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Circle of Competence Issue #109


"Tough times don't last but tough people do." - Robert Schuller


Bid Ask Spreads

I listened to a great interview by Sam Zell this weekend on Bloomberg and he noted that, when asked what he was buying, he responded that he was simply observing because 'not much was going on.' And this is true for a number of reasons - but in my opinion, mainly due to the fact that sellers in the private market aren’t being forced to budge on pricing yet (as witnessed by some of the recent real estate OMs I’ve seen lately) while buyers are demanding the same discounts that public markets have received. The spread between seller expectations and buyer demands is a result of the liquidity injected into the economy by the Fed and government stimulus bills. Simply put, the Fed and government's actions have simply kicked the can down the road 90-120 days until stimulus checks run out and the economy reopens.

But as we begin to reopen this month, 20+ million people will be unemployed, hundreds of thousands of small businesses won't reopen, and the velocity of money will be markedly lower than it was just two months ago. Given all of the recent economic data, I believe we will begin to see transactions shake out well below current highs in the private market in late summer to early fall as the stimulus sedative wears off and the pain sets in.

The question worth asking right now is this - where do you place capital when interest rates are trending negative, trillions are being pumped into the economy, and transactions aren’t happening (I.e. you don’t have a liquid market for reference)? Large venture backed companies are getting murdered (look at their recent job cuts), small business has been decimated, debt isnt getting paid, stocks are only 10% off record highs despite a 15%+ unemployment rate, and cash is being handed out like candy on Halloween.

I'd love to hear from you: what is your best capital allocation bet for the next 5-10 years?