you want to take advantage of the dislocation you would want to go to the market. You can actually make your bet there. On the private side, there will be little price discovery within the next 60 days.
There is an argument that all we have done is run a casino for the last couple of weeks on the stock market. It’s a gambling market for the last few weeks. It’s not an investment market.
