Where to Look for the Next Wall Street Blowup
The tide’s definitely gone out in markets this year, but finance has come through with few problems—so far.
The tide’s definitely gone out in markets this year, but finance has come through with few problems—so far.
When the tide goes out you find out who was swimming naked, Warren Buffett memorably said. The tide’s definitely gone out in markets this year, but finance has come through with few problems. Is it possible that this time not many were skinny-dipping?
The optimistic view is that the typical culprits—speculators using borrowed money—had been caught out already in the past two years and so weren’t up to their usual tricks. The pessimistic view is that the blowups are still to come.
Start with the positive: the list of recent crises that made investors reassess the dangers. The shock of the pandemic in early 2020revealed serious problems with leveraged trading and overnight borrowing in Treasurys. The Federal Reserve stepped in and backstopped the market, but fixed-income hedge funds that lost big as Treasurys moved in the wrong direction cut back.
In January 2021, short sellers were hit as Redditors piled into meme stocks such as GameStop, driving up their prices and causing multibillion-dollar losses for those betting against them. Melvin Capital, which was heavily short GameStop, finally shut down this year. Other hedge funds took note, and concentrated short positions were rethought.
Then in March last year—when the market was still super-bullish—hedge fund Archegos blew up, causing US$10 billion or so of losses to investment banks that had unwisely lent it money. Soul-searching at the investment banks means they have re-examined their hedge-fund lending, while Credit Suisse decided to pull out of the business altogether. Again, greater powers given to risk managers mean there is less risk of a repeat.
Roll forward to the autumn and currency and bond traders began preparing for rate rises, led by surprisingly hawkish talk from the Bank of England. But prices snapped back abruptly in November when the Bank didn’t follow through with the expected tightening, again giving funds that trade on macroeconomic news a dry run for the volatility that has dominated markets globally since.
All of these big but not huge shocks helped ensure that risk-taking was cut back, meaning there were fewer highly leveraged players who might be taken out by the extreme moves of 2022 in stocks, bonds, commodities and currencies.
So far there has been only one true catastrophe in traditional finance, the freezing of the nickel market when the London Metal Exchange foolishly decided to save a Chinese firm caught out by massive wrong-way bets. But bad as that was, it was never going to be enough to take down important parts of the financial system.
There have been some total disasters in crypto, notably the collapse of the Terra “stablecoin,” but the links to traditional finance remain small enough that this matters little to the mainstream.
The other important pillar of support is that banks are significantly stronger than in the past couple of decades, thanks to post-2008 reforms. They can weather bad times more easily as a result.
So much for the good news. The prevailing mood of finance executives I’ve asked about the lack of trouble is summed up by a repeated response: “So far.”
Long before Mr. Buffett discussed naked swimmers, economist John Kenneth Galbraith invented the “bezzle”—fraudulent losses accumulated in the good times that are only discovered when the economy weakens. After a decadelong bull market with only the briefest of interruptions in 2020, there could be plenty of bezzles yet to emerge.
The biggest bezzles in recent history took painfully long to emerge. After the bursting of the dot-com bubble in March 2000, it was 18 months before accounting fraud took down power company and leveraged energy trader Enron in what was then the biggest-ever bankruptcy. After the 2008 financial crisis, scandals continued for years across both finance and real-economy businesses.
The feedback loop from finance to the real economy and back to finance takes time to create serious problems, too. Already the weakest and most indebted developing countries are in trouble, with Sri Lanka in crisis and Ghana imposing fierce austerity to keep finances in order. The rising dollar and higher U.S. bond yields hurt governments and countries that chose to borrow in dollars and have a mismatch of dollar costs and local-currency income.
In 1994 and 1997-1998, it took more than a year for emerging-market crises—in 1994 Mexico’s “Tequila crisis,” in 1997 the Asian devaluations followed by Russia’s domestic-debt default—to feed back to Wall Street. When they did, Wall Street’s financial stability wobbled. More worryingly, the loss for investors in benchmark 10-year Treasurys from their peak is already much bigger than the shock of 1994.
There are two new risks that history doesn’t help with. The first is the unprecedented amount of liquidity that has been pumped into finance by central banks buying bonds. A lack of liquidity is what usually creates financial problems, as it prevents debts being rolled over. As the Fed and other central banks drain liquidity, problems might reveal themselves.
The second is that there’s a massive, and unknown, amount of private debt issued by lightly regulated shadow banks. My worry isn’t mainly that the lending turns sour (although it might). Rather, the danger is that the private-debt boom turns out to be a function of easy money. If investors prove less willing to lock up their money in private-debt funds as interest rates make mainstream investments more attractive, there will be a steady withdrawal of lending capacity. That could hold back the economy and make it harder for companies to refinance loans. These sorts of knock-on effects could take years to feed through into financial trouble.
I suspect there are plenty of underdressed bathers still to be exposed. I hope the crisis practice runs of the past two years mean there is less risk of Wall Street coming to a sudden stop.
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: May 31, 2022.
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The government in Switzerland has waived residency requirements in a handful of locations, including one that’s growing fast.
While golden visa schemes proliferate, Switzerland remains famously protective about buying property in the country.
Rules known as Lex Koller, introduced in 1983, prohibit foreigners from buying homes in cities like Geneva and Zurich. And in the few locations where foreigners can buy, purchase permits come with rules around size and occupancy.
But non-Swiss buyers who have coveted an Alpine home now have a pathway to ownership, and it’s likely to come with financial upside. The Swiss government has waived residency requirements in a handful of locations where developers have negotiated exemptions in exchange for billions of dollars of investment in construction and improvements.
Andermatt, a village 4,715 feet above sea level in the centre of the Swiss Alps, is the largest municipality to open up to foreign buyers.
Its main investor, Egyptian magnate Samih Sawiris, “believed Andermatt could become a full-town redevelopment when he first visited in 2005, but the key was to offer real estate to people outside of Switzerland,” said Russell Collins, chief commercial officer of Andermatt-Swiss Alps, Sawiris’s development company.
“We became the only large-scale real estate development in Switzerland with an exemption from the Lex Koller regulations.”
In the ensuing decades, Andermatt has become a major draw for high-net-worth buyers from around the world, said Alex Koch de Gooreynd, a partner at Knight Frank in London and head of its Swiss residential sales team.
“What the Andermatt-Swiss Alps guys have done is incredible,” he said. “It’s an impressive resort, and there is still a good 10 years’ worth of construction to come. The future of the resort is very good.”
Andermatt’s profile got another boost from the 2022 acquisition of its ski and resort operations by Vail Resorts, which runs 41 ski destinations worldwide.
“Vail has committed to 150 million Swiss francs (US$175 million) in investments, which is another game-changer,” de Gooreynd said.
“If you’d asked me about Andermatt 10 years ago, I would have said the ski areas weren’t good enough of a draw.”
Along with the five-star Chedi Andermatt hotel and residences, which opened in 2013, residential offerings include the Gotthard Residences at the Radisson Blu hotel; at least six branded residences are planned to open by 2030, according to Jeremy Rollason, director for France, Switzerland, and Austria at Savills Ski.
“Most of these are niche, boutique buildings with anywhere from eight to 14 units, and they’re releasing them selectively to create interest and demand, which has been a very successful approach,” he said.
“Andermatt is an emerging destination, and an intelligent buy. Many buyers haven’t heard of it, but it’s about building a brand to the level of Verbier, Courchevel or Gstaad.”
The Alpinist, Andermatt’s third hotel residence, is slated to open in 2027; with 164 apartments, the five-star project will be run by Andermatt-Swiss Alps, according to Collins.
Other developments include Tova, an 18-unit project designed by Norwegian architects Snohetta, and La Foret, an 18-apartment building conceived by Swiss architects Brandenberger Kloter.
Prices in Andermatt’s new buildings range from around 1.35 million francs for a one-bedroom apartment to as much as 3.5 million francs for a two-bedroom unit, according to Astrid Josuran, an agent with Zurich Sotheby’s International Realty.
Penthouses with four or more bedrooms average 5 million-6 million francs. “Property values have been increasing steadily, with an average annual growth rate of 7.7% in the last 10 years,” she said.
“New developments will continue for the next 10 years, after which supply will be limited.”
Foreign buyers can obtain mortgages from Swiss banks, where current rates hover around 1.5% “and are declining,” Josuran said.
Compared to other countries with Alpine resorts, Switzerland also offers tax advantages, said Rollason of Savills. “France has a wealth tax on property wealth, which can become quite penal if you own $4 million or $5 million worth of property,” he said.
Andermatt’s high-end lifestyle has enhanced its appeal, said Collins of Andermatt-Swiss Alps.
“We have three Michelin-starred restaurants, and we want to create a culinary hub here,” he said. “We’ve redeveloped the main shopping promenade, Furkagasse, with 20 new retail and culinary outlets.
And there is a unique international community developing. While half our owners are Swiss, we have British, Italian and German buyers, and we are seeing inquiries from the U.S.”
But Andermatt is not the only Swiss location to cut red tape for foreign buyers.
The much smaller Samnaun resort, between Davos and Innsbruck, Austria, “is zoned so we can sell to foreigners,” said Thomas Joyce of Alpine property specialist Pure International.
“It’s high-altitude, with good restaurants and offers low property taxes of the Graubunden canton where it’s located.”
At the Edge, a new 22-apartment project by a Dutch developer, prices range from 12,000-13,500 francs per square metre, he said.
As Andermatt’s stature grows, this is a strategic time for foreigners to invest, said Josuran of Sotheby’s.
“It might be under the radar now, but it’s rapidly growing, and already among Switzerland’s most attractive ski locations,” she said. “Now’s the time to buy, before it reaches the status of a St. Moritz or Zermatt.”
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