Dear Friends,

Compass understands the broad impact of the COVID-19 crisis. On Friday, March 20, we had a conference call addressing the concerns weighing on all of us. There is a wealth of information presented during this 45-minute call.

Together we will get through this.
We are, after all, New Yorker’s.

Be safe, be well.

Sunday Reads: Corona and Carbs

I kicked off the series with Leonard Steinberg. Leonard is a mentor, and one of the brightest and genuine thought leaders in real estate.

Leonard Steinberg

Chief Evangelist at Compass

Leonard Steinberg is the Chief Evangelist at Compass. He embodies the new breed of modern real estate professional who provides substantive knowledge about all aspects of real estate and full-fledged, elegant, and discreet service to sellers, developers, and buyers of New York property with over two decades of experience and several billion dollars in sales.

Question: Leonard, having the closest understanding to the experience of working with clients in the real estate market, what are you hearing anecdotally from clients and from the agents that you're talking to around the country every day?

Answer: Well, I think like every emergency you have in life you have to understand and address the emergency. If you were sitting on a plane right now flying, and, all of a sudden, the masks come flying out, and the staff tells you, "We're going to crash." I think the last thing you should be doing is worrying about what drink you're going to have next from the service or which movie you're going to be watching next. The first thing to do is get your mask on your face and contain the situation. I think we're in the beginnings now of the containment process.

Of course, right now, you have opportunist buyers who are trying to negotiate a good deal for themselves either out of fear or seeking an opportunity. You will have sellers who may be a little bit more panicky and some who maybe are a bit more pragmatic and say, "I don't care if I lose a few dollars. I'd rather just get a deal done and closed." So I think you have multiple scenarios, and I think it varies dramatically from city to city, area by area. We're a very large country with a wide group of scenarios related to the Coronavirus. I think every city and state is going to feel this very differently, although, collectively, we're all impacted by what Washington does and how this impacts the economy at large. For the most part, I think the minute we see some real, tangible data points and action steps from the government and in the economy in general, maybe a recovery on the equity market side, that'll start to stabilize things.

Now, I will say today, for instance, I just heard, and I'm not sure if this is verified, that mortgage payments will be frozen for 90 days. That's a really big deal. I think the next really big deal is to know that those who are in most urgent need of cash will be getting a check from the government. I think that will change things dramatically too. I do think that governments don't move quickly enough. I think they're going to move a lot faster now than ever before.

My hope is that this is more closely related to a 9/11 style incident, where you have a period of shock, then a period of acceptance, then a moment of gathering facts and structuring plans, and then you head into a recovery. Truly, I think 2008-2009 was an amazing lesson to me specifically in being a calm force of reason in a storm. What we have to always turn back to is data, knowledge, understanding. Those are the things that drive confidence, and I think if we really dig deep into those, which right now is probably a little bit early. We're going to have some kind of settling in here before we can get some really good data and insight. Those are the things that will be what the consumer will feel most comfortable around when they have to make big decisions.

There will definitely be opportunities for buyers. There may even be opportunities for sellers, because our inventory really hasn't changed. Of the utmost importance, you have to remember that real estate is hyperlocalized. What happens in Nantucket is not going to necessarily happen in Newport Beach in California or Nashville or Miami. These are all very, very different areas with very different circumstances.

I believe over time, the markets will wake up. In 2008-2009, I saw how the markets woke up. When they woke up, there was an explosion of activity and all of a sudden you could see things coming back to life. Right now, I see multiple green shoots out there that gives me tremendous confidence that even though we are still in the midst of the storm, we can get out of this and actually thrive, not just survive. I agree that there's a very solid possibility that the recovery will be quicker than slower.

Alli McCartney referenced Warren Buffett‘s quote, "Cash and courage in a crisis are priceless." The volume of cash that has been sitting on the sidelines for the last 24 months clearly states, "Asset prices are way too high. We're waiting for a correction." This is the correction for that cash to be deployed. This is what these people have been waiting for, and they have billions and billions if not trillions of dollars waiting to do so. That, to me, leads me to believe that while they may be in a big wave of bargains, I don't think the depth of those bargains will be the same as 2008-2009, because the cash volume right now, from what I know, is exceptional.

To close with a laugh…

What has Leonard been doing to pass the time at home?

Leonard’s answer: “I have to say, I've discovered a new friend, someone who I'd abandoned in the past, and his name is called carbohydrates. I'm never letting my friend carbohydrates go again. Carbohydrates have made me more happy than anything on the planet. Thank you.

”Find what makes you happy. Embrace it. Let’s move forward together (with six feet of separation of course!)

Monday Reads: Lessons Learned

Next up, Scott Clemons. Scott presents his take on what is happening in the economy right now, what the government is doing, and how he feels the government can best help the situation. Scott is a partner at Brown Brothers Harriman. He's the Chief Investment Strategist for Private Wealth Management. Scott is a contributor to CNBC and a friend of a number of our agents and some of our leaders.

Scott Clemons

Chief Investment Strategist

Scott Clemons joined Brown Brothers Harriman in 1990. In his role, he is one of the firm’s primary thinkers, writers, and speakers on topics related to the economy, financial markets and investing. Mr. Clemons began his BBH career in international equities, where he was an Analyst and Portfolio Manager for European and Asian equity strategies, working out of the firm’s New York and London offices. In 2001, he broadened his responsibilities into domestic equity management and research, and then from 2005 through 2010 managed the New York office’s Private Wealth Management business.

Question: Can you help explain to everyone exactly what is happening in the economy right now?

Answer: Here's the big picture. I like to think of it in the context that the economy is really, at the end of the day, nothing more than the quantification, in dollars, of human interaction. 68% of the economy is human interaction at a personal level. 68% of all GDP in the United States is personal consumption. The social distancing, which is the mitigation, the flattening the curve that we've all heard about and talked about and are striving for, is somewhat equivalent to economic distancing as well. This is what is hitting the economy now. The spending decisions of tens of hundreds of millions of people not going out to dinner, not getting on an airplane, not going to conferences, not traveling for business or pleasure; this is going to punch a hole in economic growth. Nobody quite knows what that is yet.

Question: Can you help explain what it is that the federal government has done, and is trying to do, to try to essentially hold things together and try to position us back to the recovery side of this?

Answer: Let me make a distinction between monetary policy, which is the Federal Reserve’s purview and fiscal policy, which is Washington and the government. The Federal Reserve seems to have learned well the lessons of 2008, which is to act quickly and to act preemptively. It started a couple of weeks ago.

To summarize Scott’s comments:

1) Actions are being taken to enable the financial framework to continue functioning.

2) Billions of dollars added to our balance sheet to buy treasuries, mortgage-backed securities, etc. in an effort to make sure those markets continue to function.

3) Established a Commercial Paper Funding Facility.

4) Borrow for your liabilities, like payroll.

5) Backstopped money markets.

So it's kind of a monetary equivalent of shock and awe. It acts as the backstop against the liquidity disruptions in the market. Now we wait for the fiscal policy response. I think ultimately the fiscal policy response will be a grab bag of tax cuts. We've already seen a delay in the deadline for first-quarter tax filings. There is talk about sending a $1,000 check, or higher, to every man, woman, and child in the country. We'll definitely see targeted bailouts; the airlines, leisure, etc. We'll see all of that. What I'm hopeful for is that the best fiscal response would be widespread testing. What's really holding the economy back is a bear market concept. Widespread testing would help to mitigate that. Something to restore consumer confidence. Confidence is key here.

Question: What are just a couple of components of what would be the right and appropriate response, you think, from the government that would help stabilize us so that we could start to think about the recovery?

Answer: Anything that approaches helping people at the granular level of what they're struggling with now. Anything the government can do to put itself between that financial disruption would be welcome. One of the ideas that have been floated, and I think well-received by lawmakers, is an extension of the Family Leave Act enabling people to spend the time they need to take care of children, take care of family members, and take care of themselves if they're ill without worrying about where income is coming from. I like the idea of delaying tax filing deadlines because you can imagine right now as we get into late March, the tax date is only a few weeks away, and people are thinking, "How can I even go and see my accountant?" Just take some of those issues off the table so people can focus on themselves and their families and regain some calm.

To close with a laugh...

What has Scott been doing to pass the time at home?

Scott's answer: “I am very fortunate to be married to a musician who plays, among other things, the violin, fiddle, and mandolin. In between trying to make sense of markets and being in touch with clients and prospective clients, we've been doing some live music of our own. I am actually a banjo player!”

Tuesday Reads: Never Before Seen in Modern History

Alli McCartney is my friend and one of the brightest minds in finance. Alli and her team are a major asset to me and many of us at Compass.

Alli McCartney

Managing Director of Wealth Management at UBS

As one of the Private Wealth Advisors with Alignment Partners, Alli provides customized, holistic wealth management advice and execution to a select group of sophisticated individuals and families. As the “face of her team,” Alli simply connects with clients personally and professionally. She is truly a relationship-builder whose service to clients goes above and beyond.

Questions:

1) What is your perspective on what the federal government can do on the fiscal side to help?

2) We're hearing a lot of people try to draw comparisons to other times in the country; whether it was 2008 or 9/11. How do you see this as being different than those moments? Maybe on the positive side? Maybe being more challenging?

Answers: Those are great questions and I've been talking about those in the media and with clients pretty much day in/day out. I'm going to give everybody a little bit of inside finance just so I'm talking about this in less technical terms and more what it feels like to be working in finance right now. I think this might be helpful. We are in a very unique situation in which a public health crisis, a global public health crisis, has ignited an economic crisis and that economic crisis has, in turn, ignited a financial crisis. This is something that we have not seen in modern history.

This feels a lot more like September 11, 2001, than it does the financial crisis in that an exogenous event, perhaps two exogenous events, have become an economic crisis that has forced a financial crisis:

1) A demand and GDP crisis as the result of a public health crisis.

2) Maybe outside of that, maybe because of that, the Saudi's pretty much dismantling all of the disciplines of both OPEC and oil supply negotiations and balances with the Russians.

Let me talk to you about what a financial crisis really is. In this sense, a financial crisis is not a bubble of excess. The plumbing of the financial markets are not working. This is creating pressure because of the lack of ability to quantify “what does earnings and GDP look like?” This is creating both rational and irrational financial behavior. Everybody wants liquidity. Everybody wants dollars. People are selling very, very safe securities. People are prizing liquidity; i.e., cash in hand now, more than anything else. They're doing that at a time where we are very weak. The market is broken. So if you have a portfolio of safe, municipal bonds, and you log on today, you're going to see that what was a $1,000 bond for the State of New York or New Jersey now looks like this: if you want to sell today, you could only sell it for somewhere between $800 and $950.

This is what gets people to step away from things like real estate because they're looking at what we're calling a mark to market of their financial asset portfolio. They're feeling poor, but the truth is, that unless you panic and sell now in a broken market, the likelihood, and when I say the likelihood I mean this has happened all throughout history, is that when the markets start to get more liquid, and the Fed is doing everything it can, UBS, everybody's doing everything we can, that bond will still likely in a year mature and the State of New York or New Jersey will give you $1,000. They will give you par; but, right now, if you sell at the bottom, you will receive distressed prices because of what's happening in the market.

Every day my team and I from seven different locations get on the phone and we say, "There are three options we have for every client in every investment:

1) We can buy more if we're under risk and we feel comfortable with the long term opportunity.

2) We can sell if there is a liquidity need or emotional or behavioral constraint that makes us do that.

3) We can do nothing and wait until we have more information."

For 99%, the answer is do nothing and wait until you have more information. We can happily sit, and wait, and let time and volatility be our friend. For the real estate market, just like the municipal market or the fixed income market, buyers and sellers have gone away unless those buyers are committed long term; buyers looking for a great entry point. Sellers who don't need to sell have walked away. It is an economic reaction irrespective of the reality.

You can view this as anxiety-provoking or you can view this as fundamentally hopeful. No matter who and what you are right now, there is no amount of experience or skill or art or science that will get you through this. This is about discipline and understanding what came before and what comes after.

In order to put this behind us and move on, there are three things the world is looking for:

1) The first is monetary policy. The Federal Reserve and the Global Federal Reserve is doing everything they can. The Fed, in particular, has done 150% of what the expectation was. They continue to do so.

2) The second thing is fiscal and that means putting money into people's pockets. We have to put money into people's pockets now. We have to put money into the system throughout the recovery because of the thing that makes this different than every financial crisis.

3) The third thing is the successful containment of the virus and the resumption of economic activity. We've seen that in China. We've seen that in South Korea. We've seen that in Singapore, however, they responded very differently initially. What we're looking at now, the people that are making investment decisions, we are looking at Italy, looking at Germany and looking to see evident successes in the future.

There's not going to be a ton of deal flow. Commission and transaction volume is not going to be here right now. What is going to happen, which everybody agrees, is that capital assets are going to be marked down significantly, (because the world of finance doesn't know how to quantify what this looks like,) and that the rebound of those capital assets is going to be swift. This, as opposed to a true financial crisis where we had an 11-year return to the highs, this is going to be probably late 2020 early 2021 event. We are talking about a limited series of time with an exile in this shock that is going to be dealt with, remediated globally from both a monetary and fiscal perspective, and then life and liquidity will resume as normal.

This is about confidence. It is really a paradox of people wanting to feel loved, understood, heard, educated, included. The one thing that is true; there are opportunities to buy assets that are generational, and people like Warren Buffett and Bill Miller have seen three and four in their careers. Could this be the next one? Warren Buffett has this quote which explains why he is the capitalist with the most success out there, "Cash and courage in a crisis are priceless." We are in a crisis. It is strange in that it is temporary, exogenous and public health-based, so absolutely we need to be kind to each other. This is going to disproportionately affect low-income earners. We need to be cautious about our communication, about our actions, about our individual and corporate brands, but this is an opportunity to take market share in the months and years to come.

What is Alli doing to pass the time?

My normal release, and this goes for my family up and down a generation, is live music, which obviously is not happening now. The amount of Austin movies, Austin television we've been watching in terms of sessions. We just had a six-person viewing of Lizzo's. Her meditation with her flute. We are trying alternate forms of music. That's working for us.

Compass National Agent Call: Dealing with COVID-19