That was unexpected. Brutally so. The economic-news feeds lighting up my inbox with headlines like “The Uncertainty World”, “The Uncertainty Recession,” and “Tariff-Induced Paralysis” (and others a lot more pessimistic in nature), have captured the mood perfectly: pervasive uncertainty. We speak about risk and uncertainty a lot at Altus. For us, risk are things that are known and quantifiable while uncertainty is, well, uncertain. And in being uncertain, therefore unquantifiable. Within any particular situation we put substantial effort into reducing specific risks, but more broadly there are times we acknowledge and accept more risk. For instance, a second loan position inherently carries more risk of loss of principal than a first position loan. But we may still take a second loan position because the benefits of taking that position outweigh the downside possibilities of added risk. Uncertainty is a different realm altogether. It is that which lies beyond our control, and in most cases – and with great potential impact – even beyond our consciousness.
Now, unlike any other time for many years, uncertainty has, and continues to, smack us in the face, repeatedly. Investing (more broadly) and our specific business (more specifically) are always highly impacted by things out of our control but generally those things move or change at a measured pace. This slow cadence usually gives us, either as business owners or investors, the opportunity to assess, adjust and respond. It is much easier to move out of the way of a slow-moving train than a bullet shot from a gun. Now, rather than taking action to avoid injury, the (potential) injury becomes inevitable, and we are instead reacting (versus responding) to mitigate the damage of the injury. This has made April a month of stress, confusion, and frustration.
We are not importer/exporters, and most of our portfolio sits on fixed-rate debt, so the impact on our business is less than most or what it otherwise might be. Most of the individual properties in our portfolio are performing well and have great debt in place – a cause for celebration rather than concern. And for our Opportunity Fund and Non-Performing Debt Fund, the uncertainty improves our buying opportunities, and therefore long-term return possibilities. By definition, when a purchase input for the same asset drops from “x” to “x – y” the investment performance improves. It is mathematical. But there is increased uncertainty (and therefore stress and frustration) for those couple properties already in our portfolio that have been impacted by the events since January – and certainly since the beginning of April:
- Commercial (industrial) leasing has largely dried up. There is a lot of interest – verifiably legitimate interest, but no action.
- Lenders hate uncertainty. So, in addition to wild action in the underlying debt indexes (such as the 10-year treasury), uncertainty causes the expansion of spreads. This means more profit to the lenders and less profit to the borrowers – all else being equal.
- The accelerating likelihood of a recession impacts economic inputs. Oil prices are down, and retailers are reporting declining customer spending (which is still largely anecdotal). Not only does this lead to decreased demand for commercial space (tying into #1), but it also reduces job growth, which in turn can further lead to eroding demand.
- Immigration policy remains unsettled, making it impossible to forecast its eventual impact with any precision. Reduced (or negative) immigration absolutely impacts housing demand. It also increases the cost of inputs into bare necessities like farming and construction.
I started on several different topics for this Altus Insight over the past few weeks. There is more than enough to talk about, and I have pages of notes and reference material. But it is also exhausting to try and make sense of any thoughts in a coherent manner when there is already an increased amount of emotion around the causes of this subject material. As an investor, and to a lesser degree business owner, my opinions and judgements on events don’t matter. For one, I could be wrong – only time will tell – but far more importantly, nothing I say or do about the events changes the reality of the situation. Investing requires clear-headed analysis and decision making. This is harder during times of inflamed societal (and likely personal) emotions, and I am not fully confident that any analysis I could have provided would have been done with that clear head.
The antidote is to focus on what we can control. This is when the value of that same utopian clear-headedness adds the most value. Getting above the fear and frustration allows allocations into investment opportunities that don’t normally exist. This is something I can control. Focusing on those daily things I/we can control is something we should always be doing, but this is even more true in times of turbulence. Excellence always wins, and decisive action allays internal fears. Taking action of improvement not only pushes us further along the spectrum of excellence, but it also puts/keeps us in the mental space where we rise above the fray.
Happy Investing.
