life. money. probability.
REIT Stocks to Buy What’s Your Home Really Worth? Winning New Whiskeys
JULY 2020
IS WHAT
STEPHANIE KELTON THINKING? Free Digital Subscription getluckbox.com
Modern Monetary Theory After 80 years, a big new idea in economics
Biden’s Veepstakes
PLUS The Evolving Office REITS respond to the pandemic
the control freak's guide to life, money & probability
july 2020
12 Modern Monetary Theory
Eighty years in the making, the next big thing in economics is triggering controversy.
13 Luckbox Leans In With Stephanie Kelton
The leading voice for MMT—the idea that governments can spend as much or tax as little as they want—has plenty to say to economists who believe inflation would ensue.
20 Stop The Presses
A voice from the choir of MMT dissenters insists that government can’t print its way to prosperity.
24 Office REITs
Office-focused real estate investment trusts are adjusting to a post-pandemic world.
25 Office Space: The Sequel
Some fear the pandemic could doom the office in its present form, but office-oriented REITs entered the crisis with strong balance sheets and not many projects under construction, execs maintain.
30 Office REIT Reckoning
The lower and middle class have been hit hard by the COVID-19 shutdowns, and the pain may spread to some office REITs, an analyst warns.
WeWork woes aside, office REITs are better positioned now than in past downturns.
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32 This REIT Wins Playing Defense
Corporate Office Properties Trust specializes in defense-related tenants, inoculating the company against economic downturns.
PHOTOGRAPHS: (KELTON) ALEX TREBUS; (WEWORK) SHUTTERSTOCK.COM
Stephanie Kelton promotes a new way of viewing the economy.
luckbox | july 2020
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editor-in-chief ed mckinley managing editor yesenia duran associate editor mike reddy technical editor mike rechenthin contributing editors vonetta logan, tom preston creative director jacqueline cantu contributing photographer garrett roodbergen
p. 42
trends
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life, luxury & the pursuit of happiness
essential trading strategies
actionable trading ideas
BASIC
CHERRY PICKS
THE TECHNICIAN
DO DILIGENCE
THE POLITICAL TRADE
35 Biden’s VP: Buy The News, Sell The Rumor
49 ETF Interest Rate Strategies INTERMEDIATE
LIQUID ASSETS
38 The Cult of Celebrity Spirits
51 Economic Insensitivity
NORMAL DEVIATE
40 Home Economics
ARTS & MEDIA
42 The Luckbox Bookshelf
61 Getting REITs Right
CHEAT SHEET
53 Acquiring Short Delta
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47 A July 22 Tipping Point
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64 Lucky GOAT
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46 Meet Katie McGarrigle
FAKE FINANCIAL NEWS
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FINANCIAL FITNESS
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56 Britain’s Cautionary Tale
52 The REIT Trade
ADVANCED
55 Digging Gold
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On the cover: Photograph by Alex Trebus luckbox magazine content is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities and futures can involve high risk and the loss of any funds invested. luckbox magazine, a brand of tastytrade, Inc., does not provide investment or financial advice or make investment recommendations through its content, financial programming or otherwise. The information provided in luckbox magazine may not be appropriate for all individuals, and is provided without respect to any individual’s financial sophistication, financial situation, investing time horizon or risk tolerance. luckbox magazine and tastytrade are not in the business of executing securities or futures transactions, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. luckbox magazine and tastytrade are not licensed financial advisers, registered investment advisers, or registered broker-dealers. Options, futures and futures options are not suitable for all investors. Transaction costs (commissions and other fees) are important factors and should be considered when evaluating any securities or futures transaction or trade. For simplicity, the examples and illustrations in these articles may not include transaction costs. Nothing contained in this magazine constitutes a solicitation, recommendation, endorsement, promotion or offer by tastytrade, or any of its subsidiaries, affiliates or assigns. While luckbox magazine and tastytrade believe that the information contained in luckbox magazine is reliable and make efforts to assure its accuracy, the publisher disclaims responsibility for opinions and representation of facts contained herein. Active investing is not easy, so be careful out there!
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RADICAL NEW THINKING … FOR WHAT IT’S WORTH There’s battle lines being drawn And nobody’s right if everybody’s wrong Young people speaking their minds Getting so much resistance from behind What a field day for the heat A thousand people in the street Singing songs and carrying signs Mostly say ‘Hooray’ for our side It’s time we stop, hey, what’s that sound? Everybody look what’s going down — For What It’s Worth, Buffalo Springfield (1966) The headline for this issue of Luckbox was inspired by Paul Krugman, the progressive New York Times economist who can’t find many positive things to say about Modern Monetary Theory. Proponents of MMT advocate using radical fiscal and monetary mechanisms to achieve economic and social outcomes that don’t square with generations of accepted economic dogma. As hard as Krugman tries, he simply can’t figure out what Stephanie Kelton, MMT’s most ardent spokesperson, must be thinking. We shouldn’t focus only on Krugman’s errant reasoning—such considerations could easily consume an entire issue. Keynesian and Austrian economists alike have overwhelmingly rejected MMT’s assertion that a government that prints its own money can spend it freely—essentially without regard to increasing the deficit. My initial instinct was to agree. As a longtime hobby economist, I take pride in owning tattered tomes of John Maynard Keynes (The General Theory of Employment, Interest and Money, 1936) and F. A. Hayek (The Road to Serfdom, 1944). But, I must confess that the Serfdom pages are much more weathered from obsessive reading. So, rejecting MMT outright would be convenient and uncomplicated. What can possibly be gained from keeping an open mind? I wouldn’t be alone in righteously rejecting reasoning contrary to what (I believe) I know to be right. These days
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there’s little time or tolerance for opposing perspectives. Shades of gray are confined to softcore porn. Weak and wavering nuance is the province of the irresolute. I am right. You are wrong. That’s the single line of reasoning we all agree upon these days. We condemn before we consider, rationalize rather than reason, and attack instead of analyze. Armed with arrogance, we activate the adage that “when you only own a hammer, everything looks like a nail.” Indeed, we hammer away, certain that we’re right. Saying it more loudly makes us more right. University of Oregon President Dave Frohnmayer, who coined the phrase “The New Tribalism,” notes that the erosion of civility in public discourse is only a surface manifestation of malaise. As evidence, he cites “the growth of a politics based upon narrow concerns, rooted in the exploitation of divisions of class, cash, gender, region, religion, ethnicity, morality and ideology, a give-no-quarter and take-no-prisoners activism that demands satisfaction and accepts no compromise.” But do we really know what we believe we know? I don’t want to get all philosophically gooey here, but, really, why does it seem as though so many of us believe that we are so right about everything? Perhaps we best be more honest with ourselves: None of us is an expert on everything (including Hannity, Maddow, Krugman, et al.), and knowing one’s own limitations is the beginning of wisdom, as Socrates famously reminded us. It also does a lot to enhance our credibility.
The new ethical skepticism—the disciplined suspension of judgement—is an essential practice on the path to wisdom. It’s inspired by Aristotle’s idea that not enough skepticism leads to gullibility and too much skepticism breeds closed-mindedness. Virtuous skepticism is the mean between these two extremes. This refreshing return to reason with humility is articulated at theethicalskeptic.com: A state of neutrality which eschews the exercise of religious, biased rational or critical, risky provisional and dogmatic dispositions when encountering new observations, ideas and data. In contrast with a wallow in passive neutrality or apathy ... a form of active investigation based upon a discipline of impartiality. In this issue, we feel privileged to provide Kelton a platform to make her case (pg. 13), and we grant equal time for a dissenting voice (pg. 20). After speaking with Kelton, reading her book The Deficit Myth, and invoking the Greeks, we concede that two opposing truths can co-exist. Governments with sovereign currency may print money without regard to deficit constraints (as America has done in 46 of the past 50 years), while, at the same time, deficits do indeed matter. To the ethical skeptics among you—please let us know what you think. Jeff Joseph editorial director
Thinking Inside the Luckbox
Luckbox is dedicated to helping active investors achieve skill-derived, outlier results. 1 Probability is the key to improving outcomes in the markets and in life.
2 Greater market volatility brings greater opportunity.
3 Options are the best vehicle to manage risk and exploit market volatility.
4 Don’t rely on luck—know your options—luck smiles upon the prepared.
luckbox | july 2020
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Correction
Luckbox Readers Have Issues
Luckbox is a one-of-a-kind blend of news and investing, which I love. But keep it right. President Trump never said the word “bleach.” —Wayne Courville, Fulshear, TX
The magazine has been fantastic to read lately. The entire How Not To Die (May) issue made me really start evaluating my life and quantifying some of my decisions. I’m slowly moving to what I hope is a healthier lifestyle, and I’m starting to track my own numbers more closely, from weight to drinks to servings of fruit and vegetables. That issue gave me a benchmark to compare to my own life and realize where I’ve been dropping the ball for years. —Lucas Hammer, Chicago
Depending on unproven and often poorly documented forecasting models was a major mistake by public health authorities. Spot on! The only exception is the false accusation that Trump “suggested” that Americans ingest or inject bleach. —Harley Michelson, Ocala, FL Thank you, Wayne and Harley. You are indeed correct. Trump did not, in fact, suggest ingesting or injecting bleach to combat the coronavirus. What he did say was: “And then I see the disinfectant, where it knocks it out in one minute. And is there a way we can do something like that, by injection inside or almost a cleaning … so it’d be interesting to check that, so that you’re going to have to use medical doctors with, but it sounds interesting to me.” We acknowledge and apologize for the error. Perhaps bleach can remove a bad ink stain.
As someone who is a “road warrior” and has flown almost weekly for the past 30 years, I found the article on airlines and the future of flying insightful and helpful as I think forward in my travels. The New Order (June) scares me. —Mitch Levitt, Columbus, OH The best financial magazine on the planet. Full stop. —Terry Parker, Columbus, OH
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Take the reader survey. Luckbox may publish your comments!
THYNG, an augmented reality app, links Luckbox magazine articles to additional digital content. Simply scan any page with a THYNG icon to view video footage on a digital device.
1 Download the free THYNG app
Modern Monetary Theories The idea that an infinite money printer can just be used, without consequence, to justify unlimited spending is ridiculous in my mind. The hashtag #whypaytaxes is already gaining popularity, and Modern Monetary Theory begs the question: If they can print money forever without a consequence, why do they need my money? The scariest thing is that MMT was, at first, an idea only of the far-left camp. With COVID-19, the Fed is printing money and the country is headed into that experiment full tilt. If it works, great, but then again, #whypaytaxes? —Matt Heid, New York
WHAT IS THIS THYNG?
I don’t believe a country can create economic prosperity by just printing its own currency. Every dollar that is printed takes a small amount of purchasing power from the other dollars already in existence because the Fed does not provide any goods or services. It’s just inflation. And the Fed is doing this on an enormously grand scale, which means every worker must work longer hours or pick up a part-time job to make up for the loss of purchasing power. By printing currency, the government is impoverishing the most vulnerable of our society who they claim to want to help. All the government is doing is creating inflation and making
people with insufficient funds pay more for the things they need. —Jose Uribe, Englewood, FL Many countries have the ability to print their own money, but the United States is in an interesting situation because our imperial foreign policy has made the U.S. dollar the world’s reserve currency. This separates us from countries like Zimbabwe that was able to print itself into hyperinflation. And because most of the debt is held by Americans through bonds, the U.S. will never have a limit on how much it can spend, nor will it ever be paid back completely. —Adam Rahn, Reno, NV
2 Select the “Targets” mode, scan any Luckbox page that contains the THYNG icon
3 Watch the page come to life with enhanced content!
6/22/20 10:48 AM
SHORT INTEREST
“COVID has changed a lot about our lives, and that certainly includes the way that most of us work. Coming out of this period, I expect that remote work is going to be a growing trend as well.”
“A house can be a great investment— for real estate brokers, the government, insurance companies and banks. Basically, for everyone except the owner.”
SEE PAGE 40
—Kristy Shen & Bryce Leung
SEE PAGE 25
—Mark Zuckerberg, in a live-streamed staff meeting
0.26
%
SEE PAGE 42
(1 in 400)
The “best estimate” of the coronavirus fatality rate among those infected Source: COVID-19 Pandemic Planning Scenarios, Center for Disease Control, May 20
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“A sovereign debt crisis is difficult to imagine in a country that issues debt in its own currency, has a flexible exchange rate, and controls its central bank … and Japan’s experience supports this view.” —Jan Hatzius, Goldman Sachs SEE PAGE 13
“You need to pick a vice presidential pick to deal with the factionalism within your own party.” SEE PAGE 35
—Rachel Bitecofer, on The Political Trade podcast
“The problem is that I don’t understand [Kelton’s Modern Monetary Theory] arguments at all. If she’s saying what I think she’s saying, it seems just obviously indefensible.” SEE PAGE 20
—Paul Krugman, in a column for The New York Times
“Star power remains a powerful force in spirits. The history of the industry is littered with examples of celebrity endorsements that have backfired, but … [George Clooney’s] Casamigos sale was a landmark moment for celebrity spirits—and the next U.S. $1 billion brand could be waiting in the wings.”
SEE PAGE 38
—The Spirits Business, August 2019
july 2020 | luckbox
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FAKE FINANCIAL NEWS
More than just food is at stake as the pandemic continues to menace America’s restaurants
By Vonetta Logan
So much of life revolves around the eateries now closed or operating at reduced capacity.
Is 25% to 50% of capacity worth the cost of reopening a restaurant?
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PHOTOGRAPH: COURTESY OF VIAGGIO
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Lockdown Economics
et me tell you about my dad. He’s former military, in his 70s but still works, and he’s never met a cut of meat that he doesn’t like. He’s a foodie even though he hates the moniker. Traveling with my boomer parents is an adventure—while my mom is up for dog sledding in Canada, all my dad cares about is what restaurants we’re going to explore. My mom and I mercilessly tease him about his penchant for planning his next food adventure while the plates are still being cleared. The happiest I have ever seen my father was at a tiny restaurant in Spain where he got his first taste of iberico ham. I tried not to be jealous, but my mom says he was smiling bigger than the day I was born. Restaurants wrap themselves around the human experience in ways that could fill this article with flowery rhetoric. Restaurants are the throbbing pulse of cities—who cares about your museums, you got any good places to eat? These bastions of happiness in my memories and in yours have been rocked by recent events. The restaurant industry was hit hard by the COVID-19 pandemic. Statewide orders to shelter-in-place back in March took restaurant reservations from February highs (thanks Valentine’s Day) to nearly zero by April. The National Restaurant Association has reported that restaurants lost $30 billion in March, and $50 billion in April. Two-thirds of America’s restaurants are independent small businesses that employ 11 million workers while generating over $1 trillion in gross domestic product. Millions of restaurant workers are unemployed and facing permanent job loss. To get a feel for what restaurants are grappling with, Luckbox interviewed Frank Colaianni, the general manager of Viaggio Italian restaurant in Chicago’s West Loop neighborhood. He provided blunt insight into what it’s like to re-open a restaurant in the COVID era. “We’ve had to let about 90% of our staff go,” Colaianni said when reached via phone. The restaurant remained open for take-out and delivery, but those receipts pale in comparison to the revenue the restaurant used to generate. At the time of our interview, Chicago was set to enter Phase 3, allowing outdoor dining, on June 3. “We’re waiting for guidance on what we can do with our outdoor patio. If we can extend it and how many additional tables we can get.” Normally there’s room
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for five tables, but COVID math means everything gets cut in half. Viaggio wants to expand across storefronts, but if the city says no, five outdoor tables will become two. Municipalities are working to ease the permit process for sidewalk seating, but for most restaurateurs, it’s a BandAid for a mortal wound. Viaggio is lucky, having landed funding from the Paycheck Protection Program (PPP), but Colaianni isn’t sure how long the luck will last. “We got the paycheck thing (a federal Paycheck Protection Program loan) and it gave us eight weeks of breathing room … but in another 45 days we have to see where we’re at.” Scary reopening Restaurant reopening is a two-headed monster that’s both blessing and curse. Can restaurants maintain outdoor seating in the sweltering heat of Vegas in August? Or in Florida during hurricane season? Even if you can eat indoors, can operating at 25% to 50% capacity cover the cost of reopening? In a scathing post on Instagram, Chicago restaurant owner Glenn Fahlstrom of Fahlstrom’s Fresh Fish Market explained why he decided to close permanently. “At 50% capacity it will be impossible to generate enough revenue to meet the ‘old expenses’ model, and with the new onerous restrictions put in place for servicing customers, it looks nothing like a restaurant should and more like someone at a freeway ramp asking for help. So i (sic) am closing Fahlstrom’s Fresh Fish Market.” The government’s attempt to help is instead hamstringing restaurateurs. Rohini Dey, founder and owner of Chicago-based Vermillion restaurant wrote an op-ed explaining it this way: “The much-hyped Paycheck Protection Program (PPP) reached a fraction of independent restaurants, most of whom were unable to access it. Those who received funds are supposed to use PPP to cover eight weeks of payroll while shuttered, which is irrational—taking a loan to employ people while you’re legally closed makes no sense. Meanwhile, we keep accumulating losses and debt.” Restaurant owners are calling for more lenient terms like extending the forgiveness part of the loan until the end of year, and for allowing loans to be used for other expenses like rent. The PPP program has frustrated minority-owned restaurants because most
loans benefitted high-revenue restaurants that already had lines of credit with big banks. Despair For Colaianni, Viaggio is experiencing three varieties of despair. Off-the-street customers aren’t their only source of revenue. The brightly lit, authentic Italian restaurant known for its rich-bodied Chianti and Rigatoni with Sunday pork gravy also relied heavily on patrons heading to the nearby United Center for a Bulls or Hawks game, or the latest concert from artists like John Mayer. “With no United Center, no concerts, no things like that, we don’t know what that looks like going forward.” He stresses Viaggio can’t even make a business forecast because no one knows when sports will return with actual fans in the seats. Viaggio will also struggle with the fallout from the cancellation of hundreds of millions of dollars of convention business that brought in diners with fat expense accounts. It’s another level of pain for urban restaurants. Colaianni is confident that if occupancy can rise above 75% there could be light at the end of the tunnel. But as Fahlstrom mentioned in his Instagram screed, onerous restrictions mean restaurants will have unforeseen costs. “There must be a list of expenses that are just lying dormant right now that we have no choice but to incur,” Colaianni says. Previously unknown expenses could arise from personal protective equipment for employees, sanitization stations and disposable goods. Re-opening isn’t a magic trick where restaurants say “ta-da” and suddenly have customers filling every table. According to the research firm Datassential, as many as 68% of customers will initially avoid returning to restaurants, and 20% will be nervous when they do. There’s also the issue of labor. Under the CARES Act, hospitality workers have seen substantial additions to their normally anemic unemployment payouts.
Restaurants run at terribly low margins with astonishingly high failure rates.
Luring workers back into the fold may prove challenging. Colaianni agrees that furloughed workers have it better sitting at home versus coming back to work. At a concert you can leave your mask on, but when it comes to eating, the masks have to come off, and the risk increases. A need for best practices The restaurant model has been broken for a while, and who knows what will happen moving forward. Restaurateur Dey writes, “Restaurants run at terribly low margins with astonishingly high failure rates and often exploitative terms for our employees. Much of this is for sheer survival and not because of rapacious owners rolling in money.” But industry estimates forecast that 25% to 50% of restaurants won’t be able to survive post-pandemic. “It was a big eye-opener,” Colaianni says. “You can see a lot of the flaws that you had in your expenses that you never really looked at before. [Restaurants] had to get creative, and that creativeness is probably what they should have been doing all along to be profitable.” Some establishments have pivoted to become independent grocery stores, some have become “ghost kitchens,” where they cook meals for delivery but don’t operate a storefront, and others have relied more on merchandise sales. While innovative, it isn’t enough for a sustainable future. The Independent Restaurant Coalition, a group representing 50,000 restaurateurs, is pushing Congress to pass a $120 billion relief fund for local restaurants. The National Restaurant Association, a powerful lobbying group that represents 380,000 businesses, has called upon Congress to provide $240 billion in relief to restaurants. But who knows if the funds will arrive before restaurants have to turn off their burners. “We work so we can live, and eating out is thrilling—whether trying a new place or an old, comforting haunt,” writes Dey. “Dining and drinking with friends around a table is something no amount of online chatting or takeout can match. Our restaurants could be the last bastion of social interaction in our increasingly insulated, technology-driven lives.” Hopefully they are bastions that can remain standing. Vonetta Logan, a writer and comedian, appears daily on the tastytrade network and hosts the Connect the Dots podcast. @vonettalogan
july 2020 | luckbox
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MODERN MONETARY THEORY The next big thing in economics, MMT, encourages governments to spend their way to utopia. Can it happen without runaway inflation? The jury’s still out.
odern Monetary Theory (MMT), perhaps the first big new idea in economic thought in the last 80 years, is attracting serious attention. Does it matter? Only to those who care about taxes, inflation, annual deficits, the national debt, full employment, universal healthcare and a viable infrastructure. In other
M
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words, just about everybody. For a better perspective on an idea that may shake the very foundation of established economic thought, Luckbox sat down for a lengthy interview with its leading proponent, economist and author Stephanie Kelton. In this Q&A, Kelton has plenty to say about MMT as a lens for view-
ing the economy—especially to critics who fear expanding the money supply would trigger rampant inflation. One of those critics, economist Jon Phelan, responds to MMT in an article that begins on page 20. Like many scholars, he opposes the growth in the national debt that adherents to MMT would welcome.
6/22/20 11:03 AM
LUCKBOX LEANS IN WITH
STEPHANIE KELTON BY JEFF JOSEPH
tephanie Kelton is a rarity among S scholars of economics. Instead of confining her ideas to a college lecture hall, she’s moved onto the world stage. Documentary filmmakers trail her. She has the ear of serious presidential candidates. Fans pack European arenas to hear her speak. Kelton has emerged as the leading voice for Modern Monetary Theory, or MMT, the idea that governments that control their own currency can spend as much as they want—on everything from universal healthcare to universal employment. Nations would reach the limit of their ability to spend only when they print so much money that it outstrips the country’s capacity to produce goods and services. The result of overdoing it would be inflation, but proponents of MMT would guard against that eventuality, Kelton says.
Kelton
Their caution isn’t enough to sell MMT to everyone. Conservatives often reject the ideas out of hand, but even progressives can find them confounding. Paul Krugman, a political liberal and Nobel Prize winner in economics, says MMT is “indefensible,” co-founder of Microsoft Bill Gates calls it “crazy talk” and Larry Summers, an economist and former Harvard president, regards MMT as a “recipe for disaster.” But Kelton’s advocacy for MMT is changing minds. She served as an economic advisor to Sen. Bernie Sanders’ 2016 presidential campaign, and former Vice President Joe Biden has named her to his economic task force. Her new book, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, became an immediate New York Times best seller. With her star rising as a public intellectual, Kelton granted some time to Luckbox, and the following conversation ensued. july 2020 | luckbox
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MODERN MONETARY THEORY
The federal government has run a budget deficit for 76 of the last 89 years. The current debt exceeds $25 trillion, and legislators routinely ignore PAYGO (pay-as-you-go) rules. So, why debate budget deficits and the debt, particularly when interest rates are low?
There are a lot of reasons. Political theater is at the top of the list. Habit, lack of understanding, desire to use fear of debt and deficits to achieve other political ends ... so there are some strategic reasons for doing it.
Inflation, a key concern among MMT’s detractors, has supposedly remained below 2% since the Great Recession. But, has it really? Over the past 20 years, the cost of higher education and healthcare have increased by multiples of somewhere between two to three times. Do you accept the Consumer Price Index as accurate?
There are different indices, and the goal is to capture the spending patterns of the typical household. So, if you’ve got three or four kids to put through college, that’s obviously a bigger share of the personal budget than somebody who doesn’t have any kids or whose kids don’t go to college or go to an inexpensive community college. So, the indices are not a good reflection of every individual, but they are meant to capture what’s generally happening to the prices of a basket of goods that the typical American consumer spends money on over time. Is it imperfect? Yes. Do I think that inflation has actually been 4% or 6% or something that we’re significantly
If central banks were so good at hitting their inflation targets ... we wouldn’t have watched Japan struggle for almost 30 years to get inflation up to 2%. 14
underestimating? I don’t get worked up about mismeasurements of inflation. I don’t think they’re orders of magnitude off, but is it imperfect? Yes. What inflation constraints exist with the application of MMT?
MMT isn’t something that you apply. It’s a lens—a description of how the modern monetary system works. And looking through that lens, you can see the real limits. So, the constraints are the same limits that exist whether we’re talking about government spending or any other form of spending in the economy. The economy has a capacity constraint—we only have so many people who are in the labor force and are available to be hired and put to work. We only have so many factories and machines. We only have the state of technology that exists today. So, those are our nation’s real resource constraints. But with those real resources, we can do a lot. Businesses can hire some of those resources and put them to work producing things in the economy. Government can hire some of those resources and put them to work. So, the question isn’t really about the limits on government spending alone. The question is on total spending in the economy, and that includes spending from the rest of the world. The root answer to your question is that the limits are in our economy’s real productive capacity, our real resources, the things we have available today—labor, capital, technology. If we put too much strain on those resources, the punishment will be inflationary pressure. What level of inflation becomes a red flag?
The central bank here and central banks around the world have chosen 2% as a target inflation rate above which they don’t want to see
prices accelerate. MMT doesn’t take issue with that. Would it follow that fiscal policy may become necessary to correct inflation rising beyond that level?
Around the world, central banks have been told that it’s their job to deliver 2% inflation and to make certain that it doesn’t run out of control. How do they do that? They change interest rates. That’s been the policy tool of central banks for decades. They raise and lower their overnight rate to fight inflation. So, can we continue to run policy that way? Sure. Does MMT think that’s a blunt instrument and the wrong policy tool to fight inflation? Yes. If central banks were so good at hitting their inflation targets using the interest rate then, surely, we wouldn’t have watched Japan struggle for almost 30 years to get inflation up to 2%. Ben Bernanke (former chair of the Federal Reserve) couldn’t do it for a decade trying everything. So, we have a problem in how we understand the workings and mechanics of inflation and what drives it. And we’ve had a lot of trouble starting it up when it’s been the explicit policy goal to push inflation higher. Central banks have failed to deliver on that. So, what do you do if inflation does go higher than 2%? Well, conventional policy would say keep raising interest rates. MMT would say that might have perverse effects. In other words, raising the interest rate means higher interest and consequently higher payments to bondholders. So, as interest rates go up, interest income goes up and people have more money to spend. You might actually cause inflation to accelerate by raising interest rates. So, what about the other side, the fiscal policy side? Lots of things. And there’s more you could do on the monetary policy side, too. You could tell banks to target credit creation from private banks to slow down spending. We could
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PHOTOGRAPH: GARRETT ROODBERGEN
A Life Without Debt?
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Just think of it. No more government shutdowns as lawmakers engage in theatrical uprisings over raising the debt ceiling limit. No one comparing Uncle Sam to a spendthrift who’s running up the credit card and borrowing from China. No fear of losing access to the bond market and being forced into default like Greece. No economists arguing about whether interest rates will be low enough to keep the debt on a sustainable path. And best of all, no more stress about how to cover “your share” of the national debt. We could rip the bumper sticker right off. We actually did it once. It was 1835—Andrew Jackson was president—and it was the only time in United States history when the public debt was paid all the way down. That was long before the Federal Reserve was created, so the debt wasn’t gobbled out of existence by the central bank. Instead, it was eliminated the old-fashioned way—that is, by reversing fiscal deficits and paying off bondholders. It didn’t end so well. U.S. History of Budget Surpluses and Debt Reduction It took more than a decade to retire the entire debt. It happened because the government ran fiscal surpluses from 1823 to 1836. Years when Percent Year Since it was taxing away more money than it was spending in debt is paid decline depression each of those years, it didn’t issue new debt. Instead, as bonds down in debt began matured, the government simply paid them off. By 1835, the U.S. 1817–1821 29% 1819 was debt free. It was also headed for one of the worst economic downturns the country has ever experienced. In hindsight, it 1823–1836 100%* 1837 seems obvious why things unfolded the way they did. Fiscal surpluses suck money out of the economy. Fiscal defi1852–1857 59% 1857 cits do the opposite. As long as they’re not excessive, deficits can 1867–1873 27% 1873 help to maintain a good economy by supporting incomes, sales, and profits. They’re not imperative, but if they disappear for too 1880–1893 57% 1893 long, eventually the economy hits a wall. As Frederick Thayer, the prolific writer and professor of public and international affairs at 1920–1930 36% 1929 the University of Pittsburgh, wrote in 1996, “the U.S. has experienced six significant economic depressions,” and “each was preceded by a sustained period of budget balancing.” (The table to the right details his findings.) The historical record is clear. Each and every time the government substantially reduced the national debt, the economy fell into depression. Could it have been a remarkable coincidence? Thayer didn’t think so. He blamed the “economic myths” that drove politicians to wrestle their budgets into surplus on the flawed belief that paying down debt was both morally and fiscally responsible. As we see from the insights of MMT, government surpluses shift deficits onto the nongovernment sector. The problem is that currency users can’t sustain those deficits indefinitely. Eventually, the private sector reaches the point where it can’t handle the debt it has accumulated. When that happens, spending grinds sharply lower and the economy falls into depression.
Excerpted from The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton Copyright © 2020. Available from Public Affairs, an imprint of Hachette Book Group, Inc.
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tighten up credit requirements and capital requirements. So, on fiscal policy, if you think that inflation is the result of a general increase in aggregate demand—too much money chasing too few goods or too much spending outstripping the economy’s capacity—then you can cut government spending. You can try to cut private spending, which is what the Fed does by raising interest rates. You could raise taxes if you wanted to remove income from people so they would have less income to spend. There are a whole range of policy responses to inflationary pressures. So under MMT, fiscal policy is not the only solution to rising inflation?
Definitely. You want to look under the hood. So, if you see the headline number go from 2% to 3%, you don’t just want to react with higher interest rates. For example, if it was accelerating healthcare costs, would anyone agree that the right policy to stop inflationary pressures to bring inflation back down to 2% is that the central bank should tighten interest rates? You’re going
While there are constraints on fiscal policy, the best defense against inflation is good offense.
to slow housing starts and slow automobile sales to fight inflation driven by healthcare costs? You really have to identify the source of the inflationary pressure and then try to tailor policy to that. We used to be good at this. We did this in the ’40s and ’50s. Where fiscal policy would be the recommended response, are there
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other constraints—such as a maximum tax burden?
No. While there are constraints on fiscal policy, the best defense against inflation is a good offense. I never heard a single soul mention inflation all my time working on the Hill. There was zero consideration of inflation because all they care about is getting some new spending bill, expanding an existing program, introducing a new program—whatever it takes to get it through the CBO (Congressional Budget Office) by making sure that it doesn’t add to the deficit. That’s the only consideration. And what MMT does is show us that that is the wrong way to go about approaching the federal budgeting process. All they think of is, “How do I offset the spending so that I can convince CBO that it won’t increase the deficit?” So, you could easily imagine Congress authorizing a couple of trillion dollars in new spending on infrastructure and pairing it, let’s say, with a wealth tax so they write a bill. They say we’re going to spend $2 trillion on infrastructure, and we’re going to subtract $2 trillion from the hands of the wealthiest people in the country so that it is all “paid for” and it won’t add to the deficit. So, the CBO looks at a bill, and they say it’s great. It doesn’t add to the deficit. Lawmakers pass the bill. Now they’ve authorized $2 trillion of spending into the economy, which could be inflationary. If you have an economy that’s already operating at full employment, and you spend $2 trillion, and your offset is a wealth tax—which is removing dollars from people who weren’t going to spend them in the first place—then you’ve done nothing to mitigate inflationary pressures as you spend a new $2 trillion into the economy. I think that no macro approach is more careful in centering inflation risk than MMT. It is the relevant
limit and no other school of thought treats it that way. To address unemployment, you speak of a jobs guarantee program as an “automatic stabilizer.” Why would that be preferable to targeted tax cuts?
Because tax cuts are just a carrot. It’s just an incentive that may or may not lead to additional job creation. If we aggressively cut taxes right now in this economic environment, maybe 20 million people are going to become permanently unemployed coming out of this pandemic. The calculation on the part of the businessman is, “If I part with my cash and spend money today by hiring and investing, I am not going to see profit. I can’t even fill my restaurant today. I have all this capacity.” So, what are tax cuts going to do? I am not anti-tax cut in the right economic environment. I’m just saying that there are a lot of events that have to happen to get you from the tax cut to the actual person on the other side who’s looking for a job. Whereas with a job guarantee, there are no “ifs.” If someone can’t find a job, then they get a job. You solve the problem immediately. That person has an income, they can now become a consumer, and they can create demand that will eventually move those people out of public-sector employment and back into the private sector. Hyman Minsky, one of the most important economists of the last century, called the public sector the employer of last resort. In his mind, we had solved the problem of what happens in a liquidity crisis. We created the Federal Reserve to be a lender of last resort, so that when there was panic and a rush to liquidity some institution could stand ready to supply all of the liquidity that was needed to arrest the crisis. When there’s mass joblessness, the government
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The National Debt (That Isn’t) The Great Recession changed the way the Federal Reserve conducts monetary policy. In November 2008, the Fed launched the first of three rounds of a massive bond-buying program called quantitative easing. Among other things, the Fed hoped its program would help stimulate the U.S. economy by lowering long-term interest rates. By the time it was over, the Fed had gobbled up some $4.5 trillion in bonds, including nearly $3 trillion in U.S. Treasuries. In addition to using quantitative easing to push longer-term interest rates lower, the Fed also changed the way it managed its short-term interest rate. Instead of buying and selling Treasuries to add and subtract reserves, the Fed switched to a “more direct and more efficient method of interest rate support.” It simply started paying interest on reserve balances. Today, the Fed can adjust the short-term interest rate any time it chooses, simply by announcing that it will pay a new rate. What this means is that times have changed. The dollar is no longer tied to gold. The United States issues a freely floating fiat currency so it doesn’t need to tax or borrow before it can spend. Indeed, the STAB model reflects the way the economy actually works. Taxes aren’t important because they help the government pay the bills. They’re important because they help to prevent government spending from creating an inflation problem. Similarly, bond sales aren’t important because they allow the government to finance fiscal deficits. They’re important because they drain off excess reserves, which enables the Fed to hit a positive interest rate target. But today, the Fed pays interest on reserve balances, so it no longer relies on Treasuries to hit its rate target. So why keep them around? Should we love ’em or leave ’em? Is the national debt a “national treasure,” as Alexander Hamilton believed? Or is it “irresponsible” and “unpatriotic,” as Barack Obama described it? Should we treasure it or trash it? One thing is for sure. We don’t want to start wiping out U.S. Treasuries the ugly way. The 1835 way. The Clinton way. By building fiscal surpluses on the back of unsustainable private sector deficits. As we’ll see in the next chapter, that has predictably negative consequences for our economy. If we really want to make the national debt disappear, there are more painless ways to go about it. The most straightforward option is to do it the way Lonergan described. Simply let the central bank buy up government bonds in exchange for bank reserves. A pain-free transaction that turns yellow dollars back into green dollars; it can be carried out using nothing more than a keyboard at the Federal Reserve. Another option would be to phase out the issuance of Treasuries over time. Instead of selling bonds to drain off the reserve balances that result from deficit spending, we could just leave the reserves in the system. We can do it without interfering with the Federal Reserve’s ability to conduct monetary policy because the Fed doesn’t need government bonds to hit its short-term interest rate target. Over time, all of the outstanding bonds will mature, and the debt will gradually disappear. There is another option. We could learn to live with ’em. There’s nothing inherently dangerous about offering a safe, interest-bearing way for people to hold on to dollars. If we choose to live with ’em, we should come to grips with the fact that the thing we call the national debt is nothing more than a footprint from the past. It tells us where we’ve been, not where we’re going. It records the history of the many deficits that have been run since the birth of our government in 1789. The bloody world wars, our many recessions, and the decisions taken by the thousands of people elected to Congress over the years. What matters is not the size of the debt (or who holds it) but whether we can look back with pride, knowing that our stockpile of Treasuries exists because of the many (mostly) positive interventions that were taken on behalf of our democracy.
STAB: When government spends money and then collects money back as people pay their taxes and buy bonds. Spending precedes taxing and borrowing.
Taxes aren’t important because they help the government pay the bills ...
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Excerpted from The Deficit Myth. Copyright © 2020.
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could create an elastic demand for labor. You just hire anyone who walks in without a job and temporarily employ them until they transition back into private sector employment. And that’s why it works like an automatic stabilizer. So, the budget moves in the right direction in the right moment and takes those workers and keeps them employed and employable. Businesses don’t like to hire people who are long-term unemployed. Is full exercise of monetary sovereignty a profound expansion of government policy that could enable a policy arms race?
Do you mean that if every policymaker woke up tomorrow and had a fuller appreciation or understanding of their fiscal capacity that they might build too many hospitals, fund too many schools, or fix bridges and infrastructure? I don’t know. I don’t know what the concern is that we would end up with better public services. MMT is agnostic with respect to how that fiscal space is used. I can give the MMT lenses to a conservative government and I can give the MMT lenses to a left-leaning government. So, some might say, “Oh, look, there’s lots of fiscal space, we can cut taxes.” OK, fine. You can use up the fiscal space that way. The other one might say, “We can do some spending on infrastructure or education or R&D.” Fine—use up your fiscal space like that. We’re at a precipice with respect to monetary and fiscal policy as the economy reopens after the coronavirus shutdowns. What’s
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the biggest risk if the response is only another stimulus similar to the recent $2 trillion package?
It would be insufficient. The Congressional Budget Office has said that the U.S. economy is going to lose $16 trillion in nominal GDP over the next 10 years. It will be lost to us forever. Why? Because we aren’t going to have a robust economic recovery and operate at maximum capacity. Failing to run your economy at full employment carries costs, right? It’s lost output—stuff you didn’t produce, which is lost income, savings and wealth. If we just did what we did before, that means state and local governments are left out again, and that’s, that’s a very big concern. If you’ve got 50 little Herbert Hoovers working against the recovery by massively cutting spending at the state level, you’re going to have the federal government trying to step on the gas while governors and mayors are slashing budgets and applying the brakes. The car’s not going to move forward. What’s the most compelling empirical evidence of how MMT would function in the medium or the long term?
Obviously, you don’t look to a country that doesn’t operate with a sovereign currency and say that’s how it would end up. If you’re Venezuela or Argentina, you’re borrowing and you’ve got mountains of U.S. dollar-denominated debt. You don’t get to have an MMT comparison because you don’t fit the criteria. Japan has taught really
interesting lessons because all the textbooks say that deficits drive up interest rates—all of them. Then you look at Japan, and it doesn’t work that way. The interest rate is a policy variable. Nobel Prizewinning economists and Harvard professors all say that if the debt increases there’s a tipping point that becomes unsustainable and inflationary, and it’s supposed to drive interest rates up. They get downgraded by the rating agencies. But Japanese government bonds were downgraded to a rating below Botswana. What happened? Nothing. The conventional narratives are all wrong. If anything, selling bonds to the private sector is more inflationary because of all the interest income. Thank you, Stephanie. One final question. If you were not the primary advocate of MMT at this extraordinary moment in economic history, or perhaps not even an economist, what would you hope that you would be doing?
I love public policy. I like policymaking. I ran for office once. When I was a little girl my godmother was a state senator in California. In fact, she was the first woman ever elected to the State Senate in California. I have a sense of how important public policy decisions are to so many lives and how they shape the world and our communities. So, I might say public policy despite having been inside the Beltway and knowing how frustrating it is. I suppose I would trade places with Tina Turner ... that would be better.
Dr. Stephanie Kelton, professor of economics and public policy at Stony Brook University, is serving on an economic task force for former Vice President Joe Biden. Politico named her one of the 50 “thinkers, doers and visionaries shaping politics in 2016” when she served on Sen. Bernie Sanders’ campaign for president. She has been chief economist for the Democratic Minority Staff of the Senate Budget Committee, chair of the economics department at University of Missouri—Kansas City, and a fellow at the Levy Economics Institute of Bard College.
PHOTOGRAPH: ALEX TREBUS
The conventional narratives are all wrong.
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STOP THE PRESSES
AMERICA CAN’T ACHIEVE PROSPERITY BY SIMPLY PRINTING MORE MONEY Like the undermentioned parrot, Modern Monetary Theory fails to check three boxes. BY JOHN PHELAN
proposals to the flood of red ink the CBO projects just from following the current path, the federal government is set to face a serious fiscal crisis in the not-too-distant future.
A masked pedestrian passes by the statue of Alexander Hamilton at the the U.S. Treasury in Washington. What would Hamilton, the first secretary of the treasury, make of MMT?
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n January, the Congressional Budget Office (CBO) released its Budget and Economic outlook for 2020 to 2030. It is horrific reading. Federal budget deficits are projected to rise from $1.0 trillion this year to $1.3 trillion over the next 10 years. Federal debt will rise to 98% of GDP by 2030, “its highest percentage since 1946,” the CBO says. “By 2050, debt would be 180% of GDP—far higher than it has ever been.” And that was before Covid-
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19 hit. Now those numbers will be much, much worse. On top of this, politicians have been announcing grand schemes for further spending: $47 billion on free college tuition, $1 trillion for new infrastructure, $1.4 trillion to write off student loan debt, at least $7 trillion on the Green New Deal and $32 trillion on Medicare for All. By one estimate, these new proposals total an estimated $42.5 trillion over the next decade. Adding these new spending
“Rather than chasing after the misguided goal of a balanced budget we should be pursuing the promise of harnessing what MMT calls our public money, or sovereign currency, to balance the economy so that prosperity is broadly shared and not concentrated in fewer and fewer hands.” Most people would say the government taxes people to raise money to pay for the functions it performs. Not so, argues Kelton. Indeed, “the idea that taxes pay for what the
PHOTOGRAPH: GRAEME SLOAN/SIPA USA VIA REUTERS
Keep printing Or, perhaps not. There is an idea afoot in economics that, as Bernie Sanders’ former economic advisor Stephanie Kelton argues in her new book The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, could revolutionize the field in the same way that Copernicus did to astronomy by showing that the earth orbited the sun. Modern Monetary Theory (MMT) states that “in almost all instances federal deficits are good for the economy. They are necessary.” That being so, we don’t have to worry about this coming deluge of red ink, indeed:
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Two Competing Economic Theories: Hayek vs. Keynes Two of the 20th century’s most prominent economists, John Maynard Keynes and Friedrich August von Hayek, offered sharply contrasting views of the Great Depression. Their arguments of the 1930s seem acutely relevant today during another global financial crisis.
Hayek argued that the Keynesian proposal to reduce unemployment through government spending would require the central bank to expand the money supply and thus cause inflation.
Keynes believed the level of employment is determined by aggregate demand in the economy and not by the price of labor. Thus, government spending could increase demand and thereby reduce unemployment.
I f socialists understood economics, they wouldn’t be socialist. [ Socialistic] economic planning, regulation, and intervention pave the way to totalitarianism by building a power structure that will inevitably be seized by the most power-hungry and unscrupulous. “ Emergencies” have always been the pretext on which the safeguards of individual liberty have been eroded. —Friedrich August von Hayek, Nobel Prizewinning Austrian-British economist, philosopher and advocate of classical liberalism. Hayek was the de facto leader of the Austrian School of Economics—the concept that social phenomena result exclusively from the motivations and actions of individuals. He’s best known for his 1944 treatise on market libertarianism, The Road to Serfdom.
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The difficulty lies, not in the new ideas, but in escaping from the old ones. Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all. The political problem of mankind is to combine three things: economic efficiency, social justice and individual liberty. —John Maynard Keynes, widely considered the founder of modern macroeconomics and father of the Keynesian school and its 1936 treatise. British-born Keynes advocated using fiscal and monetary policies to mitigate the adverse effects of economic recessions and depressions. He challenged the tenet of neoclassical economics that capitalism would bring full employment. He detailed his ideas in his 1936 magnum opus,The General Theory of Employment, Interest and Money.
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government spends is pure fantasy.” Instead, “it is the currency issuer— the federal government itself— not the taxpayer, that finances all government expenditures.” It does so by printing money. So,
The federal government is set to face a serious fiscal crisis in the not-too-distant future.
while you or I might have to worry about running up vast debts, “Uncle Sam has something the rest of us don’t—the power to issue the U.S. dollar,” Kelton writes. Galloping inflation This is hardly revolutionary. Governments and economists have known for centuries that a monetary sovereign—a body which issues the currency its liabilities are denominated in—can meet whatever liabilities it incurs simply by issuing a sufficient nominal amount of currency. The idea that a monetary sovereign, like the federal government, could go “bankrupt” is, thus, not strictly true. The trouble is that excessive issue of currency erodes its real purchasing power as postulated by the equation of exchange (MV=Py), one of the few genuinely useful, and universally accepted, equations in economics. Indeed, when the University of Chicago’s Booth School of Business
surveyed a group of economists last year on the questions “Countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt” and “Countries that borrow in their own currency can finance as much real government spending as they want by creating money,” not a single one of them agreed with either statement. Even Kelton acknowledges this: “Just because there are no financial constraints on the federal budget doesn’t mean there aren’t real limits to what the government can (and should) do. Every economy has its own internal speed limit, regulated by the availability of our real productive resources—the state of technology and the quantity and quality of its land, workers, factories, machine, and other materials. If the government tries to spend too much into an economy that’s already running at full speed, inflation will accelerate. There are limits.” This is fatal to Kelton’s claim for any great novelty for MMT. She writes: “There is absolutely no good reason for Social Security benefits, for example, to ever face cuts” because “our government will always be able to meet future obligations because it can never run out of money.” Again, technically, this is quite correct, but only in nominal terms. If inflation kicks in then, in real
terms, that money might not buy very much. The effect will be a very real cut in what a Social Security check can buy. Kelton raises this question: “The question is, What will that money buy?” But she instantly dismisses it with a boilerplate about how, “We need to make sure that we’re doing everything we can to manage our real resources and develop more sustainable methods of production as the babyboom generation ages out of the workforce.” You don’t say? Nothing new So, what’s the point of MMT? Where is the Copernican revolution we were promised? There isn’t one. What we have is a list of the left’s favorite spending priorities: Social Security, education, healthcare, child poverty, infrastructure, climate change … all paid for by borrowing, which isn’t a problem because we can finance it by printing money. We are offered examples, but where Kelton’s theory is just underwhelming, her history is actively bad. We are told that:
“As a share of gross domestic product (GDP), the national debt was at its highest—120%—in the period immediately following the Second World War. Yet, this was the same period during which the middle class was built, real median family income soared, and the next generation enjoyed a higher standard of living without the added burden of higher tax rates.”
The equation of exchange states that the money supply in an economy (M) multiplied by the number of times it is spent in a given period (velocity of circulation, V) equals the price level (P) multiplied by output (y). This is a truism. It is just another way of saying that nominal spending (or aggregate demand, MV) equals nominal income (Py), or MV=Py. Because all spending is someone else’s income, this is true by definition. The equation becomes more interesting when we make assumptions about its component variables. Assume that y is fixed by real factors and V is constant (the old monetarist assumptions), it follows that any increase/decrease in M must be offset by an increase/decrease in P—inflation, in other words. These real resource constraints—the determinants of y—determine society’s standard of living. If M increases faster than y, the nation just gets more inflation and a boost in nominal GDP, not more goods and services and an increase in real GDP. This is basic economics.
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True, the federal government ran up a considerable debt defeating Nazi Germany and Imperial Japan—money well spent. But with victory over Japan in 1945, federal government spending fell sharply: by 73% between 1945 and 1948 in real terms. In seven of the 15 years to 1960, the federal government ran a budget surplus. And when there were deficits they weren’t large, averaging 1.0 percent of GDP. The economy grew faster than government so that federal government spending fell as a share of GDP from 41% in 1945 to 17% in 1960. That Golden Age that Kelton talks about was one of mostly sound federal government financial management. We also are told that deficits “didn’t dissuade John F. Kennedy from landing a man on the moon.” Again, this is true, but these deficits were accompanied by inflation which rose from 1.4% in 1960 to 12.3% in 1974. These examples hardly support Kelton’s case for vast deficits and their essential harmlessness. There is an old joke: What does a parrot have in common with the Holy Roman Empire? The parrot isn’t holy, Roman, or an empire. Modern Monetary Theory is much the same. It isn’t very modern; throughout history people have been saying that we would be rich if only we had more of the medium of exchange. It isn’t monetary policy so much as a way of escaping the inevitabilities of fiscal policy. And its theoretical basis is a banal truism. It is simply the latest in a long line of claims to have found a Magic Money Tree for government.
Excessive issue of currency erodes its real purchasing power.
MMT Fallout: Another Zimbabwe in the making? The Initiative on Global Markets at the University of Chicago polls economists weekly. Here’s what some say about MMT.
A government may be able to do this once but doing this systematically will make it impossible to sell bonds in the future. —Kenneth Judd, Stanford
At some point, it becomes untenable and the country becomes Venezuela or Zimbabwe. —Steven Kaplan, University of Chicago
If this were true, each such country could finance the purchase of all of the world’s output, which is obviously impossible. —Darryl Duffie, Stanford
Creating money can finance a great deal of spending, but incidents of hyperinflation, collapse and other crises indicate there are limits. —Larry Samuelson, Yale
There will come a point when the currency is so debased that further spending becomes difficult if not impossible. —Eric Maskin, Harvard
An Unconvinced Intelligentsia How economists reacted to the following statement: Countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt.
Strongly Agree............0% Agree............................0% Uncertain.....................0% Disagree.......................28% Strongly Disagree.......72% Source: Initiative on Global Markets Economic Experts Panel (March, 2019) The panel comprises 42 economists representing the University of Chicago and Stanford (8), MIT and Berkeley (6), Harvard and Yale (5), Princeton, Northwestern and Columbia. Responses are weighted by each expert’s level of confidence.
John Phelan is an economist at The Center of the American Experiment, a Minnesota-based think tank that advocates free markets, limited government and government accountability. He holds a master’s from the London School of Economics. @minnesotanomics
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OFFICE REITS
How will real estate investment trusts—the landlords of prestige offices in the glass-and-steel towers of the biggest cities—adjust to a post-pandemic world?
fter COVID-19 banished all but a few Americans from their offices for months on end, many observers couldn’t help but wonder if they’d ever return. And if they did come back, would they need more space or less? Would everything about offices have to
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change to accommodate sanitation and distancing? Those questions intrigue just about everyone, but they’re of especially acute interest to executives at real estate investment trusts, or REITs, that control office space. To see what they’re thinking, Luckbox took the pulse of the
industry with interviews for the office space report that begins on the opposite page. Office REIT coverage continues in this section with an excerpt from an upcoming book, pg. 29; a crash course in REIT stock tips, pg. 30; and a look at an especially well-positioned REIT, pg. 32.
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OFFICE SPACE: THE SEQUEL Real estate investment trusts that specialize in office space appear likely to emerge intact (but different) from the downturn BY ED MCKINLEY
hen a newspaper mistakenly ran Mark Twain’s obituary while he was still alive, the cantankerous author supposedly responded that “reports of my death are greatly exaggerated.” These days, people who rent out office space could be feeling the same way. Pundits are pronouncing the office kaput. They consider the office missing in action, down for the count, dead on arrival. They reason that employees who have tasted the freedom of working from home will never willingly return to the drudgery of working regular hours. And why wouldn’t employers prefer to cut their expenses by renting less office space? But it’s not all that simple, according to executives at office-oriented real estate investment trusts, or REITs, the publicly traded companies that own, operate or finance properties on a large scale. They’re
PHOTOGRAPH: 20TH CENTURY FOX/PHOTOFEST
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continuing to collect rent—more than 90% of the rent that’s due—and they believe that pandemic-induced selloffs have driven office REIT stock prices to artificially low levels. A disclaimer Not all REITs are the same. They all own or control property, but the properties vary, notes Calvin Schnure, chief economist for National Association of Real Estate Investment Trusts, a trade association generally referred to as Nareit. The pandemic has triggered an economic boost for REITs that own data centers and cell towers because the public has lived online during the shutdown, Schnure says. At the other end of the spectrum, the plague has temporarily shuttered hotels and halted or severely curtailed foot traffic in malls. Office REITs fall in the middle. Offices have been idled while
Impending layoffs give Initech staffers a case of the Mondays in the 1999 cult film Office Space.
Loose Lips at Twitter Speculation about “the end of the office” doesn’t sit well with people who earn their living by renting out office space. Take it from Stephanie M. Krewson-Kelly, a vice president at Commercial Office Properties Trust. “People can talk, but where’s the proof?” she asks pointedly. As an example of the damage that careless chatter can cause, Krewson-Kelly cites a chain of events that began May 12 when Twitter CEO Jack Dorsey announced the high-profile tech company would allow its employees to work from home “forever.” That “choice word,” as Krewson-Kelly calls it, caused stock in real estate investment trusts to sell off strongly in anticipation that decentralization of office work would continue even after the pandemic recedes. Investors feared that a cultural shift toward home offices could cause commercial occupancies to decline and force down rent, she observes. As the years passed and leases ran out, tenants might not renew. But three days later, Dorsey lifted the cloud of doom when he said that Twitter didn’t plan to give back any of the corporate real estate it leases. Instead, the company would rework floorplans to provide space for social distancing.
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workers stayed home under shutdown orders, but office REIT tenants—unlike retailers—still paid the rent, Schnure maintains. That’s because office REITs tend to own fairly new prestige buildings in the central business districts of the nation’s key cities, such as New York, Chicago and Los Angeles. They rent to investment-grade Fortune 500 tenants. What’s more, office REITs entered the pandemic-induced economic downturn in better shape than in previous hard times, according to Schnure. In the decade since the Great Recession, office REITs strengthened their balance sheets, raised about $440 billion of equity capital, reduced their leverage ratios
and cut their debt to assets to about the lowest in history. They not only lowered their reliance on debt but also lengthened the maturity of the remaining debt. In fact, the weighted average maturity before the pandemic was a year and a half longer than it was when the financial crisis of 2008 hit, Schnure continues. “That means that they’re not going to face as many immediate cash flow problems to roll over the debt,” he says. “They were well-prepared in terms of some pretty prudent balance sheet measures ahead of the crisis, and that’s going to give them a bit of an advantage dealing with it.” And the advantages don’t end there for office REITs. Despite the
Reopen with Caution Americans are blithely mingling in bars and on beaches as the economy reopens— almost as though the coronavirus has somehow been banished. But the pandemic is far from over, and companies that are asking employees to return to the office are welladvised to take precautions. That can begin with training workers to practice infection control measures, epidemiologists say. Instruction can include the proper way to wear a mask, best practices for washing hands and tips on gauging social distancing. Employees should form the habit of sanitizing shared objects, including copiers, coffee pots and refrigerators. They should wait to enter a common area if too many colleagues are already crowding into the space. Limiting the number of people in a conference room also makes sense. Workers should learn to identify the symptoms of COVID-19, including fever, fatigue, shortness of breath and a dry cough. If they exhibit any of those qualities, they should not come into the office. Management should monitor employees for symptoms and send them home when appropriate. But only 25% of the people carrying the disease exhibit symptoms, which makes social distancing vital. Companies can aid distancing by having only a portion of the workforce in the office. They can accomplish that by staggering attendance. Some companies may redesign offices, increasing the number of offices and cubicles and relying less on shared space. In areas open to the public, companies can reduce the number of chairs to provide more space, and they can mark the floor with tape to encourage distancing. Before reopening the doors, management should review the legal implications of bringing workers back to the office. They may be required by law to protect employees with health conditions that make them particularly susceptible to COVID-19.
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Average space per worker in a dense office 2000: 350 sq. feet 2020: 175 sq. feet Source: Stephanie M. Krewson-Kelly
healthy pre-pandemic economy, relatively few construction projects were underway when the virus struck, Schnure says. Construction relative to existing office space was about 2% at the end of 2019, compared with 6% in the 1980s, he notes. So even as the pandemic causes demand to weaken as leases expire, the problem won’t be compounded by a big wave of supply hitting the market. “That means that we’re probably going to be a bit more resilient in the office market over the next two years than you would have been had you had a higher level of construction,” Schnure says. That resilience is fine, but what about the trend toward working remotely instead of commuting to the office? Working from home Some employees have apparently developed a fondness for working at home during lockdown, and speculation about the effect on office space has run rampant. Many fear the trend could bring irreparable harm to the office space market. Employees might come into the office on staggered schedules, working from home a few days a week. The trend toward shared, open spaces might reverse to provide closed offices and cubicles that don’t promote the spread of infection. But companies can’t shrink their office space overnight because commercial leases tend to run for a number of years, and redesign and construction take time. Office REIT executives insist their industry may have to change but will emerge intact. “Working from home is not new,”
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says Stephanie M. Krewson-Kelly, a vice president at Corporate Office Properties Trust. “It used to be called telephonic commuting and then telecommuting. Those terms were coined in 1970s, so working from home has been around for quite a long time—almost 50 years.” Working from home ebbs and flows, but the pandemic has demonstrated people prefer to work in an office, according to Krewson-Kelly. Offices promote collaboration and provide a backdrop for training, she says. In her view, it’s also difficult to land a promotion working remotely. Research backs her up, Krewson-Kelly says, citing a survey of more than 2,300 office workers conducted by a third party for Gensler, a San Francisco design and architecture firm. Only 12% of workers want to work from home full-time, a summary of the survey says. Although most would prefer to return to the office, they’d appreciate more space, less desk-sharing, and more support for mobile and virtual work, the summary says. In another study, this one of 5,000 workers, Gensler’s research partner asked employees to rank work environments. At high-performing companies, the largest group picked the office as their first choice, followed, in order, by home, coworking spaces and coffee shops. At companies defined as low-performing, workers’ preferences were, in order, home, the office, coworking spaces and coffee shops. Meanwhile, Nareit’s head economist seems delighted to work remotely. “I’m hoping that we keep working from home,” he says. “It’s giving us a lot of flexibility. This is something that is certainly going to
have a lot of momentum behind it.” The lockdown added to that momentum by barring people from offices, but new hardware helps, too, Schnure maintains. “A lot of offices, a lot of employees, a lot of employers are finding that the technology for working from home, including the Zoom teleconference, is just head and shoulders better than it was 10 years ago,” he says. But however the working-fromhome trend shakes out, the shared workspace model—where freelancers find refuge from loneliness in surrogate offices—seems challenged. WeWork WeWork, the best-known shared workspace company, was already troubled when the pandemic struck, notes Glenn Mueller, a business professor at the University of Denver. The company had been voraciously acquiring office space by either leasing or buying it. WeWork was signing 15- and 20-year leases and then renting the space out by the day, Mueller says. “So they got a long-term liability with short-term income,” he continues, “and that whole concept is up for grabs as to how it works out in the future.” For the last couple of years, WeWork was signing about 10% of all the new office leases in the nation, a trend that’s not as startling as it might appear, Mueller continues. “When you have 10-year leases, that means 10% of the marketplace is releasing each year,” he notes, “and 10% of that would be 1% of all office space. Its growth looks big but its percentage of the total is small. Growing from half a percent to 1% is a 100% increase, but out of the total
REIT Dividends During Downturns Even with much of the world in lockdown, dividends continued to roll in for most investors who own shares in office-oriented real estate investment trusts. Stock prices in those trusts, often referred to as REITs, can be volatile, says Stephanie M. KrewsonKelly, a vice president at Corporate Office Properties Trust. When the pandemic struck this year, REIT stock prices declined 24%, the mirror image of last year’s upward swing, she notes. But stock price performance aside, REITs generally provide a 3% to 4% yield by paying a common stock dividend, Krewson-Kelly continues. Longer term, that steady dividend income accounts for about half of REIT total returns, which for the past 40 years have averaged 11% to 12%. REITs produce bond-like income because their tenants sign long-term leases, notes Glenn Mueller, a University of Denver business professor. That makes REIT stocks valuable to investors looking for income in retirement. REITs can raise their interest rates and have tended to pay dividends that outpace inflation, making them more advantageous than bonds, which have fixed interest rates, Mueller says. “REITs are businesses that can develop creative solutions, while bonds are set contracts,” he adds. Krewson-Kelly agrees. “It’s important for people to realize that REITs are not in a habit of cutting their dividends,” she says. “If you take hotel REITs out of the equation, then across the board, REIT dividends have been pretty darn secure for decades. It’s important for folks not to overreact to the current crisis.”
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it’s still just a rounding error.” WeWork locations are mostly in big cities, says Krewson-Kelly, which is one of the reasons urban office REITs like SL Green Realty (SLG), which bills itself as New York City’s biggest commercial landlord, and Vornado Realty Trust (VNO), another Manhattan giant, are trading disproportionately worse. Their stock prices have been hit hard because of their exposure to tenants like WeWork, she says. Yet in general, office REITs appear likely to maintain dividends and see stock prices rise, the executives say. But overall global recovery? It’s complicated.
he says. “It takes longer than you expect. There’s a lot of economic damage, a lot of financial damage and a lack of confidence after a major shock like this, so I don’t expect a V-shaped recovery.” Mueller agrees. “When this started, a lot of people said it’s going to be a V-shaped downturn,” he says. “Then into Month 2 and Month 3
of COVID-19, people were saying, ‘Well, it looks like it’s going to be more U-shaped, and the U may be fairly wide.’” Predictions of reaching recovery mode by the fourth quarter strike him as optimistic. But just the same, based on conversations with REIT experts, reports of the death of the office seem exaggerated.
WeWork woes aren’t confined to the United States. The company has space in buildings like the Sarona Market and Tower in Tel Aviv, Israel.
Office REITs tend to own prestige buildings in the central business districts of the nation’s key cities … investment-grade Fortune 500 tenants pay their rent.
Not Just Offices and Malls A casual observer might think of real estate investment trusts, or REITs, as companies that own and sell shares in rental properties—like office buildings and shopping centers. That idea’s not really wrong. It’s just outdated. REITs still own properties like those, but now they also own industrial sites, hotels, apartment buildings, timberland, healthcare facilities, distribution centers, self-storage businesses, cell towers and data centers. Some REITs specialize and others diversify, says Calvin Schnure, chief economist for Nareit, a trade association. “Twenty years ago, the traditional retail, office, industrial and residential properties were over 75% or 80% of the business by market cap or by net operating income,” Schnure says. “But now they’re about half or maybe even less than half. Other sectors make up about half of the overall universe.”
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PHOTOGRAPH: SETH ARONSTAM / SHUTTERSTOCK.COM
Economic rebound REITs began the current crisis in good shape, but they don’t exist in a vacuum, says Schnure. “Even though the overall economy did not have a lot of imbalances prior to this crisis, it’s going to take some time for all the sectors to start working together again and heal the damage.” It won’t be easy. “The next two years or so are going to be a period of getting through the crisis and then a macroeconomic recovery,”
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How Safe Are REIT Yields? History provides an answer. Most real estate investment trust sectors seldom skimp on dividends, even during a financial crisis. An excerpt from a new book, Educated REIT Investing, explains why. EIT yields may be attractive, but they are meaningless if the dividend behind them is not sustainable. Historically, the contractual nature of rental revenue from leases has enabled REITs to pay dividends that have proved to be secure, even during most economic recessions. Equity REITs derive the majority of their income from leases that, depending on their duration and the credit of the tenant, provide REITs with recurring, more bond-like cash flows than most non-REIT companies can offer. Provided a REIT management team does not operate its business with excessive levels of debt (or leverage), the preferred and common dividends of that company should be safe. Many people look at the dividend paid versus the REIT’s FFO (funds from operations) per share. That said, the 2007‒2008 global financial crisis (GFC) that precipitated the Great Recession of 2008– 2009 (Great Recession) served as a grim reminder about economic and market forces that can jeopardize REIT dividends. According to S&P Global Market Intelligence, in 2008–2009 over two-thirds of all REITs cut or suspended
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their common dividends in response to the GFC in order to conserve cash. Equity REITs produced a dismal total return of negative 37.7% in 2008, before rebounding in 2009 and achieving a positive total return of 28.0%. Despite widespread dividend cuts, in 2008 REITs underperformed the S&P 500 Index by only 73 basis points and then actually outperformed that index by 153 basis points in 2009. During an economic crisis or “black swan” event, such as the GFC of 2007‒2008 and the dramatic economic disruption associated with combatting the Coronavirus (COVID-19) pandemic of 2020, many REIT boards of directors may elect to cut or temporarily suspend dividend payments to preserve capital. To mitigate the risk of a dividend cut, invest in REITs that operate with lower leverage levels than their peers and/ or REITs that invest in more essential property types (such as industrial, office, apartments, or grocery-anchored shopping centers). The rash of dividend cuts by REITs during the Great Recession was similar to the percent of REITs that slashed their dividends in the wake of the savings and loan crisis of the late 1980s. More
recently, the Coronavirus (COVID-19) pandemic in early 2020 precipitated rapid business closures, stay-at-home quarantines, and mandatory social-distancing practices across the U.S. With travel abruptly grinding to a halt, non-essential retail stores and businesses being forced to close for months, and tens of millions of American workers suddenly unemployed, every hotel REIT and 18—or nearly half—of the 37 retail REITs (including free-standing retail) either suspended or dramatically reduced their common dividends to preserve capital. However, hospitality and retail REITs represent only 25% of publicly traded equity REITs, and those companies that owned more necessity-based real estate, such as industrial property, offices, apartment buildings, self-storage facilities and data centers, generally did not reduce or suspend their dividends. The common thread during each of these three crises, the REITs that maintained or increased their dividends were those that were operating with lower levels of debt and owned commercial property types for which demand remains steady during adverse or uncertain economic conditions.
Educated REIT Investing With a little help from their friends, two experts on real estate investment trusts, or REITs, have compiled a book aimed at benefitting just about anyone interested in the industry. Stephanie Krewson-Kelly and Glenn Mueller are the authors of Educated REIT Investing, and it’s scheduled for release in early August. Novice REIT investors should have no difficulty digesting the seven chapters in the first part of the book, while investment banks and stock analysts can use the moretechnical second part to introduce junior associates to REITs, Krewson-Kelly says. Mueller is a professor in the Franklin L. Burns School of Real Estate and Construction Management in the Daniels College of Business at the University of Denver. Krewson-Kelly teaches there and serves as vice president of investor relations at Corporate Office Properties Trust. As Luckbox went to press, the authors hadn’t settled on a subtitle for their new book but may choose The Ultimate Guide to Understanding and Investing in Real Estate Trusts. Other REIT experts contributed some chapters. The new book expands upon an earlier book called The Intelligent REIT Investor: How to Build Wealth with Real Estate Investment Trusts.
Excerpted from Educated REIT Investing by Stephanie Krewson-Kelly and Glenn Mueller.
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OFFICE REITS
OFFICE REIT RECKONING
Workers and small-business owners suffered in the first months of the pandemic, but real estate investment trusts could feel the shock later. Nevertheless, one ticker merits consideration. BY BRAD THOMAS
ocial distancing has claimed millions of victims. Start with the people who make their living from social interaction. It’s a long list of “little guy” personnel that includes servers and hosts at restaurants, store cashiers, childcare providers, hairdressers, fitness instructors and hotel workers. Also factor in people who work at car dealerships, mines, dry cleaners, laundromats, construction sites, amusement parks, concerts and other big-venue gatherings. The lower- and lower-middleclass have been hit hard throughout the shutdowns. But office REITs are going to feel similar problems and pain. The phrase “office REIT” refers to real estate investment trusts that own office buildings and lease them to companies. They pay much of their taxable income to investors in the form of dividends. Twenty-four of them account for roughly $75 billion in market value. And the sector itself is segmented into two categories: “Gateway REITs” hold portfolios
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Small changes in occupancy and market fundamentals can have significant positive or negative effects on office REIT performance. 30
concentrated in six U.S. cities— New York, Chicago, Boston, Los Angeles, San Francisco and Washington. “Non-gateway REITs” hold portfolios concentrated in locations outside those ultradense cities, generally in the Sunbelt or in secondary office markets. Overall, analysts remain bearish on the office REIT sector with its weakening long-term demand and a significant pipeline of supply growth. Just the same, opportunities can arise in the sector. Let’s take a closer look at why. On-time office REIT rents The near-term outlook remains relatively steady. Office REITs reported little difficulty collecting rent during a scary part of the pandemic in April. They achieved 94% of office rents and 92% of total rents in April. leaders included Easterly Government Properties (DEA) at 99%; and Equity Commonwealth (EQC) at 98%. On the other end, Empire State Realty Trust (ESRT) reported achieving just 73%, but that figure jumps to 93% when charges to security deposits are included. The 92% total rent collection from office REITs compares to: 96% for residential REITs
92% for industrial REITs 73% for net lease REITs 59% for shopping center REITs 22% for mall REITs Strong rent collection has—for now, at least—enabled the vast majority of office REITs to maintain dividends at current rates. An exception was small-cap City Office REIT (CIO), which reduced its dividend from $0.24 to $0.15. It’s the lone pure-play office REIT to announce a dividend cut since the start of the pandemic. [On the other hand, office-heavy diversified REITs Armada Hoffler (AHH) and American Assets (AAT) did too.] Expect a few more highly leveraged small-cap office REITs to reduce dividends in the months ahead—if only out of an abundance of caution—given their elevated payout ratios and debt metrics. Thirteen office REITs command investment-grade bond ratings from the S&P 500. And the larger sector operates at leverage ratios generally in line with the REIT sector average of around 40%. That said, 10 office REITs have debt ratios above 50%, with six above 60%. This is the “danger zone” for potential dividend cuts or other means of deleveraging. Also of note, all but one office REIT—Office Properties (OPI)— operates under the traditional internally managed corporate governance structure.
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Gives and takes Office REITs tend to be concentrated in coastal “gateway” markets, where post-recession job growth has been strong. But so has supply growth. Several of those ultra-dense spots, including New York and Chicago, are expected to see slower population growth and might even fall victim to an “urban exodus” of residents abandoning big cities. That poses a risk for gateway-focused REITs. It’s a shame because office REITs were finally hitting their stride over the last two years. Before that, they had suffered a decade of middling performance. But then came seemingly unstoppable job growth until the pandemic struck. They had been in the sweet spot. Same-store net operating income growth for office REITs averaged 2.54% in 2019. That easily outpaced the 2.12% average growth of the broader REIT index. The sector tends to outperform later in the economic cycle, given the typically long-term structure of office leases. They average five to 10 years for suburban assets and 10 to 20 years for central business district assets.
The sector’s foibles Office ownership is a capital-intensive business with relatively low operating margins and high capital-expenditure needs. Tenants tend to have quite a bit of negotiating power relative to landlords, particularly given oversupply. Given the high fixed costs of managing an office property— whether fully occupied or mostly vacant—operating leverage is high. So small changes in occupancy and market fundamentals can have significant positive or negative effects on performance. More than other REIT sectors, office REITs have a relatively small tenant roster and tend to be geographically concentrated. Vacancy rates across the sector have consistently averaged more than 10% for most of the post-recession period. Metrics have improved in recent quarters. But it’s expected to be short-lived, given the coronavirus (including work-from-home trends) and the large development pipeline.
(See pg. 32.) It’s the only office REIT focused on serving U.S. government agencies and defense contractors engaged in defense information technology and national security. This is a strategic niche with tenants generally focused on knowledge-based activities, such as cybersecurity, R&D and other technical defense and security areas. The niche provides real estate to a specialized cyber-based platform. The defense installations (or government demand drivers) where its tenants operate are knowledge-based centers that aren’t weapons- or troops-related. Shares in Corporate Office Properties trade at 13.1x P/FFO with a 4.11% dividend yield. Analysts estimate earnings growth of 6% in 2021, which translates into potential returns of around 15% annually. Brad Thomas, editor of Forbes Real Estate Investor and founder of Wide Moat Research, publishes commentaries at bradtom.com and appears regularly on Fox Business. @rbradthomas
One bullish forecast One name analysts are bullish on is Corporate Office Properties (OFC).
In April, office REITS collected 94% of rent due.
Disclosure: At the time this story was submitted, the author owned shares in City Office REIT.
REIT this Ten office REITs have debt ratios above 50%, with six above 60%. This is the “danger zone.” 0% -10% -20% -30% -40% -50%
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THIS REIT WINS PLAYING DEFENSE
Defense contractors need secure offices that specialized REITs can supply.
Corporate Office Properties Trust specializes in defense-related tenants, inoculating the company against economic downturns
ot even a worldwide pandemic can stand in the way of the master plan for Corporate Office Properties Trust (OFC), according to executives at the Columbia, Md.-based real estate investment trust, or REIT. The company’s leadership decided a decade ago to sell most of its commercial office space and instead specialize in providing highly secure offices for the U.S. Department of Defense (DoD), the intelligence community and defense contractors, says CEO Stephen E. Budorick. Defense spending tends to remain strong in good times and bad, shielding the company from the ups and downs of a fickle economy, he notes. The government and its contractors use the offices for intelligence, surveillance, reconnaissance, research, development, testing and evaluation. Over the years, dedication to the sector has made the company the “quintessential REIT,” positioned to pay unwavering dividends as profits grow and share prices appreciate, says Stephanie M. Krewson-Kelly, vice president of investor relations. “We are absolutely unique in
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88% of COPT’s revenue is defense-related 32
the public environment,” Budorick maintains. “We represent a very safe, secure investment.” The history The shift from commercial to defense-oriented real estate was already proceeding under then-CEO Roger A. Waesche Jr. when Budorick joined the company as CIO in 2011. Budorick became president and CEO in 2016 and continued the defense-centered policy. Over six or seven years, the company “undiversified” by selling half its property, Budorick recalls. It shrank from 22 million square feet to 11 million square feet and used the proceeds from divesting what he calls “commodity” office space to develop 8 million square feet of defense IT space. Space now under development will bring the company back to 22 million square feet, he says. About 88% of the company’s revenue comes from defense-related tenants, and the remaining 12% flows from commercial real estate. Of the 88%, the federal government pays for 35%, and defense contrac-
tors account for 53%. About 9% of revenue comes from a multi-tenant wholesale data center in Manassas, Va., that’s designated a secure “Tier 3” facility that safeguards confidential information. Renting space in the data center “shell” enables tenants to devote their capital to buying or developing equipment instead of buying real estate. The tenants at the data center and the defense-related offices require so much secrecy that a third of Corporate Office Properties Trust employees have obtained the highest government security clearances. The company developed properties near defense-related activities, with about half in Maryland and half spread across Virginia, Alabama and Texas. The need for proximity to defense operations gives the company a geographic profile that differs significantly from the usual office REIT concentration in the central business districts of a few of the nation’s largest cities. Big profits ahead? The transformation into a defenseoriented office REIT hasn’t been
PHOTOGRAPHS: COURTESY OF COPT
BY ED MCKINLEY
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cheap. Consequently, the company’s profits have remained stagnant for several years, Budorick reports. “You sell a building, you lose that cash flow immediately,” he says. “You’re replacing it over a number of years with a new asset.” But the company was scheduled to reach an inflection point this year and post strong earnings for the first time in a while. Next year and thereafter, the company expected especially robust growth. “We’re in a position to predictably and regularly grow our FFO (funds from operations) through strong operating fundamentals, but also through external growth from the new developments coming online,” Budorick says. Corporate Office Properties Trust can comfortably recycle about $300 million back into development annually without much need for outside capital and without skimping on investor returns, he predicts. Potential investors have understood the company’s position, Budorick contends, but have remained “in the ‘show me’ mode and want to see us deliver growth.” If the company achieves his prediction of 2% to 3% growth this year and stronger growth in subsequent years, stock prices will rise accordingly, he says. “The pandemic has really reminded people of the strength of our company,” Budorick continues. “Our company has better credit, a better balance sheet, better assets.” COVID-19 immunity For the most part, the pandemic has done little to derail the company’s plans. In April, it collected 98.8% of its rent, compared with a national average for office REITs of 91.5% for the month, Budorick says. May numbers were similar, he notes. For smaller tenants, like locally based cafeteria operators in government office buildings, the company granted three months of free rent in exchange for two-year leases that kept the deals nearly revenue-neutral, and
they represented .75% of the company’s annual rents. Larger commercial tenants tended to prefer extensions as they adjusted to the pandemic. Heated commentary about reconfiguring offices for social distancing has roiled the media lately but doesn’t faze Corporate Office Properties Trust, according to Budorick. If government or contractors need more space for social distancing, rent will increase, not decrease. In one example of today’s thinking, the coronavirus did not deter the DoD from signing a post-outbreak contract with no modifications to its pre-outbreak plans. Moreover, working from home isn’t an option when government secrets are involved. “Sixty-five percent of our lease space is either in a secure campus or has attributes built into the space called ‘skiff’ (sensitive compartmented information facilities), Budorick says. “They are performing missions in those spaces at the highest security level of the U.S. government. That work cannot leave the office.” Another 20% of the activities in the company’s offices is at a lower security level than skiff but is still too sensitive to conduct outside the office. That means a total of 85% of what happens in the company’s buildings can’t become part of the pandemic work-from-home trend.
Corporate Office Properties Trust plans to pay big dividends as profits grow and share prices appreciate. Another COVID-19 fear—infection on public transportation— poses little threat for the company. Most of its properties are located in suburban or rural locations instead of the big-city downtowns favored by most office REITs. Employees commute by car, not bus or train. Problem solved Although catering to the defense sector can cushion against economic woes, uncertainty can still creep into the business. The Budget Control Act of 2011, for example, reduced the defense budget for seven years, causing agencies to cut square footage and pack workers into tighter spaces, Budorick says. The legislation also dictated that the lowest bid that met technical criteria won the contract. Competition heated up, and REITs paid strict attention to margins. In the last four years, however, defense spending has increased, much to the benefit of the Corporate Office Properties Trust. Pandemic aside, the REIT’s master plan seems to be working.
A specialized REIT can develop office space near defense-related facilities.
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THE POLITICAL TRADE
Biden’s VP: Buy the News, Sell the Rumor
Kamala Harris 52¢
When it comes to betting on Joe Biden’s VP, prediction market prices tell one story. But the news can tell another.
By Derek Phillips
Val Demmings 17¢
Susan Rice 13¢
Elizabeth Warren 6¢
Political prediction market traders began betting on who will be the Democratic vice-presidential nominee long before the party settled on a candidate for the top of the ticket. In the markets, where cents represent the forecasted percentage of an outcome to occur, traders have narrowed the field to the six most-likely candidates, with Kamala Harris projected as the favorite. But making money in the VP market doesn’t depend solely on guessing correctly—sometimes it’s a matter of knowing how the news will move the market. The Veepstakes Shortlist
Tammy Duckworth 5¢
Keisha Lance Bottoms 4¢
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n the PredictIt market forecasting the Democratic vice-presidential nominee, fortunes rise and fall with global events. In a departure from the old model of floating a candidate’s name in the media to gauge public response, this year a person’s likelihood of being selected for the job will be determined mainly by how her story fits into the larger narrative of what is happening to the country. Smart traders take long positions by determining whose stock appears likely to improve with each news cycle, selling at a high when rumors arise that presumptive Democratic presidential nominee Joe Biden is giving that candidate serious consideration. Buying on the news, as it turns out, is much easier than the old (buy the rumor, sell the fact) model of reading the tea leaves of backroom deals and pseudo-psychological analyses of whose governing style and political ideology aligns best with the top of the ticket. Many traders made the mistake of approaching the market the way it worked for Hillary Clinton and Donald Trump in 2016, only to get sucked in by rumors that Biden had made a deal with Amy Klobuchar or that Stacey Abrams was doing her best to show flexibility on issues where she once disagreed. Unfortunately for those two candidates— and the traders they took down with them— timing is everything in politics. In 2020, if someone doesn’t offer a unique set of skills and experience to address the myriad crises the country is facing, there is no way that person will be chosen for VP. Here are a few moves top traders made while buying the news in recent months: Buying Gretchen Whitmer and Elizabeth Warren (YES) on news of the COVID-19 outbreak As an example of the success Democrats enjoyed in the 2018 midterms, which was supported by the diverse coalition they are
“If someone doesn’t offer a unique set of skills and experience to address the crises the country is facing, there is no way that person will be chosen for VP.” 36
Democatic VP Nominee Price History Fluctuations in PredictIt’s Democatic VP nominee market are anything but uncommon. Significant news coverage can change the candidates’ standings overnight. 90-Day Lowest Price
90-Day Highest Price
Recent YES Price
Kamala Harris
24¢
57¢
57¢
Val Demmings
3¢
23¢
17¢
Susan Rice
1¢
18¢
11¢
Elizabeth Warren
5¢
19¢
5¢
Tammy Duckworth
2¢
8¢
5¢
Keisha Lance Bottoms
1¢
12¢
5¢
Potential Nominee
predictIt.org pricing through June 20
hoping to build again this year, Gretchen Whitmer was in demand even before the pandemic. But she was priced at only about 4¢ because of a lack of name recognition. Knowing that a pandemic hotspot in her state would thrust Whitmer into the national spotlight netted traders about 10¢ per share. In a similar vein, traders who read the news immediately knew what Elizabeth Warren’s loss of her brother to COVID-19 meant for her likelihood to be selected. As someone who has now had personal experience with loss from the pandemic, Warren was instantly seen as someone who could help heal a nation desperate for empathy. The predicted probability of Warren being selected moved 5¢ per share overnight. Buying Amy Klobuchar (NO) on the news of George Floyd’s death and buying Val Demings, Keisha Lance Bottoms and Susan Rice (YES) Nobody knew whose position would improve in the immediate aftermath of George Floyd’s death, but it was pretty clear Amy Klobuchar would fall. Knowing Klobuchar was once the county attorney for Hennepin County, smart traders knew her connection to Minneapolis law enforcement would become a liability and that her troubles with black protest movements would be even worse. Klobuchar immediately lost half of her share value and then practically lost the remainder when news broke of her past unwillingness to prosecute officer Derek Chauvin.
As for those whose stock improved, Val Demings, Keisha Lance Bottoms and Susan Rice were each valued at about 2¢ but rose dramatically. With Demings and Bottoms, traders can find specific news events to correlate with their increased odds. As for Rice, sometimes it is as simple as having the instinctual knowledge that if news breaks about a crisis in race relations, the chances for the nominee to be a person of color increase across the board. The challenge, of course, is knowing when to sell before their weaknesses become apparent. And now we have Kamala Harris Market pricing suggests that the larger bet is currently on whether another national news event will alter the race again. Other candidates have faded as the market reached a sort of consensus that Biden is comfortable with his lead in the polls and that Kamala Harris is the natural choice for a nominee who is both a person of color and has a national profile. Harris currently sits at about 52¢ on PredictIt, suggesting the market is reasonably confident that nothing new will happen and that she represents the safe choice. For what it’s worth, rumor has it that Biden is leaning toward Harris, and if his decision were to come today, it would probably be her. But in 2020, who would really want to bet against the news? Derek Phillips began trading political futures professionally during the 2016 election, turning $400 into $400,000 in four years. Phillips is a recurring guest on The Political Trade podcast. @dmpfrompi
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DEREK PHILLIPS’ BEST BETS What will be the Electoral College margin in the 2020 presidential election? Buy NO on all Democratic positions In general, I don’t endorse betting on President Donald Trump to win reelection this year, but if you feel the need to make that bet, this is the smartest way. Buying against every bracket for the Democrats effectively prices you in at a 22% chance that Trump wins reelection, with the added benefit that if you are wrong you will only lose in one bracket. This is a stark contrast to the marquee markets where Trump is priced in the 40s and your entire investment is at risk. This bet also works as catastrophic insurance if you are betting heavily on a big night for the Democrats and would like to cut some risk.
Which party will win the U.S. Senate election in Iowa in 2020? Buy Democratic YES or Republican NO in the 40s After three successive polls of varying quality showing Democrat Theresa Greenfield in the lead, smart traders are rushing to buy Joni Ernst, assuming this is the low point in the election cycle for the Republicans and this race in particular will soon revert to fundamentals. I make a lot of money betting against smart players. Those buying the Republican in this spot are making a lot of assumptions that I’m not yet willing to make: Namely that the economy will rebound, public sentiment will start to turn against the Black Lives Matter protestors and the worst of the COVID-19 crisis is behind us. If these factors continue to be a drag on the party into late summer, expect those with money on the Republican in Iowa to hit the eject button.
Who will win the 2020 Democratic vice presidential nomination? Buy Tammy Duckworth and Kamala Harris for a combined 50¢ With all the ups and downs of the last few months, it’s hard to like any of the VP choices who have already had their moment in the sun. I still love Tammy Duckworth as a longshot bid, figuring that if we have a new crisis in the next month it would probably be militaryrelated. In fact, the open criticism of Trump from top military brass already feels like the beginning of a new opening for Biden to run as a military and foreign policy favorite, an appeal that a Purple Heart recipient like Duckworth could help to fortify. I’m buying Duckworth for a big payday and will probably buy enough Harris to cover the bet, given that if the next month is unexciting, it will probably be her.
Electoral College margin of victory? Dems by 280+
13¢
1¢
Dems by 100 - 149
15¢
1¢
4.3M Shares Traded
Which party will win the IA Senate race? Republican
51¢
1¢
Insight into wagering on political prediction markets? Check out Luckbox’s The Political Trade wherever you listen to podcasts. Weekly episodes feature top prediction market traders and political insiders, including Rachel Bitecofer, Anthony Scaramucci and James Carville.
Democratic
48¢ 2¢ 34,675 Shares Traded
2020 Democratic VP nominee? Kamala Harris
52¢
2¢
Susan Rice
13¢
1¢
50.2M Shares Traded
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LIQUID ASSETS
The Cult of Celebrity Spirits Since George Clooney cashed in with Casamigos, more celebs have been attaching themselves to alcohol By Jeff Joseph
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Eli Manning and Peyton Manning
PHOTOGRAPHS: (SWEETENS COVE) COURTESY OF SWEETENS COVE; (BOTTLES) GARRETT ROODBERGEN
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e value our liquid assets and the master distillers who make them special, so we’re not the least bit impressed when a celebrity attaches his name to a brand—as should be evident from our (May 2019) review of Metallica’s Blackened Whiskey. We were similarly unmoved by Justin Timberlake’s Sauza 901, George Clooney’s Casamigos, Michael Jordan’s Cincoro Tequila, Drake’s Black American Whiskey, Bob Dylan’s Heaven’s Door Rye Whiskey, Conor McGregor’s Proper No. Twelve Irish Whiskey, Dan Aykroyd’s Crystal Head Vodka and Ryan Reynolds’ Aviation Gin. We’ve tried them all. With much more compelling offerings in each category, there’s simply nothing special—move on. So, we were skeptical when the news came that sports celebrities Peyton Manning, Andy Roddick and Jim Nantz—co-owners of Sweetens Cove, a Tennessee golf course with a cult-like following—were “collaborating” on the launch of a new, eponymously named premium bourbon whiskey. Intrigued by the course tradition of welcoming newcomers with a celebratory “shot” of whiskey at the first tee, we found the story became even more interesting when they hired Marianne Eaves, former Brown-Forman blender and Castle & Key distiller, to blend the first 100 barrels of their 13-year-old, $200-per-bottle Tennessee bourbon. With the initial 14,000 bottles to be sold only to Tennessee residents, finding Sweetens Cove is a challenge. When we were able to secure a tasting bottle before the June commercial release, we invited our favorite whiskey connoisseur and collector, David Sweet, to put Sweetens Cove to the test against other coveted whiskeys with more mature age statements. Sweet brought some age-stated Jack Daniels and Knob Creek whiskeys to our tasting, as well as a selection from his own award-winning label, Barrel and Bottle.
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FOUR WINNING WHISKEYS Knob Creek 12 Small Batch Bourbon First up, this age-stated Knob Creek was originally positioned as a limited edition bourbon when it was released in late 2019. Proof: 100 Age: 12 Years Color: Bronze Price: $60 Mashbill: 75% corn, 13% Rye, 12% malted barley Nose: Brown sugar and maple with sweet oak Taste: Long rich flavors: brown sugar, light vanilla with burnt caramel and oak Finish: Luxurious black pepper, oak and peanut Mature, sophisticated, serious bourbon. The age is prevalent. We preferred it neat.
4 out of 5
Kudos to the blender and Sweetens Cove team! A unique flavor of mature wood and huge spice without the typical big vanilla that comes through in mature bourbons. Complex with a big finish. —David Sweet, Barrel and Bottle
Jack Daniels #27 Gold Maple Wood Finish Initially, JD’s #27 Gold was intended to have limited distribution. The bottle became available at the Lynchburg distillery shop in 2018 and is now available in select markets throughout the United States Proof: 80 Age: Not stated Color: Gold
Price: $100 Mashbill: JD’s flagship bill: 80% corn, 12% malted barley and 8% rye Nose: Light, sweet maple syrup Taste: Approachable creamy caramel and molasses Finish: Smooth, very easy to drink The whiskey finishes in maple barrels from six months to a year. If there were such a thing as a “session” whiskey, this would be it.
3.5 out of 5
Barrel and Bottle’s Oloroso Sherry Barrel Dave Sweet, our expert guest, has launched Barrel and Bottle, a new spirits label made in collaboration with the special releases of storied distilleries. This past June 1, the label introduced a new skew featuring Town Branch Single Malt aged entirely in an Oloroso Sherry casks for over 10 years. To keep it real, Sweet sat out of this tasting. Proof: 120.5 Age: 10 years and 4 months Color: Dark red and brown Price: $100 Mashbill: Malted Barley Nose: Dark cherries, chocolate, dark molasses and baked plums Taste: Rich molasses, dark cocoa, baked fruits, and raisins that spring from Oloroso sherry barrel aging Finish: Oak, cocoa, burnt fruits and slight pepper;
water brings out milk chocolate and sweeter fruits One of the oldest American single malts available is a recent winner of Double Gold at the 2020 San Francisco Spirits Awards. It’s a standout. Opulent and distinctive.
4 out of 5
barrelnbottle.com
Sweetens Cove Tennessee Bourbon Whiskey Last up, Sweet comes back to the tasting table for Sweetens Cove Tennessee Straight Bourbon Whiskey. We’re big fans of Manning’s gridiron exploits, but expected to feel indifferent to yet another celebrity collaboration. Proof: 101.4 (cask strength) Age: 13 years Color: Dark caramel Price: $200 Mashbill: 84% corn, 8% Rye, 8% malted barley Nose: Peanut, oak and banana Taste: Berries, pecan and a full range of black pepper and spices at the outset Finish: A big finish of dark cherry, dark chocolate and oak explodes, then lingers Wood from the age penetrates through the spice. Water opens up an orange finish. Unusual. Awesome. Touchdown!
4.5 out of 5
sweetenscovespirits.com
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THE NORMAL DEVIATE
Home Economics
Even when it comes to a house, active investors don’t have to be passive By Tom Preston
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itting down? Good. At home? Even better. Because beneath you lies your biggest single investment. Or should I say so-called investment? That would be your house. That’s where most people place most of the money they’ve earned. For others—those with significant savings in a 401(k) or trading account—a house might seem to have a lower value. But individually, the stocks, options, futures and funds in those accounts may have a lower value than the home. Put another way, a home is the single biggest piece of undiversified risk in most financial portfolios. Fluctuating value One of the difficult aspects of a home as an investment is that unlike stocks, options and even mutual funds, it’s hard to know exactly what it’s worth until it comes time to sell it. Real estate brokers’ sites can give an idea of what home prices are in the area, but so many variables come into play that it takes a lot of work to come up with a reasonably accurate value for a house. What’s more, house prices fluctuate. A home’s value is sensitive to the strength or weakness of not just the local economy but also the national economy. Interest rates are an important determinant of demand for real estate, particularly residential. The reason is that when people seek a mortgage, a higher interest rate means higher monthly payments. Higher monthly payments mean fewer people can afford the mortgage, which means less demand for real estate.
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The opposite—lower interest rates—can mean more demand for real estate. And as mortgage rates from different banks across the country tend to hover around a national average, with some regions higher or lower, demand depends on the overall interest rate environment. Interest rates fluctuate, creating fluctuating demand for homes. As the prices for other things— such as cars, gas and food—go up and down, the extra savings or spending can make a monthly mortgage payment possible or impossible, again influencing the demand for a house and its price. So, the country’s monetary policy, overall employment rate and even consumer confidence can influence the value of a home. But even so, real estate is a safe investment, right? Despite the ups and downs of supply and demand, real estate prices generally have gone up between 1% and 4% a year, outside of some notable crashes. Yes, certain real estate markets have seen much higher increases, but those gains tend to be short-term, and catching them is a matter of timing. Slow recovery In some markets, it took 10 years for home prices to recover from their collapse in 2008 and 2009. That said, residential real estate prices aren’t typically very volatile. For example, between July 2018 and July 2019, the price of the average home in the U.S. had about 1.7% volatility. That’s extremely low compared with the volatility of the S&P 500, which averaged about 19% during that time.
A home is the single biggest piece of undiversified risk in most financial portfolios.
The short-term rental market was valued at $100 billion in revenue in 2016, and grew to $167.9 billion in 2019. Source: VRMA
But because of the size of the value of the average home—about $280,000—the dollar amount of that volatility was about $4,600 per year. That means the average home could see prices land between $275,400 and $284, 600 about 68% of the time in a year. If a home’s value is larger, the price range is wider, too. And that was a period of relative price stability for houses, not like 2008 to 2009. Also, the time it takes to complete a real estate transaction is usually measured in weeks, if not months. Compare that to a few milliseconds for an online stock trade, and it’s clear why real estate, even in the best scenario, is not a liquid investment. So, even someone who knew the price of a home might crash next week would find it tough to sell it in that time. Every investment entails risk, and choosing when to enter and exit is an important way to manage. Real estate isn’t exactly safe by that measure. But technology is beginning to help manage it in other ways. Short-term rentals The recent growth (and more recent crash) in the short-term rental market has let homeowners monetize their homes with relatively low barriers to entry. Renting out a spare bedroom via Airbnb or one of its competitors has been a way to generate extra income. From the perspective of an investment, though, the income from a rental is reducing the cost basis of a home, thus reducing its risk. That’s how it works when selling calls against stock. The cheaper the
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asset becomes, the less risk it carries. Unfortunately, the coronavirus has killed the short-term rental business for now. Whether it comes back or not, and when, are the big questions. On the other hand, quarantining to stop the spread of COVID19 means people are working from home. In May, Facebook’s Mark Zuckerberg said as many as 50% of its employees might be working from home in the next five to 10 years. And if Facebook’s doing it, other tech companies might encourage it, too. It not only keeps people healthy, but also saves on real estate expenses. That could potentially boost real estate values and generate a tax break. Investing in REITs But real estate may seem a bit longterm. Some may want to go directly to the capital markets. If they’re willing to take risk, they can find partial hedges for real estate. Some publicly traded residential real estate investment trusts, or REITs, have options listed on them. Essex Property Trust (ESS), AvalonBay Communities (AVB) and Equity Residential (EQR) are examples. The key is to understand there’s a performance difference between the price of the REIT and the price of a home. The REIT might rally while the price of a house stagnates or drops—or vice versa. But traders who think that over time their houses will generally rise and fall with the REIT, could sell call verticals in the REIT’s options to generate credits to protect from real estate drops. For example, with ESS trading at $242, the short 260/270 call vertical with 30 days to expiration was worth about $1.20. With each option representing 100 shares of stock, each Essex Propety Trust option would cover about $24,000 of a home’s value. Ten options would cover $240,000. That relationship is imprecise, but it puts some context into the number of call spreads to sell. Selling
three 260/270 call spreads would cover about one-forth of a home’s $280,000 value and generate $360 in credit before commissions. If that call spread expires worthless, the trader keeps the $360. If Essex rallies 7.5% past 270, the three call spreads would create a $2,640 loss. But if the $280,000 home rallies 7.5%, it would add $21,000 to its value. Investors need a funded trading account to do that, and they should understand that the gains in a home aren’t immediately available to cover the potential loss of the trade. But it’s something to consider for anyone who doesn’t want to remain a passive participant in the biggest so-called investment in the portfolio.
129 million
Housing units in the United States Source: statista.com
7.2
%
increase in home prices since 2018. Source: Zillow
$277,000 median U.S. home price for 2019 $219,000 average starter home price Source: National Association of Realtors.
Tom Preston, Luckbox contributing editor, is the purveyor of all things probabilitybased and the poster boy for a standard normal deviate.
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ARTS & MEDIA
The Luckbox Bookshelf What we are reading, and why
THE LAST TAXI DRIVER By Lee Durkee
Lee Durkee’s novels draw upon his own hip but hardscrabble life, combining the working-class realism of Charles Bukowski with the counter-cultural flamboyance of Hunter S. Thompson. But Durkee’s timing has been simply awful. Let’s look at some highlights that became low points. When Durkee’s first book, Rides of the Midway, was published 19 years ago, the reviews ranged from good to glowing. But then came 9/11. “After the dust from the towers had settled, nobody seemed particularly interested in coming-of-age novels set in Mississippi,” he laments. Hardly anyone bought the book. In fact, its anemic sales made Durkee nearly unpublishable. So he spent the next two decades writing novels that never saw print. He says he kept going because he didn’t know how to stop. He stayed alive by driving a taxi 70 hours a week in Mississippi. Finally, nearly two decades later, Durkee landed a publisher for a novel he called The Last Taxi Driver. Suddenly, his paranoia flared. He convinced himself something would go terribly wrong worldwide and thwart the success of his book. Unfortunately, he may have been right. His second book was published March 3, just as the United States was going into lockdown to slow the spread of the coronavirus. Almost overnight, every bookstore in the world was closed. Promotion hit a brick wall. Durkee’s book tour was canceled because he couldn’t board a plane or book a hotel room. But here’s hoping The Last Taxi Driver finds its audience. They’ll be better off for having read it. They’ll find the book’s narrator, Lou,
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shares the author’s dual work life. Both drive cabs to support their writing habit, which makes them “hacks” in two senses of the word. They also share a long list of foibles, chief among them a tendency to identify nearly everything as a threat. Durkee admits to projecting his paranoia—a trait he celebrates—onto his protagonist. In the book, as in life, neurosis plays out against a seedy background of dead-end taxi runs. Lou ferries a newly released prisoner on a wild goose chase to the rundown abodes of one ex-girlfriend after another, only to find no one at home. He routinely transports impoverished service workers from the housing projects to their minimum-wage purgatories. He takes a pair of sullen, gravely ill patients home from the hospital to die under dismal circumstances. And then the lineup of passengers takes a turn toward the bizarre. In the face of such perversity, Lou sometimes loses sight of his own identity: “I’m that rare beast, a Mississippi Buddhist, and I used to think I was a good Buddhist, or a decent one, before taking this job. Now I know better. Now I know I am the worst Buddhist in the world.” So from the beginning, Lou doesn’t embrace his taxi-driving lifestyle. But then his pain intensifies when it becomes clear Uber is coming to town to displace it.
THE LAST TAXI DRIVER
4.5 out of 5 Out of perversity comes an enlightening portrayal of life
As the story unfolds, Lou shows signs of spiritual growth. He comes to realize that no matter how bad his day becomes, so many other people—probably millions— have it worse. He drifts into pondering big questions. But Durkee isn’t about to provide readers with a facile key to ultimate understanding. Lou repeatedly sinks back into the bile of his anger or succumbs to the near-paralysis of his guilt. Yet somehow, the author creates such a vivid likeness of life that readers can’t help but feel uplifted. There’s beauty in the beastliness. Don’t miss this one. —Ed McKinley Unreported Truths about Covid-19 and Lockdowns: Part 1: Introduction and Death Counts and Estimates By Alex Berenson
Elon Musk brought this titillating title to the attention of a huge potential audience when he blasted on Twitter that “this is insane @JeffBezos,” followed by, “time to break up Amazon. Monopolies are wrong!” The message was dispensed in early June to his 36 million followers. His plea came as a response to a tweet by Alex Berenson, who said that Amazon’s Kindle outlet for self-published e-books had rejected his submission to distribute his COVID-19-related work. It’s a compilation of facts that call into question whether the virus is as deadly as public health experts say. Berenson, a Yale University grad who joined the Denver Post in 1994 as a business reporter, went on to write for The Street before an 11-year stint with The New York Times as an investigative reporter. At this writing, Unreported Truths was among the Top 10 of all books sold on Amazon, with a 4.75 (of 5) rating from nearly 2,000 readers.
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In the book, Berenson makes a convincing case that authorities have overstated coronavirus deaths and overplayed the risk to younger adults and children. “The median age of people killed by the coronavirus is roughly 80-82 worldwide. It is almost certain that more people over the age of 100 than under 30 have died of SARSCOV-2.” Compelling, yes. But caveat emptor. While someone should reconcile the data, science, economics and the politics of the shutdown— and analyze the pandemic that took more than 100,00 lives, crippled the world’s largest economy and left tens of millions unemployed—it won’t all be found in this 25page paperback pamphlet of a “book.” Despite extensive footnotes and factual data that hasn’t played a prominent part in the media’s coronavirus coverage, most readers will be left wanting more for their $5.95. We’ll defer further judgment until Berenson’s Part 2. —Jeff Joseph
published the the pro-plant diet How Not to Die issue (June) is now reading Steak & Cake. Author Elizabeth Karmel earned her carnivore cred as one of America’s leading grilling and barbecue experts and executive chef of New York’s Hill Country Barbecue. Anyone who isn’t grabbed by the porterhouse and coconut cake cover can look inside for more than 100 compelling culinary couplings to consider. From tomahawks to tacos, the grilling recipes are simple to follow and the cake preparations do not require sophisticated baking experience or utensils. Favorites include the prosciutto-wrapped filet with blue cheese and pecan butter, paired with an apple upside-down cake with creme fraiche. Another winner is the California tritip (cut) Santa Maria preparation with slowcooked cabbage and old-fashioned garlic bread, coupled with turtle brownie bites. We could go on, but you get the idea.
Steak & Cake: More Than 100 Recipes to Make Any Meal a Smash Hit
By David Schiller
By Elizabeth Karmel
A luckbox is an unpredictable outlier, so readers should not be surprised that the team that
Guitar: The World’s Most Seductive Instrument
This full-color gift book captures the soul, significance, history, magic and raw mojo of the guitar in all of its beauty and variety. Here, music lovers will find nearly
200 vivid full-page photos of historic instruments, including Eric Clapton’s Brownie, George Harrison’s hand-painted Rocky, Prince’s Yellow Cloud and Willie Nelson’s Trigger. Then there’s the Hauser that was bound up inextricably with Andrés Segovia’s preeminent artistry, and so much more. Marrying pure visual pleasure with layers of information, Guitar makes a glorious gift for any guitar lover, beginning with the diecut cover that depicts three tuning keys of the art deco–influenced headstock of a John D’Angelico New Yorker acoustic. Coffee tables, make room. The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy By Sephanie Kelton
Unlike author Leo Durkee’ book, The Last Taxi Driver, the release of Stephanie Kelton’s approachable primer on Modern Monetary Theory could not have been better. Even readers who don’t buy into the theory that a sovereign monetary regime can safely print lots of money should relish Kelton’s rigorous romp in radical economic thinking. Strong buy. (See the full story on pg. 13)
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FINANCIAL FITNESS
The Inescapable Forces of Economics Laws of physics apply to everything, from physique development to trading By Jim Schultz
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ir Isaac Newton isn’t bestknown for his rock-hard abs or unmatched prowess in the capital markets, but that’s not to say that what he is known for isn’t relevant to achieving both: specifically, his third law of motion. Essentially, for every action—or force—in nature, there is an equal and opposite reaction. Climb up a rope by pulling down on it, for example. Action-reaction pairs sound simple enough, but in practice, they’re even simpler, and their applications transcend high school physics classes. Newton’s laws play out in the world of body development to a great extent. If sandblasting body fat off of the frame is the goal, when execution goes up, bodyweight goes down. When diligence increases, body fat decreases. When consistency trends higher, jean sizes trend lower. Immutable Laws It almost doesn’t matter what strategy is plotted or what program is put into action. Provided one adheres to some central principles, such as caloric deficits, the map doesn’t matter. It’s following the map that ensures an inverse relationship between the action of doing something and the reaction of dropping pounds. In economics, it’s no different. In fact, undergraduate students in finance etch Newton’s laws into
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the backs of their brains in hopes of understanding the basics of the bond market. In a seemingly counterintuitive way, bond prices and interest rates are inversely tied. When interest rates rise, bond prices fall. When bond prices fall, interest rates rise, depending on who’s the chicken and who’s the egg. The relationship makes logical sense. If interest rates rise, then all newly issued, clean paper will come out at those higher interest rates. Therefore, all that old, crusty, dirty paper must now be discounted to remain competitive. Fair enough, but it gets even better—the mysterious laws of the universe and their applications in the financial markets don’t stop there. The yin-yang relationship between prices and rates also extends to the equity market. While the specifics of this beast are a bit messier than those of the bond market, the general spirit of the up/ down dichotomy remains. The Inverse When interest rates rise, stock prices tend to fall, too, and vice versa. Why? One reason is that higher interest rates increase the opportunity cost of buying stocks. Put another way, why would an investor buy shares in Nike, with all of the randomness, unpredictability and uncertainty of those shares, when that same investor could buy a bond in Nike at the
now higher interest rate with more predictable cash flows and certainty of return? Thus, those share prices have to be discounted to remain a viable option for investors. At the same time, when rates are dropping, it’s common to see stock prices rising. Now, stock returns— and their associated dividend payments—appear to be far more attractive options than the paltry returns that bonds offer. Thus, stock demand increases and stock prices rise. Is it always this clean? No. Do all the bias-driven, emotionally charged participants in the stock market always follow the mathematical laws of rational risk-return optimizers? Not every time. But could that help explain why the stock market is now brushing back up against all-time highs, even amid a global pandemic, financial problems on Main Street and civil unrest throughout the nation? Not as the sole factor, but certainly as a contributing cause. If the laws of physics and maintaining one’s physique have taught anything, it’s that they apply just about everywhere. Jim Schultz, Ph.D., a derivatives trader, fitness expert, owner of livefcubed. com and the daily host of From Theory to Practice on the tastytrade network, was named North American Natural Bodybuilding Federation’s 2017 Novice Champion. @jschultzf3
When interest rates rise, bond prices fall. When bond prices fall, interest rates rise, depending on who’s the chicken and who’s the egg.
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WELLNESS
Om Alone
Combine the right equipment with the right vibe to create a rewarding home yoga practice By Lissette Caballero
S
etting up a yoga space at home offers the rewards of peace, exercise and harmony. It’s a way of making yoga part of your life in your own style. As many continue to shelter in place or begin to rejoin the world, it’s a great time to carve out a spot at home for self-care and well-being. Here are a few simple tips to help create a home studio with the right feeling: Mat with Good Grip A quality yoga mat has a good grip or stickiness. The grip helps keep hands in place and minimizes slip, thus building trust in the pose and inspiring confidence to go deeper by pushing the body further. So, yes, a good mat can help you become better at yoga. Tall people need an extra-long mat, such as the Heathyoga Eco Friendly Non-Slip mat. The Jade Yoga Harmony mat is another great eco-friendly choice. For a premium mat, try the Lululemon Reversible Mat, which costs a bit more and weighs a bit more, but offers more grip and cushion. Pair of Yoga Blocks When modifying yoga postures, a block helps maintain proper alignment and makes it easier to reach the ground. Have a set of two blocks strong enough to hold your body weight. Inexpensive pairs of foam yoga blocks are available online from Gaiam, the standard, trustworthy brand. Cork yoga blocks, like the ones from Manduka, cost a bit more
but provide stability and durability. Yoga Strap A strap can help users accomplish some poses. Either procure one online, such as the Manduka Unisex AligN Yoga Strap, or use an old wool scarf or a necktie. Note that some companies sell complete yoga kits that include a mat, a pair of blocks and a strap. A beginner who does not want to spend too much could look into companies such as YogaDirect and Gaiam. Just be aware that the mat—not the blocks or strap—makes the biggest impact on a physical yoga practice. Some Real Estate Use a part of the home with pleasant surroundings, a clean, level floor, and a neutral or pleasant smell. The practice space should promote a positive mental attitude. Have natural light, plants and good airflow. If there isn’t extra room for a dedicated space, don’t sweat it. Just roll out the mat to practice yoga and roll it back up when finished. Then the living room can go back to normal. Music The right music can help with focus and add some fun. For a meditative mood there’s MeditativeMind on YouTube. The long playlists of binaural beats and solfeggio frequencies align brainwaves. For a more upbeat, energetic yoga practice, try playlists by MC Yogi on YouTube or Spotify. He mixes hip-hop beats, electronic and traditional Sanskrit music.
Online Classes Some 300 million people joined Zoom during the pandemic to work or study, so why not practice yoga online too? Besides, some people remain hesitant to head back to studios, and that’s created a new wave of online yoga. The shift to virtual classes brings opportunity to either start or go deeper into a homebased practice. Lissette Caballero teaches pilates, yoga and breathwork in Miami. @yogitraveladdict
YOGA BREAK While getting the home studio to come together, here’s a simple upper back and shoulder stretch to do in the meantime. Stand up and find some free space. Tune into your breath. Breathe in deep and out deeply. Space the hands apart as if holding a basketball. Now reach that imaginary basketball all the way out in front of you. Push the ball forward so that you round your upper back, tuck in your chin and look downward, but keep the lower back against an imaginary wall. With the arms outstretched, reach the ball above yourself, looking up at the ball. Really push the ball as high as you can, getting the shoulders up toward the ears. Then “release” the imaginary ball and bend the elbows as you begin to open the arms wide. Squeeze the shoulder blades together as you move the arms down to get a more satisfying stretch in the chest. Release and repeat. Pro Tip: For more engagement, synchronize your breathing to the movement.
july 2020 | luckbox
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trends
TRADER
KATIE McGARRIGLE tastytrade Host & Content Manager Office Chicago
6 2
Age 30
3
4 5
Years trading 7 1
How did you start trading?
Being at the wrong place at the wrong time. Kidding! I do NOT have a finance background, so this whole thing sort of fell into my lap! I was a new hire on the support team at tastytrade (after interning as a video technician), and in an attempt to get up to speed on the jargon and strategies being talked about all day, I was encouraged to open a brokerage account. A day or two later, Tom Sosnoff found out and decided to throw me in front of a camera to learn options trading in real time before the tastytrade audience. As soon as I started to understand how options incorporate probability, and that I can choose a range OR a direction for a stock to move in, the concepts started to sink in. Favorite trading strategy
Capital efficiency matters most in a small account like mine (~$25k). Therefore, I’m always looking for ways to keep buying power in check—especially when it comes to futures options—one of my mostused tools. I like iron condors, naked options in inexpensive products. Lately, I’ve been using a lot of strategies that take advantage of skew (broken wing butterflies, jade lizards, iron condors). I also try and make sure to have exposure to the six main asset classes (equity indexes, U.S. Treasuries, metals, energy, foreign exchange and agriculture) and then pepper in a few individual names/ETFs.
46
1. Beverages—always more than one 2. Plants—for feng shui 3. Laptop—I constantly flip back and forth between trading, email and the tastytrade backend 4. Kindle Fire—for podcasts, binging non-tastytrade stuff while working, 5. Notepad— I’m a big list-maker; always have a to-do list 6. Headphones—for concentration, relaxing ASMR videos (Autonomous sensory meridian response is a relaxing sensation that begins on the scalp and moves down the body. Also known as “brain massage,” it’s triggered by placid sights and sounds, such as whispers and crackles.)
Average number of trades per day?
2
What percentage of your outcomes do you attribute to luck?
In all my years of trading, I can probably count on one hand the number of times I’ve said, “Phew! I got lucky!” At tastytrade, we learn to assess the market environment with a variety of metrics and go from there. We like to set up high-probability trades that have a reasonable risk:reward ratio, and we always try to keep size in check. If your positions “check the boxes” before you’re even filled, it’s less about luck and more about letting the probabilities play out! Favorite trading moment?
When I was still learning, Tony Battista was trying to teach me the concept of delta (a metric used to gauge directional exposure) and how traders can choose their delta in a covered call strategy
based on where you place the short option. In that moment, things just clicked! I finally understood the flexibility that options can afford rather than simply trading stock, and how tastytrade mechanics play into that flexibility.
FAVORITE TRADING BOOK
Worst trading moment?
Some trades that still give me a little PTSD are 2019 silver futures (had a strangle that quickly got the better of me), choppy moves in /CL in the first four months of 2020, and a UNG strangle early in my trading career when volatility exploded. The biggest thing I’ve learned is to stay small, follow your gut and be flexible. If you feel like the velocity in the product is getting too swift, it’s OK to cover a position. Most days, I’d rather close out a bad trade and chip away at losses with a new position that has higher probabilities than continue to micromanage something that’s losing money.
THE 4-HOUR WORK WEEK By Tim Ferris $14.29 (Amazon) Hardcover (416 pages)
Meet Katie McGarrigle
luckbox | july 2020
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trends
CALENDAR
EYEING A 7/22 TIPPING POINT On the heels of the New Moon on July 20 is one of 10 annual “Gann Days” on July 22, when the Sun enters its ruling sign of Leo and markets could generally be ready for a change in trend. Crude oil could be making a low at mid-month with the Sun, Jupiter and Pluto all at a 90-degree angle to its first-trade Mars. Look for a high near the New Moon on July 20. Gold is positioned for a potential high at mid-month, when Jupiter and Pluto are opposite its first-trade Venus and the Sun is aligned with it. When the Sun (gold’s ruler) enters its ruling sign of Leo on July 22, prices could begin to trend higher. The S&P 500 looks to start the month at a low point, then rally the week after the July 4 holiday. However, stocks could be making a low when the Sun enters Leo on July 22.
PHOTOGRAPHS: (DNC) REUTERS/SCOTT AUDETTE
Susan Abbott Gidel, author of Trading In Sync With Commodities—Introducing Astrology To Your Financial Toolbox, also edits Red Letter Trading Days, a monthly newsletter. @susangsays
JU L Y
4 Independence Day
5 National Workaholics Day
5 Lunar Eclipse
7 Delaware and New Jersey Primaries
11 Louisiana Primaries
12 Puerto Rico Primaries
12–18 International Conference on Machine Learning Virtual event 13–16 Democratic National Convention Postponed to Aug. 17–20 Milwaukee
14 Bastille Day
20 New Moon in Cancer
1–22 Marketing in the New Normal 2 Virtual Conference 22–23 Sun Enters Leo/Gann Day
29 Fed Interest Rate Decision
National Workaholics Day Workaholics are everywhere. It’s an American thing. It’s part of the culture and part of public policy. The U.S. is the only industrialized nation without mandatory parental leave. At least 134 countries set laws mandating the maximum length of a work week; but not in the United States, where 86% of males and 67% of females work more than 40 hours per week. According to the International Labor Organization, Americans work 137 more hours per year than Japanese workers, 260 more hours than British workers and 499 more than French workers. The real rub? According to the Bureau of Labor Statistics, average productivity for an American worker has increased 400% since 1950, which means the American worker should be able to afford the same standard of living as a 1950 worker while working only 10 hours. So, who is profiting from that increased efficiency? Not the American worker. The holiday falls on a Sunday—take a break.
Democratic National Convention Originally scheduled for mid-July, the Democratic National Committee in May voted to adopt rules and bylaws changes to enable delegates to participate without attending in person. While the change prompts some to think the convention could become a largely virtual event, political prognosticators on prediction market site predictit.org forecast a 70% probability that the Democratic nominee will accept the nomination from the stage at the Fiserv Forum in Milwaukee.
Barack Obama and Hillary Clinton soak up the adulation at the 2016 Democratic National Convention in Philadelphia.
Highlights from past Democratic conventions 1896 36-year-old nominee William Jennings Bryan had not been a candidate prior to the convention. 1904 Democrats nominated 81-year-old Henry Davis, the oldest VP nominee ever. 1924 Deeply divided Dems took 103 ballots to select compromise candidate John W. Davis. 1992 The Clinton/Gore ticket was the youngest candidate combination in U.S. history.
july 2020 | luckbox
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tactics essential trading strategies
BASIC
ETF Interest Rate Strategies
Exchange-traded funds provide a good way of trading economically sensitive interest rates
By Michael Gough
The right shares Using ETFs, you can trade a specific Treasury duration or structure more advanced curve trades. Symbol
Duration
Weekly One Standard Deviation Move
SHY
1-3 Year
$0.12
IEI
3-7 Year
$0.53
IEF
7-10 Year
$0.82
TLH
10-20 Year
$1.66
TLT
20+ Years
$2.42
1.4
Yield Curve
1.2
The greater the duration of the loan, the greater the interest rate.
1.0 0.8 0.6 0.4
is auctioned with maturities ranging from 30 days to 30 years, and each has its own interest rate. Plotting each of these rates and their respective durations creates the yield curve. (See “Yield Curve,” above right.) Notice that the greater the duration of the loan, the greater the interest rate. When choosing which rate to trade, remember that longerdated debt also has greater volatility. Several popular Treasury debt ETFs and their weekly one-standard-deviation ranges are shown in the chart. The further out on the curve an investor trades, the greater the weekly movement. While these ETFs provide a great way to trade rates, note they represent a basket of Treasury debt prices and not their yields . Debt prices and debt yields move inversely. Thus, a trader who thinks 20+ year interest rates will decrease could buy, and one who thinks they will increase could sell. An increase in debt prices is always associated with a decrease in yields and vice versa. While price is an equalizer in comparing bonds, traders
30 YR
20 YR
10 YR
7 YR
5 YR
3 YR
1 YR
2 YR
0.2 1 MO
F
ew products are as costly and complex as interest rate futures. For retail traders looking for interest rate exposure, Treasury ETFs are a much better place to start. But before buying a bond ETF, take the time to understand a few basics about rates. Before buying a Treasury ETF, it’s important to understand a few basics about rates. First, know that there’s no one interest rate. Interest rates are determined by a number of factors, one of which is how likely a borrower is to pay back the money. The greater the risk of default, the higher the interest rate. This is referred to as credit risk. To avoid credit risk and just trade rates, use Treasury ETFs. Backed by the robust U.S. economy, Treasury debt is largely considered “risk-free” with zero credit risk and serve as a global benchmark for interest rates. To trade rates and avoid credit risk, look to trading U.S. Treasury yields because U.S. government debt is largely considered “riskfree” because of its high credit quality. A second factor that determines the interest rate is the length of the loan. Treasury debt
live in a world of yield. So an inversion is often required to go from trade idea to trade execution. Besides trading a specific portion of the yield curve, advanced interest rate trading strategies can also be constructed using these ETFs. A trader could combine them to trade twists and shifts in specific sections of the yield curve. Instead of buying or selling 20+ year rates, a trader could buy iShares 1-3 Year Treasury Bond ETF (SHY) and sell iShares Barclays 20+ Year Treasury Bond ETF (TLT) simultaneously to construct a yield curve trade that profits if the difference between short-term and long-term rates increase. This is referred to as a steepening of the yield curve. With products covering all parts of the yield curve, traders can trade almost all expectations of economic change with interest rates. (See “The Right Shares,” left.) Michael Gough enjoys retail trading and writing code. He works in business and product development at the Small Exchange, building index-based futures and professional partnerships. @small_exchange
july 2020 | luckbox
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tactics
INTERMEDIATE
Economic Insensitivity Traders can reduce risk by trading products that aren’t closely tied to unpredictable macroeconomic swings By Anton Kulikov
B
asing trading decisions on an opinion about the economy isn’t easy. One indicator may signal strength while another indicates weakness. Meanwhile, economists and the Fed hedge their statements. It’s enough to make an investor yearn to be free from economic risk. With that in mind, let’s review some products that aren’t tied too closely to macroeconomic swings. First comes the definition of a macroeconomic swing. To keep things simple, use the S&P 500 Index as the gauge for how the economy is performing. Basically, when the index goes up over a long period of time, consider that a “good economy,” and when the index goes down, consider that a “bad economy.” Next, determine what defines a “relationship” between two products. In finance, correlation is the most commonly used measure for determining such relationships. Correlation is a number, ranging from -1 to +1. Where the number is in that range shows the strength or weakness of the relationship between the two products. If two products have a correlation close to + 1, then they’re strongly related. So when one product rises, the other does, too. When one product falls, so does the other. If the S&P 500 and the ecomomy move in tandem, and a product has a correlation to the S&P 500 of close to +1, then that product is economically sensitive. If the product has a
correlation to the S&P 500 of close to -1, it’s also economically sensitive. An (inverse) correlation of negative 1 means the two prices move in opposite directions—when one goes up, the other goes down, and vice versa. The main point, however, is that the prices affect each other. If two products have a correlation close to zero, then there’s no relationship between the two products. In other words, the movement of one does not affect the other. To find products that have little or no relationship to macroeconomic swings (i.e., the S&P 500), look for a correlation of close to zero with the S&P 500. Five entities—including economic sectors, commodity products and currency products—that bear the smallest correlation to the S&P 500 are listed to the right. Notice that the utilities sector is the least-affected economic sector that isn’t commodity—or currency-based. Overall, commodities and currencies provide great diversification to an equity portfolio because their prices do not depend on economic swings. Adding a little more complexity to this, by selling an at-the-money put in each of these underlying every 30 days, actually reduces the risk of the overall position by roughly a third, compared with buying and holding 100 shares of the outright underlying. This is because options have other factors that determine their price besides just the under-
No crystal ball required Tired of guessing the direction of the economy? Then pick a sector, commodity or currency that’s not closely tied to macroeconomic swings. These entities have nearly zero correlation to movement in the S&P 500, indicating a bit of immunity from economic fluctuations.
Product
Correlation to Economic Swings (the S&P 500)
Gold
-0.1
Euros
-0.1
Bonds
-0.5
Oil
0.3
Utilities
0.5
lying price. This reduction in risk also happens because even though options prices are correlated to the underlying, they are not 100% correlated. This lower overall correlation between the underlying and the at-the-money put option means that the option has an even lower correlation with the S&P 500 than the outright stock would have. When making trade decisions going forward, look at the correlation to the S&P 500 when determining how sensitive or insensitive a stock, commodity or sector is to economic swings. The information’s easily accessible on most trading platforms. Anton Kulikov is a trader, data scientist and research analyst at tastytrade. @antonkulikov97
One economic indicator may signal strength while another simultaneously indicates weakness. july 2020 | luckbox
11:55 AM
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tactics
ADVANCED
The REIT Trade Real estate investment trusts tend to pay dividends that can ease the pain of a bad trade By Michael Rechenthin
G
ot a bad trade? Tell everyone you bought the stock for the dividend. It’s an old joke among traders and provides cover for a mistake. But in all seriousness, dividends do add a nice buffer to lackluster stock returns. Half of the returns over the past 20 years in the S&P 500 have been dividends. Some industries tend to provide larger-than-average dividends, and Utilities (XLU) is one example. Another is real estate investment trusts, or REITs. So, what’s a REIT and why is it important to have a basic understanding of them? REITs have been around since President Eisenhower agreed to allow investors to amass large-scale portfolios of income-producing properties. Over time, rules have been established that create their designation as a REIT. They are as follows: 1. 75% of its gross income must come from real estate holdings 2. 75% of its assets must be in real estate 3. 90% of its income must be paid to shareholders as a dividend The REIT essentially trades like a stock, and it’s technically diversified because it’s made up of multiple properties with separate cash flows. Rising rates hurt REITs, especially those with high levels of debt that need refinancing. The good news is there’s a low probability of that occurring. In fact, the futures market is pricing in a roughly 5% probability that rates will increase from their current levels over the next year—low rates provide a headwind for REITs. The table in “Top Stuff,” above, shows the most liquid REITs. It also helps to look at the returns during the past year, compared with the S&P 500. See “Fair comparison,” right. What are some trade ideas to help get those probabilities on your side? Reduce risk by lowering the trade’s breakeven. Consider a covered call in IYR—sell the second out-of-themoney call. Right now, with the stock at 83.32, traders can sell the 85 call for 1.60. That lowers the breakeven to 83.32 – 1.60 = 81.72, which is
52
Top stuff The most liquid real estate investment trusts (REITs) offer opportunities with dividends. Correlation with the S&P 500
Current Dividend Yield
IYR
iShares Trust U.S. Real Estate ETF
0.92
2.9%
VNQ
Vanguard Index Funds
0.92
3.1%
SPG
Simon Property Group Inc
0.56
2.8%
XLRE
Select Sector SPDR Trust Real Estate Select
0.93
2.2%
Fair comparison During the past year these real estate investment trusts lost more value than the S&P 500. 20% 10% 0% -10% -20% -30% -40% -50%
SPY XLRE IYR
VNQ SPG
-60% -70% Jul 2019
Sep 2019
Nov 2019
approximately 2% lower than the current stock price. Annualized, this is approximately 17% protection. And the dividend provides an additional cushion of 3%, which is nice for anyone who occasionally forgets to roll those calls. Simon Property Group (SPG) is at lows from 10 years ago. Why? It’s the biggest mall operator in the U.S., and unpaid rents are stacking up because of COVID-19. Contracts are contracts, and Simon is suing many of its tenants for unpaid rent. Still, it has one of the stronger balance sheets of mall REITs. Traders who think Simon might have sold off too much could consider a cash-secured covered put. With the stock currently at 72.87, the first out-of-the-money put is 70 and can
Jan 2020
Mar 2020
May 2020
bring 3.25. By selling this put, the breakeven becomes 70 – 3.25 = 66.75 or 8% lower. That means the stock can drop by 8% over the next month and a half before a loss occurs. Both strategies are worth considering when choosing a trade.
REITs essentially trade like stocks, and they’re technically diversified.
Watch here for trades from the research team
luckbox | july 2020
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tactics
CHEAT SHEET
Acquiring Short Delta Delta can be either static or dynamic. Here’s how to get either one. By Mike Hart
A
cquiring short delta means adding positions that benefit from a move to the downside. Keep this cheat sheet as a reference for strategies. Delta can be either static or dynamic. To generate static short delta, sell stock or sell a future. Regardless of the price movement that follows, the short delta remains constant. Dynamic short delta is subject to change based on the underlying’s movement. It occurs in the options world. Next to closing out long delta positions, the naked options strategies are the most straightforward. Traders have two main choices: Buy a put or sell a call at an out-of-themoney strike to generate the desired short delta level. Adding spreads to a portfolio provides a level of defined risk to a dynamic short delta trade. Either sell a call spread or buy a debit put spread. Typically, sell a call spread when the premium is rich and volatility is high. Opt for the put spread when volatility is low. A final way to add dynamic short delta is by getting long inversely related products. Volatility is chief among these, carrying about a -.98 negative correlation. To do that, use options on the VIX to get long. Whatever strategy a trader uses to get short, it will likely be one of the approaches laid out on this cheat sheet. Mike Hart, a former floor trader at the Chicago Stock Exchange and a proprietary futures trader, specializes in energy markets and interest rates. He’s a contributing member of the tastytrade research team. @mikehart79
Buy a put for a debit Buy a put spread for a debit
Sell a call for a credit Sell a call spread for a credit
WAYS TO ACQUIRE SHORT DELTA
Long call spreads Get long volatility using VIX Long calls
Sell stock Sell a future Close out existing long delta positions
Active Investor Alert! Follow @mikehart79 on Twitter for daily trading ideas and tactics.
july 2020 | luckbox
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trades actionable trading ideas
CHERRY PICKS
R I PE & J U I CY T RADE IDEAS
Digging Gold
Sign up for free cherry picks and market insights at info.tastytrade.com/cherry-picks
By Michael Rechenthin
hen the markets are in turmoil, money tends to flow out of stocks and into “safer” investments. The market’s definition of “safe” changes, but when stocks declined in March, money went into bonds and gold. The results? Let’s look at how diversification played out during the height of the turmoil. Gold has a history of providing safety, and while precious metals no longer back currencies, the perception of their value remains powerful. (See “Hetero Genius,” right.) Traders looking to include gold in their portfolios can use the gold exchange-traded fund (ETF) GLD. Don’t confuse gold with “the poor person’s gold,” aka silver. Market crashes almost always see declines in silver, which normally has strong correlations with gold, but its correlation breaks apart when stocks decline. Even though silver doesn’t often carry the flight-to-safety title, it can be traded easily with the symbol SLV. (See “Choose diversity,” right.) When stocks declined in March, bonds and Treasuries rose. The 20+ year bond ETF TLT increased by 20% when stocks declined by 20%. Rates came down as bonds went up. While most investors are long equities, most have little or no investment in bonds or gold. Diversification can help buffer a portfolio against extreme losses. As with any metal, don’t just let it wither away
W
Hetero Genius Diversification can help buffer a portfolio against extreme losses.
10%
0%
-10%
-20% TLT GLD
-30%
Mar 2020
in the account. Make those shares earn their keep! Sell calls against every 100 shares held. Consider the following portfolio: Long positions in stocks, bonds and metals (with covered calls) to help reduce volatility. Achieve this by purchasing 100 shares of each and then selling the second out-of-themoney call (i.e., the second strike above the current price). Michael Rechenthin, Ph.D. (aka “Dr. Data”), heads research and data science at tastytrade. @mrechenthin
Apr 2020
SLV SPY
May 2020
XLU
Jun 2020
Choose diversity Investors looking to incorporate gold into their portfolios can use the gold exchange-traded fund (GLD). Allocation
Portfolio
Choices S&P 500 (SPY) Russell 2000 (IWM)
70%
Stocks
Nasdaq (QQQ) Dow Jones (DIA) Utilities (XLU)
20%
Bonds
20+ Year (TLT)
10%
Metals
Gold (GLD)
july 2020 | luckbox
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trades
THE TECHNICIAN
A V E T E RA N T RA D ER TAC K LES T EC HNICALS
Britain’s Cautionary Tale By Tim Knight
nvestors and analysts usually go back 10, 20 or 30 years when they consider long-term economic data. But how about taking a really long view? Let’s fire up the time machine and travel back to the middle of the 19th century. And to keep it really interesting, let’s look at the undisputed No. 1 economic power in those days: the United Kingdom.
I
Less time on the job It’s fascinating to consider just how radically the length of the work week has changed. At the beginning of the time series, around 150 years ago, workers toiled for an average of about 60 hours a week. That required reporting to the job six days a week and staying there 10 hours a day. And each of those hours was probably grueling. Contrast that with the present. A host of factors, including the labor movement and automation, have combined to reduce the average number of hours worked per week by nearly 50%. Oddly, the bigger decreases took place around the time of the two World Wars, illustrating the improved bargaining power that men returning from battle had with their employers. The British unemployment rate over the years is startling. In spite of the miserable working conditions of the 1870s, employers seem to have found all the workers they needed. The unemployment rate was persistently around 6% to 7%. What managed to push it beneath 1% was The Great War (now known as World War I). But worldwide depression soon followed, and unemployment ascended to about 15%. Then global conflict came to the “rescue” again when World War II broke out. This time, the unemployment rate effectively went to 0% because every breathing person was either fighting in the war or producing materiel for it. Following yet another victory, however, Britain once again saw unemployment climb from the 1950s through the 1970s. With economic malaise and stagnation, the rate began to challenge the peak of the 1930s. In more
56
Shrinking work week Many factors, including the labor movement and automation, have decreased the average number of hours worked per week by nearly 50%. Average weekly hours worked in Britain 32.08. -0.02. -0.06%. D: 01/01/1907 : 56.58. Y: 57.58 56 54 52 50 48 46 44 42 40 38 36 34 32 1878
1888 1898 1908
1918
1928 1938 1948 1958 1968
1978
1988 1998 2008
Get a job Employment rates have improved in Britain when returning veterans landed jobs. Unemployment rate in the United Kingdom 4.70. -0.10. -2.08%. D: 02/01/1909. C: 7.73. Y: 15.04 15 11 8 6 4 3 2 1
1879
1889 1899 1909
1919
1929
1939 1949 1959 1969
1979
1989 1999 2009
Like all currencies, the British pound has grown. But what’s especially intriguing is its rate of ascent.
luckbox | july 2020
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trades
recent days, the job market had regained its strength—at least until the pandemic.
Government’s growing appetite Government consumption of goods and services continues to increase in Britain.
Goods and services Perhaps the greatest sea change in economies around the world has been the role that national governments have assumed. Driven partly by enthusiasm over Keynesian economics, most large nations have made government their largest customer (and nearly their largest employer). Britain was no exception. Take a look at government consumption of goods and services. As with all the graphs here, this one is on a logarithmic scale because the sheer increase in growth would make the chart look absurd on an arithmetic scale. The overall trend is clearly ascending, and three “bumps” (of increasing magnitude) were caused by major conflicts: the Boer War, World War I and World War II. Although the British government was altogether generous in its acquisition of the goods and services of its own people, the same cannot be said for how the other nations interacted with Britain. Although the 19th century was the apex of British power and importance in the world economy, the chart of its current account—the net balance between imports and exports—plainly shows how Britain consumes vastly more from overseas suppliers than it sells to other countries. Unprecedented rates What’s the result of “megatrends” like the gargantuan role of government in the economy, crumbling exports and, until recently, a strong labor market? It’s caused the wholesale collapse of interest rates over the past 40 years. From World War II to the end of the 1970s, rates rose from about 3% to nearly 20%. That had a suffocating effect on the economy, as the malaise of the 1970s demonstrated in Britain. Since then, however, rates have slid downward, as they did in the U.S. and Japan. The “Policy Rate,” the equivalent of the Discount Window of the U.S. Fed, is set by England’s central bank for overnight lending to member banks. Although this rate had been sliding for decades, the COVID-19 response has effectively placed it at zero, which even over the span of a century is unprecedented. Plunging pound Like most major currencies, the supply of British pounds has grown exponentially over the
Real government consumption of goods and services. 365281.00. 3019.00 0.83%. D: 01/01/1908. C: 31686.00. Y: 31686.00. Y: 357603.60 360000 300000 260000 220000 180000 140000 120000 100000 80000 60000 40000
20000 1878
1888 1898 1908
1918
1928 1938 1948 1958 1968
1978
1988 1998 2008
Unbalanced trade Britain consumes much more from overseas suppliers than it sells abroad. Current account in the U.K. -84504.00 -4271.00 5.32% D: 01/01/1908 C: 150.00 Y: 4434.00 0 -5000 -10000 -15000 -20000 -25000 -30000 -35000 -40000 -45000 -50000 -55000 -60000 -65000 -70000 -75000 -80000 1878
1888 1898 1908
1918
1928 1938 1948 1958 1968
1978
1988 1998 2008
An unchecked rise in rates From World War II to the end of the ‘70s, interest rates rose to nearly 20%. Consol (Long-term bond) yields in the U.K. 1.98 0.52 35.62% D: 04/01/1909 C: 2.98 Y: 16.09 16 14 12 10 8 7 6 5 4 3 2
1879
1889 1899 1909
1919
1929 1939 1949 1959 1969
1979
1989 1999 2009
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decade, but what’s especially shocking is the rate of its recent ascent. From the 1870s to just before World War I, the gold-backed currency remained stable, and the money supply grew slowly and steadily. The advent of war, however, swiftly pushed the “M0” higher, and it plateaued at approximately that level until World War II, when it grew again. From that point, roughly three phases of fiat hypergrowth occurred. From around 1945 through 1970, the money supply grew at a faster pace, but quite steadily. From the 1970s until 2008, the pace remained steady, but the angle of the ascent was slightly sharper. Following the financial crisis of 2008, however, the money supply went absolutely bananas. In short, the past dozen years have no precursor, even the explosion of money during two global conflicts. Growth comes at a price, as illustrated by the chart of the British pound’s value relative to the U.S. dollar, an instrument that hasn’t been backed by gold since 1933 or silver since 1968. In the 19th century, and for the first decade of the 20th, the British pound was astonishingly stable—almost a flat line on a graph. Through the aforementioned later turmoil, however, it’s been debased to about one-fifth of its previous value. Britain has been one of the great financial centers of the world with much of the business conducted in the City of London, the richly historic home of the stock exchange and the Bank of England. But the fall from grace of the former British Empire on the world economic stage has been a sight to behold. What’s more, central bank “accommodation” has spread far beyond the shores of the United Kingdom. In the United States, the stunning 10,000 point increase in the Dow Jones Industrial Average that took place in just 11 weeks following March 23 provides living proof that multi-trillion-dollar fiat creation can swiftly re-inflate assets, even when they have endured an unprecedented collapse in both value and confidence. During times like these, it’s valuable to take a long look backward at trends that endure longer than a human lifetime and see the devaluation that can take place in a nation’s currency and core economy. Tim Knight has been using technical analysis to trade the markets for 30 years. He hosts Trading the Close daily on the tastytrade network and offers free access to his charting platform at slopecharts.com.
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Unprecedented descent Britain’s post-COVID-19 response has effectively placed the “policy rate” at zero. Bank of England Policy rate in the U.K. 0.25. 0.00 0.00% D: 04/01/1909. C: 2.50. Y: 16.08 17 14 11 9 7 6 5 4 3 2 1
1879
1889 1899 1909
1919
1929
1939 1949
1959
1969
1979
1989 1999 2009
Printing more pounds After the financial crisis of 2008, Britain’s money supply grew at a dizzying pace. Monetary base MO in the U.K. 480910.00 19135.00 4.14% D: 06/01/1909 C: 213.71 Y: 418095.40 450000 300000 200000 100000 50000
1880 1890 1900
1910
1920 1930 1940 1950 1960 1970
1980 1990 2000 2010
British pound loses stability and value In the last century, Britain’s currency has declined relative to the U.S. dollar. U.S./U.K. Foreign Exchange rate in the 1.24 -0.01 -0.80% D: 04/01/1909 C: 4.88 Y: 5.13 5.0 4.5 4.0 3.5 3.0 2.5 2.0
1.5
1879
1889 1899 1909
1919
1929
1939 1949
1959
1969
1979
1989 1999 2009
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DO DILIGENCE
QU I E T FOU N DAT I O N HELPS P ROACT IV E INV ESTO RS U NDERSTAND TH EI R PORTFOLI OS
Getting REITs Right By James Blakeway
nvesting in real estate can be tough. Getting the timing right and choosing a city—or a sector—on the rise could reap large returns, but watch out if a hurricane flattens that near-beach condo and turns the formerly booming resort town into a has-been hotspot. Owning commercial or residential properties to collect rental income can also prove cumbersome. Dealing with disrespectful tenants, performing perpetual property maintenance and shouldering the burden of a second mortgage can combine to produce a splitting headache. Investing in physical property also comes with a cost barrier to entry. For a mortgage on a $200,000 condo, the likely down payment
I
would be 20%, which is $40,000. For most investors, that’s an incredible amount of money to tie up in a single, illiquid asset. Worth the trouble? So should investors just give up and stick with stocks and bonds? On the contrary. They can participate in the real estate market regardless of their available capital. They can do it by purchasing shares of real estate investment trust companies (REITs). REITs generate income by owning physical real estate or through mortgages and mortgage-backed securities. While some REITs are private and thus unavailable to individual investors, 186 publicly traded REITs are listed on the New York
Stock Exchange. Many are large enough to make the S&P 500 stock index. They have a combined value of approximately $940 billion. This gives investors a huge amount of choice and flexibility to participate in diversified real estate portfolios. (See “Short list,” below.) Take, for example, Equity Residential (EQR). It owns 309 apartment properties with approximately 80,000 units across the country. They’re in large cities and suburbs, including locations in and around San Francisco, New York and Boston. Investors who purchase 100 shares at the current price of around $60 have a $6,000 investment with no unit-specific or even region-specific risk.
Investing in a REIT exchangetraded fund can give investors access to a highly diversified global real estate portfolio.
Short list The largest REITs in the S&P 500 offer the chance to dive into a pool of assets. Dividend
% of S&P 500
% of XLRE
REIT Name
Symbol
Real Estate Type
Geographical Locations
AMERICAN TOWER CORP
AMT
Cell Towers
Global
1.60%
0.41%
15.60%
CROWN CASTLE INTL CORP
CCI
Cell Towers and Fiber Leasing
US
2.84%
0.26%
9.50%
PROLOGIS INC
PLD
Logistics Facilities
Global
2.49%
0.25%
9.50%
EQUINIX INC
EQIX
Data Centers
Global
1.53%
0.22%
8.30%
DIGITAL REALTY TRUST INC
DLR
Data Centers
Global
3.07%
0.14%
5.10%
PUBLIC STORAGE
PSA
Self-Storage Facilities
US, Europe
3.98%
0.13%
4.10%
SBA COMMUNICATIONS CORP
SBAC
Cell Towers
North and South America
0.60%
0.13%
4.80%
AVALONBAY COMMUNITIES INC AVB
Apartment Complexes
US
4.00%
0.08%
3.10%
EQUITY RESIDENTIAL
EQR
Apartment Complexes
US
3.96%
0.08%
2.90%
WELLTOWER INC
WELL
Medical Offices & Senior Living US, Canada, UK
4.75%
0.08%
2.90%
ALEXANDRIA REAL ESTATE
ARE
Office Space
US
2.66%
0.07%
2.60%
REALTY INCOME CORP
O
Commercial Property
US
5.02%
0.07%
2.70%
SIMON PROPERTY GROUP INC
SPG
Malls and Retail
US
14.06%
0.06%
2.70%
ESSEX PROPERTY TRUST INC
ESS
Apartment Complexes
US
3.34%
0.06%
2.30%
WEYERHAEUSER COMPANY
WY
Timberland
US
N/A
0.06%
2.30%
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GET THE BEST OF BOTH WORLDS Trade a product that is efficient like futures & simple like stocks.
Learn more at thesmallexchange.com Š 2020 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information presented here is for illustrative purposes only, and is not intended to serve as investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Trading in derivatives and other financial instruments involves risk.
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Not just houses REITs also offer investors opportunities outside of residential real estate. American Tower Corp. (AMT), one of the largest publicly traded REITs, specializes in cell tower ownership and management. American Tower owns approximately 180,000 towers around the globe, renting space on the towers to wireless carriers. Individuals might find it difficult to buy cell towers, but REITs make it possible to participate. Some REITs struggled early this year because of COVID-19. Take the example of Simon Property Group (SPG), which owns and operates 207 properties, 85% of which are malls or outlet malls. The future of the American mall has been in question for some time and became drastically bleaker with statewide stay-at-home orders and people’s reluctance to enter crowded spaces upon reopening. Simon Property started the year above $145/share before dropping below $45 several times in Q1. While Simon may be a tough investment with brick-and-mortar retail in the grip of COVID-19, it could be an attractive opportunity in coming months if the situation improves. Clearly, the individual investor is well-served by the REITs market, with plenty of publicly traded choices. However, as with most investing vehicles, the choices can become overwhelming. How does one select which REITs to invest in to complement a portfolio?
$940B Combined value of REITs on the NYSE
Selecting a REIT Luckily, investors can choose from several REIT exchange-traded funds (ETFs). They trade like any other ETF and offer a slice of a portfolio constructed with multiple REITs. Investing in a REIT ETF can give investors access to a highly diversified global real estate portfolio. One such REIT ETF is the Real Estate Select Sector SPDR fund (XLRE). As with other select sector funds, the Real Estate SPDR is designed to track the real estate stocks in the S&P 500. So, the top holdings are the same as the top REITs in the S&P index. The Real Estate SPDR holds 31 REITs. By the end of May, the SPDR fund was still down 10.4% year-to-date which, combined with a 3.55% dividend, could make for a compelling longer-term income investment. Any investment in the Real Estate SPDR provides a slice of a $729 billion diversified real estate portfolio. Reviewing the Real Estate SPDR fund further, consider an analysis conducted by Quiet Foundation’s free online platform. The REIT components were entered into the system in the same weightings as in the ETF to gather more insight. The report highlights that this ETF may have more opportunity for growth than the overall S&P 500 ETF over the next year. Also highlighted is the recent price move relative to the volatility. The REIT ETF has lagged behind the overall S&P 500 in recovery but also has seen larger price swings. This potentially points to opportunity in the REIT ETF as it may continue to recover and catch up with the overall S&P 500. The Quiet Foundation report also commends the liquidity of the REIT ETF portfolio,
REITs generate income by owning physical real estate or through mortgages and mortgagedbacked securities.
Evaluate any portfolio with Quiet Foundation
given most of the REITs held are extremely liquid products. One point to consider is the correlation between the REIT ETF and the S&P 500 Index, which sits at 0.81. This suggests the REITs are moving in the same direction as the stock market. This may be a warning sign to investors who are looking to REITs as a diversified asset in a portfolio. Note that this correlation figure is high as a result of COVID-19, where multiple asset classes trended downward with the sell-off in the stock market. Historically, the real estate ETF has moved more independently from the overall market, with an average correlation to the S&P 500 of 0.45 in 2019. This would indicate that REITs can serve as a diversified asset in more normalized times. Options traders may also find opportunity in REITs in the second half of 2020. As implied volatility in the S&P 500 trended back below 30, REITs still exhibited higher than average volatility and thus higher options premium. Investors who would be willing to purchase a REIT, such as Simon Properties, at lower than current prices could consider selling put options. Whether through REITs, REIT options or REIT ETFs, there’s a diversified real estate investment for nearly any investor. While they don’t have the same wow factor as a Naples condo, REITs can serve as an additional asset class in a well-balanced portfolio.Regardless of the REIT product of choice, do the research and do the due diligence. James Blakeway serves as CEO of Quiet Foundation, a data science-driven subsidiary of tastytrade that provides fee-free investment analysis services for self-directed investors.@jamesblakeway
Past performance is no guarantee of future results. Information provided in an EPI Report does not consider the specific profile, objectives or circumstances of any particular investor or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her investment professional. Investment suitability must be independently determined for each individual investor. QF does not make suitability determinations or investment recommendations for investors. EPI utilizes the S&P 500 as its benchmark given that the S&P 500 is considered a barometer of stock performance in the United States. Aspects of the analysis and information found in an EPI Report are based upon simulated and/or hypothetical performance. Simulated and hypothetical performance have inherent limitations and do not represent the actual performance results of any particular investment products. The EPI Report does not guarantee any results or outcomes in the financial markets. Investors should be aware of the methodology used to produce an EPI Report and the inherent limitations when placing reliance on the results. For additional information about EPI Reports, visit the QF website: quietfoundation.com.
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LUCKBOX OF THE MONTH
LUCKY GOAT
W
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Tennis star Roger Federer is vying for the title of Greatest of All Time. Oddly, COVID-19 is aiding him in the quest.
rescheduled to begin Sept. 20, but it’s anyone’s guess whether that goal will be met. Furthermore, the weather in Paris during September tends to be cooler than in May or June, and historical data suggests Djokovic plays better on clay when the mercury drops—a big X factor if the tournament is actually held in the fall. Moreover, the U.S. Open, played annually in Flushing Meadows, N.Y., is expected to be held as originally planned on Aug. 24. The event, which Nadal won in 2019, theoretically provides the Spaniard with an additional opportunity to notch his 20th Grand Slam title. However, some of the top players in the sport, including Djokovic and Nadal, have already expressed reservations about attending the U.S. Open given the New York area was one of the hardest-hit by COVID-19. And a so-called “second wave” of the coronavirus is projected to hit the Northern Hemisphere this coming fall or winter. In fact, Nadal said tennis should “wait a little bit more” before restarting, while Djokovic has called the player restrictions proposed for the U.S. Open “quite extreme.” Taken together, the likelihood of Nadal and Djokovic racking up additional Grand Slams in 2020 has been reduced substantially. And while Federer has already announced he will sit out the rest of 2020 to heal a nagging knee injury, it’s almost certain he wasn’t that disappointed to hear that the French Open wouldn’t be played as scheduled. For that reason, Roger Federer is the unequivocal Luckbox of the Month.
Association of Tennis Professionals Rankings Player
Age Points
Novak Djokovic
32
10,220
Rafael Nadal
33
9,850
Dominic Thiem
26
7,045
Roger Federer
38
6,630
Data through 6/17/20
Grand Slam Tournaments Australian Open hard court French Open
clay
Wimbledon grass U.S. Open
hard court
737,872
2019 U.S. Open Attendance
Take the reader survey. Luckbox may publish your comments!
PHOTOGRAPH: REUTERS/MIKE HUTCHINGS
hile sports entertainment is in many ways an afterthought amid the global pandemic, it also remains an important distraction—a source of escape in tough times. Just think of all the sports fans who’ve whiled away part of their time in quarantine or lockdown by pondering sports figures and their places in history: Is Tiger Woods the greatest golfer ever to grace the links—or is it still Jack Nicklaus? Who’s the best driver ever to sit behind the wheel—Michael Schumacher or Mario Andretti? Professional tennis may not have the largest global following when compared with European football (aka soccer), cricket or auto racing, but it deserves some special attention because the greatest era in the sport’s history is playing out right now. The insanely high quality of play seen on court backs up that assertion, but it gets even more interesting because three players on tour are vying for the “Greatest of All Time,” or GOAT, designation: Novak Djokovic, Roger Federer and Rafael Nadal. With such high stakes, the suspension of the global tennis tour for much of 2020 has altered each player’s chances of ending his career with the most major titles, like Grand Slams. Federer is the all-time record holder with 20 total majors; however, Nadal is nipping closely at Federer’s heels with 19 majors and the added benefit of being five years younger. Djokovic, with 17 titles, also has a strong chance of claiming the GOAT designation. Circling back to the pandemic, the end of May typically coincides with the conclusion of the French Open in Paris. In 12 of the past 15 years, Nadal has raised the winner’s trophy on the final Sunday—a record haul at a single major event. Unfortunately for Nadal, the French Open wasn’t held because parts of the French economy were in lockdown. That means Nadal was denied the opportunity to equal Federer’s record at a venue where he would have been the prohibitive favorite. The suspension of play in 2020 has therefore created the conditions by which Federer is receiving yet another award to help fill his trophy warehouse: Luckbox of the Month. As it stands, the French Open has been
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