"Mad genius" predicts end is near.
You may have heard that Kenneth Heebner, whose name is so frequently and predictably followed by comma "top-performing fund manager" comma that you might think it's his full name, just called for "the biggest housing-price decline since the Great Depression".
According to the April 12, 2007 Bloomberg.com interview that broke his sensational and widely-quoted pronunciamento, Heebner claims that "as much as 40 percent" of subprime, low-doc and no-doc loans may default, "flooding the real estate market". Bloomberg quotes Heebner as speculating that "prices may fall by a fifth in some markets". Heebner is bailing from big investments in apartment REITS such as AvalonBay Communities because "they will face competition from single-family homes that have been converted into rentals". His move defies the conventional wisdom that the apartment industry benefits from a slump in real estate sales.
Well, gosh, who knows? And that's the problem. "Who knows?" keeps the professional or amateur economist in business and in the limelight. The Ph.D. economist and bubble blogger both sail under the same colors, and those colors are emblazoned "who knows?" So who knows? No one. Because economics is a "soft science", which means that economics is a "who knows?" science. And the "science" part of "soft science" is debatable.
What's the difference between the "soft" and "hard" sciences? Here's a handy rule of thumb. If you can accidentally burn down your lab, you're a "hard" scientist. The impact of your work on the real world, good, bad or indifferent, is measurable. If, on the other hand, the impact of your work on the real world is like a tree in a forest that no one hears fall, then you're a "soft" scientist. You're also a "soft" scientist if the soundness of your ideas is still debated fifty years after your death. In fact, this may be the loftiest goal and greatest achievement of the "soft" scientist, the pinnacle of success in his field and its Good Housekeeping Seal of Approval.
So who knows? At least when you're a fund manager "running money", as Kenneth Heebner does, your performance tells the tale soon enough. But until then, "who knows?" gives you credibility with the amateur doom-sayers looking for name-brand affirmation, and exposure if your comment touches a social nerve or fills a media vacuum.
Which means that anyone trying to determine the veracity of Heebner's comments will have to look, not at his comments, but at their context.
I learned of Heebner's comments from a spam email sent me by "TWO SHARP GUYS" trying to sell me their $297 seminar, "The Foreclosure Specialist, A Real Estate Agents (sic) Complete Guide To Working the (sic) Foreclosure Market". The lofty subject—Big money in apocalypse!—and dignified approach—It's coming! It's coming! Hallelujah it's coming!—reminded me of the attorney I met in 1999 who was busily taking seminars to position herself for the tidal wave of Y2k litigation sure to flood the courts when all our computers rolled over to 01/01/00, rolled on their backs and expired. What a bonanza that turned out to be! for the media, which needed a plausible new catastrophe to sell, and for the hucksters, who needed a fresh supply of credulous opportunists to reel in.
Of course, "top-performing fund manager" may be all the proof you need when it comes to Kenneth Heebner's credentials. And Hebneer's record is certainly gaudy if you don't dig too deeply. A visit to fund rater Morningstar's Web site confirms that Heebner's CGM Funds Realty has outperformed the market by far over the past month, year-to-date, three months, three years and five years (although not one year). Morningstar gives Realty its highest rating, five stars, for "return".
But Morningstar also gives Realty its highest rating, five stars, for "risk", as in "clocked-at-one-hundred-and-fifty-miles-an-hour-with-no-seatbelts risk". In fact, Morningstar is quoted elsewhere as saying that Heebner's investing style is "too gutsy to be practical". And speaking of quotes, not only will you find Heebner consistently described as "top-performing", you'll also find him called "eccentric", "a mad genius" and "a gunslinger". Why? Because Heebner makes huge bets on small numbers of companies and sectors. Heebner doesn't diversify; he puts all his eggs in an aggressively small number of baskets. That's a no-fear way to amp up your return, and it suggests that Heebner is one fund manager without an investment committee looking over his shoulder. So when he's right, he's really right, and when he's really right, he really pays off for his shareholders.
Fortunately for Heebner and Realty's shareholders, lately he's been really right. Beginning in 2001 Heebner rode the boom in homebuilder stocks and bet big: at one point he had an eye-popping 63 percent of Realty's assets invested in them. But by early 2005 he was unloading homebuilders even as real estate soared. Homebuilder stocks tanked shortly thereafter.
"Genius!", exclaim the writers, and it's hard to argue with his stellar rate of return. And yet...and yet...an impertinent little voice inside me wonders "in 2005 wasn't even the National Association of Realtors warning us that real estate was overheated?"
That same pesky little voice also tempers my enthusiasm for his other claim to fame, shorting tech stocks in late 2000 and 2001. Because by late 2000 it was fairly obvious, even to a real estate agent with only low-level sources in the tech industry, that the writing was on the wall for Silicon Valley, at least for that cycle. Sure, maybe I had an unfair advantage: I work in Silicon Valley, right at ground zero. So naturally I had clients telling me about the latest start-up denied another badly needed round of funding, and about the latest round of dot-com layoffs. And then there was Greenspan's warning of "irrational exuberance" way back in December 1996. And then there was Black Friday, April 14, 2000, a clear warning shot across the bow that the tech market's days were numbered, at least for that cycle. And then there was the mortgage broker I talked to in late 2000 who'd sold all his tech stocks earlier that year. Genius! If that mortgage broker were running other people's money I guess he'd be in the Fund Managers Hall of Fame by now.
Do still more digging and you find out ach! that Heebner is human. He makes mistakes, and ironically his biggest was tech. Because before he shorted tech—Genius!—he boycotted it, then half-heartedly dipped his toe in it. And when big-bet Heebner is wrong, he's really wrong. His Focus fund returned a paltry 3.5 percent in 1998 while the benchmark Standard & Poor Index soared 28.6 percent. His Realty fund, lately so high flying, lost a tidy 21 percent that same year. Heebner admits he doesn't like tech, saying it's too hard for a tech company to maintain a competitive edge. I guess what he's really saying is that it's hard to spot the next Microsoft, Amazon.com, Google or Cisco. I guess even Genius! can have a blind spot.
Of course, there's no doubt that Heebner is a) right often enough, b) lucky, and c) ballsy, all qualities the successful fund manager and, for that matter, successful human being, can usefully employ. I'll applaud his contrarian style even as I cross the street to avoid it. Predictably, Heebner's April 12 remarks got him a seat at the head table on the bubble blog rubber-chicken circuit. And Heebner does have something in common with a handful of bubbleheads. No, not the good/lucky/ballsy part. Read the bubble blogs and what's skulking behind all that venomous cockiness is usually a) timidity, b) fear of commitment, and c) an ostensible willingness to flout conventional wisdom that's really a genuine willingness to buy into alternative conventional wisdoms that better suit the bubblehead's temperament. Ain't no new paths being blazed on no bubble blogs.
No, the similarity lies in three other areas. One is the willingness to make hair-raising sector bets. The hard-core bubblehead—not the market coquette who flirts with real estate just to snub its amorous advances, but the hard-nosed bubblehead who could've bought a home back in aught-something and didn't, or who did buy and has since cashed out—that bubblehead has made a huge bet against real estate. The second similarity is related to the first: a megalomaniac belief in one's own opinion. Part of the Heebner mystique is that he was the only student participating in a college psychology experiment who couldn't be talked out of his opinions by a participant posing as an expert. The third similarity is related to the second: a willingness, perhaps even need, to take extreme positions.
I suppose a real expert could poke holes in, or at least cast doubt on, Heebner's cataclysmic predictions on real estate. What information is he basing them on? Is it realistic to believe, as Heebner does, that "the biggest housing-price decline since the Great Depression" can happen without putting the country into severe recession? [As it turns out, no.] Are subprime and Alt-A loans a large enough part of the outstanding loan portfolio to have such a widespread, catastrophic impact? [As it turns out, yes.] Will they torpedo the entire real estate market, or just those areas where risky underwriting was common? [As it turns out, maybe, but probably not.] And even within those areas, will defaulting loans affect all neighborhoods or just the ones that saw the most envelope-pushing? [As it turns out, the low-end neighborhoods driven by subprime were by far the hardest hit.] Will even the significant number of heartland markets that experienced only modest price appreciation during the boom, and where prices continue to rise even now, be dragged down with the high fliers? [As it turns out, not really.]
And as someone who worked in the rental industry for nine years, I have to wonder if the highly transient sybarite who rents a high-tech high-touch AvalonBay Communities apartment can really be tempted by the typical single-family rental in this area, a tired no-frills fifty-year-old rancher owned by a crusty skinflint who lives two-thousand miles away and hangs up when you ask him to fix something.
Who knows?