Blog post| Exodus: Cities and markets
One of the more prominent stories over the summer has involved the exodus of people away from Covid-19 stricken urban centers to more livable suburban communities. While this has affected some areas more than others, the pandemic has certainly exposed the costs of living in close proximity to others.
Perhaps nowhere have the challenges been more evident than in New York City. As both an international hub and a densely populated city, NYC has been the poster child of pandemic consequences. As such, it also reveals important clues to the investment environment.
It started with anecdotes about businesses closing and traffic falling. After some time, reports highlighted suburban real estate markets heating up. They were fueled by people desperate to get out of the city. Those reports were followed by accounts of plummeting rents in the city.
More recently, anecdotes have morphed into broader narratives. A recent post on LinkedIn by James Altucher captures the sentiment. People are really upset about what has happened to NYC.
Altucher argues many of the aspects that have made NYC great, such as business opportunities, culture, and food, have all been negatively affected. He is right. He also argues that much of the harm will be permanent. He is right about that too. But his claim that "NYC is dead forever" reeks of hyperbole.
Not dead yet
For one, cities everywhere have been disproportionately affected by lockdowns and social distancing. NYC is not unique in that respect.
In addition, cities experience cycles. Any number of factors can coalesce to make a city more or less attractive. After an eleven-year bull market and low rates that have driven property prices up, it shouldn't be too surprising that a major financial center like NYC might overshoot.
Further, nothing Altucher writes suggests cities no longer have a reason for being. This is a point Jerry Seinfeld made in a blistering rebuke in the New York Times:
"You ever wonder why Silicon Valley even exists? I have always wondered, why do these people all live and work in that location? They have all this insane technology; why don’t they all just spread out wherever they want to be and connect with their devices? Because it doesn’t work, that’s why."
Even Altucher seems to admit as much. Describing how "restaurants happen in clusters", he wistfully recalls areas like "Restaurant Row", "Little India" and "Koreatown" that have been unique to the NYC dining scene. While he emphasizes how much these businesses have suffered, he does not explain how his friends and acquaintances who are fleeing to places like "Maine, Vermont, Tennessee, upstate, Indiana, etc." are going to experience superior choices.
On the other side of the equation, Altucher doesn't even bother to demonstrate how alternatives provide clearly better living conditions. A story in theFinancial Times did highlight a development in Stamford, Connecticut designed to be a "New York City Lite".
Despite extolling the virtues of "easy living", it was also revealed that the developer had strained to recruit businesses such as restaurants and retailers. The supermarket that was recruited subsequently went bankrupt. So much for choice or convenience.
Emotions in motion
Other comments reveal more about the true nature of Altucher's message. For example, he complains that he misses the days when he could "play chess all day and night" and vents that "I want 2019 back". These comments have nothing to do with making a thoughtful assessment. Rather, they are an emotional outpouring of a self-indulgent brat whose adult playground of a city isn't what it used to be. They say a lot more about him than about the city.
As Sujeet Indap writes for the FT, "Those who have the time to wax eloquent on the topic are almost never unemployed, undernourished or physically trapped." True enough. For Altucher, check, check, and check. Indeed, in the context of massive unemployment, over 200,000 cases of coronavirus in NYC, and several thousand deaths, his comments come across as insensitive at best. At worst they sound downright antisocial.
The comments about NYC are interesting, however, because they also capture much of the zeitgeist running through investment markets. This shouldn't be surprising. Homes and jobs and lifestyles are all investments just as financial assets are. In a financial center like NYC, all these things are highly correlated. This also means the high emotions and frustration over the diminished allure of NYC may await the stock market as well.
Ups and downs
Both cities and financial markets experience cycles. Big cities have had a good run and so have stocks. As often happens with cycles, momentum can take over and exaggerate cyclical peaks and valleys. The presence of momentum is a common characteristic of economic cycles.
Cycles imply change. Often this is a function of tradeoffs that constrain the amplitude of the cycle. In a dense city like New York, people endure small living quarters and close proximity to others in exchange for job opportunities, culture, food choices and other benefits.
The Covid lockdowns and social distancing changed this balance almost overnight. The change was felt most acutely by people who had the most marginal relationships with the city to begin with. Young families with kids, people with health issues, and people who can barely afford to live there have been disproportionately affected.
Some got caught in the momentum and excitement to live there. Some just hadn't gotten around to making the move away yet. The bottom line, though, is that these people were always vulnerable to changes in the value proposition of city living.
The change is also being felt acutely by those with the least emotional resilience. Those who feel entitled, who expect perfection, and who have zero tolerance don't respond to adversity so well. Some people panic. All these conditions are exacerbated by unrealistic expectations and a lack of preparation.
A bigger point is the physical exodus of people leaving NYC may foreshadow an imminent exodus from stocks. In both, problems have been glossed over and forestalled with debt. In both, weak and inconsistent enforcement of rules has facilitated increasingly reckless and dangerous behavior. In the absence of all the glitter, the real problems of cities have been exposed in an especially harsh light. As a result, people are leaving big cities to places that seem safer and more stable.
It wouldn't be surprising to see a similar response when markets lose their glitter too. Just as soon as markets go down in a meaningful way, there will be plenty of investors screaming about how bad stocks are. Some of those people will be marginal and should not have been in stocks to begin with. Some will simply have no capacity to handle a selloff and will run around screaming, "Stocks are dead forever".
An obvious lesson for people who make long-term investments is that it is important to build in resilience to various possible changes. If you can't stand working from a tiny apartment, then you need to create alternatives. If you can't stand having your portfolio down twenty percent in a quarter, then you need to balance it out with other more stable assets. It may feel boring at the time, but you don't get advanced notice of when you will need that insurance. In addition, setbacks are less scary when you are prepared for them.
A final lesson is that change can be, and often is, good. Innovation is change. Learning is change. Improvement is change. Sometimes a crisis is needed to provide the impetus to change things that may require effort in the short-term but be absolutely beneficial in the long-term.
Recently NPR replayed an episode of the "American Routes" show which featured musicians from New Orleans and how Katrina affected them. Many of them lost almost everything they had. Allen Toussaint lost his Steinway piano along with all his recording and mixing equipment.
When asked for his reaction to the tragedy, he calmly replied that primarily he was glad to have his health and that his friends and family were alright. In describing the aftermath of the hurricane his one-word characterization, surprisingly, was "exciting". For him, the material losses were superficial. What was really interesting were all the opportunities to do things differently and to explore new things.
This is both a precious piece of wisdom, but also a wonderful insight into human nature. Sometimes we hold on too tight to things. Sometimes we need to do a reset in order to get on a better course. Sometimes we need to take a short-term trip down into a valley in order to reach an ever-higher peak in the fitness landscape.
In regard to cities, there are all kinds of opportunities to improve on the natural benefits of resource efficiency and serendipitous interactions that proximity brings. A lot of space gets wasted for roads and parking lots. Rules and regulations get enforced unevenly. Although pandemic related lockdowns and social distancing have highlighted many weaknesses of cities, in doing so, they also create a roadmap for how they can be redesigned for a much better future. There are hardships to be endured for sure, but there are also exciting possibilities.
The same applies to markets, although the process has not started yet. Indeed, both fiscal and monetary policy seem intent on preventing any correction from happening. Despite that, a redesign of capitalism and capital markets could pave the way for a much healthier future. But first, it needs to get started.