On Friday morning in Jackson Hole, Kevin Warsh gave his first speech as Chairman of the Federal Reserve. He called it “In Our Time.” A lot of good stuff (and concerning stuff, if you’re a rate sensitive investor like me) to parse through.

What you’ll likely read from most coverage on it is how the market interpreted his commentary. Those general market comments were - inflation is still too high, a rate hike is likely back on the table in September, and the market moved a little (bond yields moved a lot). I’m not sure this is the most important part of his speech, though.

Two rather interesting things happened.

First, he said the inflation of the last five years was the Fed’s Fault.

In his own words: The responsibility for sixty-five months of elevated inflation “sits squarely with the central bank.” Which is pretty big. I would tend to agree, to an extent - although I might quibble on a few details. Yes, the Fed needs to control inflation. But also, there are some Act of God events that have occurred that you could argue were outside of their control. One of which was Congress, which he declined to mention. You might argue that Congress is not an act of God, but for the Fed it might as well be.

But, it’s refreshing for an institution to take accountability and not hand-wave problems away, or worse yet point fingers elsewhere and take no responsibility. So from that perspective, it’s good.

The market also, tellingly, took him and his word seriously. Which is exactly what a Fed Chairman wants. His credibility is critically important to helping control both the narrative and the self-reinforcing power of inflation.

Secondly - he told us he’s going to stop telling us what he’s going to do.

He described the Fed’s habit of guiding markets as a “hall of mirrors”: the market watches the Fed, the Fed watches a market that is only pricing what it thinks the Fed will do, and eventually both parties are staring at each other instead of at the economy. Which is an interesting, and a coherent, way to express the current bizarreness of “Fed Watching”.

What he actually said is “In normal times, the role of forward guidance should be limited and circumscribed.” And he went on to describe his role as being committed to a discipline, and not to a decision. In effect - he’s going to be guided by discipline about what needs to be done, versus pre-committing to something.

I liked, again, this direct quote.

"I wish our understanding of the economy were so precise as to provide a mechanical, tried-and-true answer... But our knowledge just doesn't extend that far."

He then launched into a recap of, basically, “given these principles - how then do you read the economy today”. Which in his judgment that conditions are presently accommodative.

In short - current interest rates are not controlling inflation (i.e., rates are accomodative to inflation). Which the market duly interpreted as a rate increase coming shortly.

Which I find ironic. Because, you know, the market will do what the market is going to do. The Fed Chairman is refusing to provide forward guidance, but the market will be damned before it doesn’t try to forecast what exactly this means.

And it’s an interesting trap. On one hand, I agree with Warsh that forward guidance is bizarre and creates a weird feedback loop. On the other hand, it’s hard to argue that providing less confidence to market providers wouldn’t thereby increase volatility, fear and problems.

All that aside, a large part of controlling inflation is the belief that the Fed will act. And on that point, I’d say he was successful.

Now, onto your weekly recap.

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In keeping with our new series, we’ve published our latest video diary discussing the famed DALBAR Study. In short - retail investors tend to underperform (often a lot) the actual performance of the fund they invest in. The classic argument is that it’s “behavioral bias” issues on the behalf of these investors.

In this video, we dig into the study, and why it doesn’t map perfectly onto alternative assets. And what you, as an investor, need to keep in mind when committing as an LP to this style of deal.

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Central Banking Interventions

A relevant topic, given everything happening this week. In this analysis, we look at the gory history of Central BAnking intervention in their Treasury markets, with an eye for the following question - who ultimately pays?

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The accompanying video to the above article, we’ve seen this one fairly blow up on YouTube as well. 7,500 + views, currently over 570 hours of watch-time, and great community engagement. Let me know what you all think.

From the Deal Room

Over the last 2 years we’ve had a very specific focus for investment - good basis, good debt, high-cash flow right out the gate. The last few deals we’ve done on this thesis are presently generating ~10% Cash-on-Cash Yield to our equity investors.

We are presently in contract on two new opportunities that have comparable yield potential. Fully occupied, financed through an excellent lender with long-term, fixed rate debt, and managed in-house by our stellar property management team.

If you’re curious, here’s a quick look at our “portfolio” performance here in Portland. (Portfolio, in this case, equals buildings that we manage in-house, that is not counting 3rd party managed properties).

Reach out HERE to setup an introductory call if you’re an accredited investor and you’re interested in capitalizing on what I view as a fairly severe market dislocation in our market.

That’s all for now, folks.

Have a great weekend.

Think Well. Act Wisely. Build Something Timeless.

I’ll show you why that number is mostly wrong — and then why the honest version should bother you more than it does.

Because the standard argument for private investments is that illiquidity p…

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I don’t really do topical pieces. Not timeless enough. And I’m not really starting today. But today’s article is critical to understand what the recent rumblings by Treasury and the Fed on managing the US debt payments can and do mean for your everyday investor. History gives us some tremendous examples. Read on to explore this topic further, and let me know in the comments what you thnk will happen if the Treasury intervenes hard to control yields. As per our new norm this piece is loaded with extra analysis and deep-dive segments for our paid subscribers. Regular subs will still get the entire regular article - none of this bait and switch nonsense.

On October 11th, 2022, Reuters reported that the benchmark ten-year Japanese government bond had not traded for a third consecutive session. In other words - in one of the largest bond markets in the world, not a single buyer showed up. It was also the first time that had happened since ten-year bonds became the benchmark in 1999.

Context is king. The BoJ had moved meaningfully into the market and stated, flatly, that they would not permit the ten-year treasury to exceed a 0.25% ceiling. Which meant, in this case, that while they couldn’t “mandate” the market to do what they willed, they could force it by force of capital.

So on this particular date, the Ten-Year JGB traded at 0.245% (right up against the 0.25% ceiling), and the Nine-year JGB was trading at 0.285%.

Which is, you know - odd. A lower duration bond, yielding more. Typically, in bonds, you want to be paid more for holding for longer.

The pricing on the 10-year JGB was not a price in any meaningful sense of the word. It was more like a government-issued number. Everybody knew the BOJ would intervene to hold the ceiling, and so investors by and large accepted and acquiesced to it. Very hard to fight the full migt of the BOJ (or the Fed). However, neither group could force independent buyers to play. And they didn’t. Hence nobody showing up. The BOJ had truly become the buyer of last resort.

Kicker though. The intervention actually worked. The Bank of Japan said the ten-year would be zero, and for seven and a half years the ten-year was approximately zero. By the narrow test of did the policy achieve its stated objective, Japanese Yield Curve Control was one of the most successful monetary interventions in modern history.

The subject of this piece focuses less on whether or not a Central Bank intervention can control bond pricing (which they can, it turns out, do. Sometimes quite effectively), but rather what do we (the royal we) pay instead.

Because history, as always, gives us a rich laboratory to explore this question.

In four separate episodes across eighty years — the United States in the 1940s, Japan in the 2010s and 2020s, Britain for seventy-two hours in 2022, and what we are seeing in Washington today (as of this writing, August 26th 2026) — the pressure never disappeared. It just moves elsewhere.

And in each episode it came out through a different valve, at the expense of a different group of people. And these people rarely if ever recognized what was happening to them.

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Valve one: inflation (the United States, 1942–1951)

In March 1942 the Federal Reserve and the Treasury agreed to fix the price of American government debt. Unlike the aforementioned BOJ intervention, this was not targeted at just one duration treasury. Nope. They were going to fix the entire curve.

Bills were to be at three-eighths of one percent. One-year certificates at seven-eighths. Notes at two. And the long bond fixed at a ceiling of two and a half percent.

Similar to the BOJ intervention, this one held for nine years.

But what exactly did all of this cost the people?

WW2 related Price controls came off in the summer of 1946 and inflation went vertical: 18.1% December-to-December in 1946, 17.6% in the twelve months to June 1947, 14.4% on a 1947 calendar-average basis. It was (see below chart) the worst peacetime inflation in American history. And our friends at the Federal Reserve could do nothing about it, because fighting inflation means selling bonds and the way one fixes the yields across the entire curve is to promise to buy said securites at a fixed price.

Between 1945 and 1951, consumer prices rose 44%. A 2½% coupon compounding over the same six years returns 16%. A dollar placed in the safest instrument on earth in 1945 was worth about eighty cents in 1951 purchasing power.

As is the way with government bonds, every coupon was paid as agreed. Which is why people sometimes claim bonds are “safe”. But, the holder still lost a fifth of his money.

The academic name for this is financial repression, and the definitive measurement of this came courtesy of Carmen Reinhart and Belen Sbrancia’s. Their estimate: the annual liquidation of government debt through negative real rates ran 3 to 4 percent of GDP a year for the US and UK.

Real rates were negative in half of all years between 1945 and 1980. The worst single year for an American bondholder was 1946, at negative 13.6 percent.

Eighty-five million Americans bought war bonds — household ownership went from 21% in 1941 to roughly 85% by 1944. A Series E bond bought in June 1944 and held to maturity returned −13% real; redeemed early after 1946, −16% to −22%. Expected real return at purchase was around +10%. Realized by 1952: −17%.

These bonds were sold under the slogan “The Greatest Investment on Earth.”

Why Treasury wanted it. Gross federal debt peaked near 120% of GDP in fiscal 1946. By fiscal 1948, with the war over and outlays collapsed to under $30 billion, net interest consumed 14.6 cents of every federal dollar spent — the highest share in the modern record. When interest is one-seventh of your budget, a 1% increase in financing costs (say from 2% to 3%) is not an academic or trivial exercise. You could argue it’s more like … apocalyptic. Which is, at least in part, why there is a LOT of focus on our interest rate today.

The safety valve: in this case, fell on the savers. The mechanism here wasn’t a side effect of the peg — it was the peg. The debt burden fell not because the economy grew or spending was cut, but because purchasing power was transferred out of the pockets of everyone holding government paper and onto the government’s balance sheet. A tax, in short, that nobody was fully cognizant of.

Valve two: the currency (Japan, 2016–2024)

Let’s return to our opening example of the BOJ, and the second release valve.

The cost of the defense. By 2023 the BOJ owned more than half of every Japanese government bond in existence — up from 11.6% when Kuroda took office in 2013. In January 2023 alone it bought ¥23 trillion of JGBs in a single month, an all-time record. The band widened under pressure — to ±0.25% in March 2021, ±0.5% in December 2022, a 1.0% “reference” by October 2023 — but the commitment held.

However, the market it was defending stopped working. The BOJ’s own Bond Market Survey tracks a “degree of bond market functioning” index. By their math, an extremely well functioning bond market would score 100. An extremely dysfunctional bond market would score a -100.

And so, by their own math it read 62 before QQE in early 2013. 5 after QQE. −48 after negative rates. −71 after YCC. Which is how you get the October 2022 board I opened with. The BOJ’s own researchers concede the point in a 2024 working paper: arbitrage across issues and maturities “became difficult.”

And the pressure, in this case, came out of the yen.

~102 to the dollar when YCC began, September 2016 151.95 in October 2022 — a 32-year low 161.95 in July 2024 — weakest since December 1986 ~164 in mid-2026 — roughly a forty-year low.

Japan’s Ministry of Finance has been fighting that ever since, and the interventions are enormous: ¥9.18 trillion in 2022 — the first yen-buying since 1998 — and roughly ¥15.3 trillion in 2024, including a single-day record of ¥5.92 trillion. As recently as July 30th, 2026, it took coordinated Japan–Korea intervention to move the yen three percent.

And, ultimately, the yield went up anyway. YCC formally ended March 19th, 2024, with the ten-year at 0.74%. By December 2025 it was 2.09%, highest since February 1999. On August 17th, 2026, it printed 2.93% — highest since September 1996.

Seven and a half years of holding a yield at zero. The yield went to three regardless. They bought a forty-year low in their own currency on the way.

The valve: anyone holding yen. Which, critically, includes the domestic saver who thought he was taking no risk by staying in cash.

Valve three: the government (the United Kingdom, September 2022)

On Friday, September 23rd, 2022, Chancellor Kwasi Kwarteng delivered a “Growth Plan” containing roughly £45 billion a year of tax cuts — without the independent budget forecast that normally accompanies one. The signal the market received was not “tax cuts.” It was: this government does not intend to show its arithmetic.

By the Bank of England’s own count, the thirty-year gilt yield rose 130 basis points in three trading days. Sterling hit an all-time low of $1.0327.

And then the plumbing broke(!).

British defined-benefit pension schemes hedge their liabilities with leveraged gilt and swap positions rather than owning gilts outright — roughly £1.4–1.5 trillion of liabilities hedged that way, up from £400 billion in 2011. When yields rise, those positions lose value and generate margin calls payable in cash, in hours. Selling gilts to meet the call pushes yields higher, which generates more calls. Sir Jon Cunliffe called it “a self-reinforcing spiral of price falls and further pressure to sell gilts.”

The collateral buffers had been sized to absorb about 100 basis points of movement. The move was 130. Roughly £66–70 billion of collateral calls landed in six days, and schemes dumped something like £37 billion of gilts into a market that had stopped bidding.

Please bear in mind that these were the conservative investors. As any defined-benefit pension ought to be, by definition. They were fully hedged. De-risked. Doing precisely what the textbook and the regulator told them to do. And they became the forced sellers, in six days, because their hedge was leveraged and somebody else held the option to call it.

As you can imagine, this was also a politically toxic situation. We’ll get to that shortly.

How did the BOE handle this situation?

• Framed explicitly as financial stability, not monetary policy

• Fully indemnified by the Treasury — the taxpayer bore the risk, not the central bank

• “Strictly time limited” — a hard end date printed in the announcement

• Reaffirmed its bond-selling program simultaneously, so nobody could mistake it for QE

• And it warned in the same breath that the rate-setting committee “will not hesitate to change interest rates by as much as needed.”

In short, the BOE executed a textbook “backstop” intervention. They promised massive buying power to calm the panic, bought only what was strictly necessary, and exited as quickly as possible at a profit.

Many pension funds were facing forced sell-offs in government bonds. So the BOE established a daily auction, offering to buy up to £5 billion of bonds everyday for 13 straight business days. However, because the Bank was acting as a buyer of last resort rather than forcing artificially low rates, the market didn’t actually flood them with £65 billion of bonds.

And as a result, the panic subsided because everybody knew that a buyer existed. The BoE only ended up taking 30% of its total offer. And then it unwounded its entire position by January 12th, 2023, and made a tidy little £3.8 billion profit.

So where’s the pressure? In this case, it wasn’t the currency or inflation.

Instead, it was the government. Kwarteng was sacked on October 14th — the same day operations ended — after 38 days as Chancellor. His successor cancelled roughly £32 billion a year of the plan within 72 hours. Truss announced her resignation on the 20th.

The Bank of England bought the pension system enough time not to detonate, and then stood back and let the market repossess the government that caused the problem. It never once tried to change the market pricing.

The valve: the politicians. Which is, I’d argue, the correct place for it! I do like this one.

So what the heck is a Treasury Buyback?

Which brings us to where we are today (as of August 26th, 226) — and to a piece of mechanical confusion that is doing real damage to the commentary right now.

The facts. Treasury announced it would increase long-end “liquidity support” buybacks by at least double — from a $2 billion maximum to at least $4 billion per operation, in the 10-to-20 and 20-to-30 year sectors, September 9th through November 4th. The day before, the thirty-year had touched 5.33%, highest since 2007. On the day of the announcement, total public debt crossed $40 trillion for the first time; it crossed $39 trillion in March.

But what are the mechanics here, without the hyperbole?

It is not QE, and it structurally cannot be. The Treasury has no printing press (technically they can print physical dollars, but they cannot engage in “economic money creation” the way the Federal Reserve can. Every dollar it uses to repurchase a long bond is a dollar it must borrow first, by issuing Treasury bills. What you are looking at here is a duration swap: retire long paper, issue short paper to fund it. A very small, very polite Operation Twist run by the borrower instead of the central bank.

It is tiny. Roughly $28 billion of long-end purchases across the entire window, against approximately $10 trillion of ten-year-and-longer Treasury paper outstanding. That is 0.14%. For scale: Treasury’s own net borrowing estimate for the July–September quarter alone is $739 billion.

It costs money. Treasury is buying back cheap-money-era bonds at deep discounts and funding the purchase at roughly 4% on bills. Wolf Richter worked a real operation: $175 million face of a 1.875% coupon retired for $91.7 million — and the annual interest expense on that slice went up, from about $3.3 million to $3.7 million. Debt outstanding falls a hair. The interest bill rises a hair. It also shortens the weighted-average maturity of the federal debt, which increases rollover exposure at a moment when bills are already above 20% of outstanding.

In fairness to the Secretary, his substantive claim is narrower and better than the coverage suggested. What he actually said was that yields don’t reflect the fundamentals “of this Iran conflict” — an argument that the market carries too large a war premium. That seems fairly defensible to me. July headline CPI ran 3.4% while core ran 2.5%, and essentially the whole gap is energy, up roughly 15% year over year with gasoline near 25%. Strip out the barrel and inflation is half a point from target. If the Gulf calms, a real piece of this yield leaves on its own.

But a $4 billion buyback is not the instrument that delivers that, and he surely knows it. This is more about the signal right now than an actual, full-scale intervention.

So which valve is this one?

We’ve got three candidates here, and I’d argue it could be any, all or a mix of the three.

The currency. Japan’s answer, and the one sophisticated money is already positioning for. Robin Brooks at Brookings this week: “When fiscal policy is out of control, governments can obviously do many things to cap yields, but this just puts depreciation pressure on the currency… Markets are primed for Dollar debasement to resume.” Citi, more coldly: “The main price to pay for lowering rates in such a way is a weaker currency.” Watch the dollar. Watch gold.

Credibility. Britain’s answer, in slow motion. Treasury’s most valuable asset in a $32 trillion market is predictability, and this announcement came off the normal refunding calendar in a way Jefferies’ Thomas Simons called “shot from the hip.” Krishna Guha at Evercore: “a weak form Operation Twist… that in itself will have little enduring impact and could backfire if it is seen as signaling concern about the ability to fund longer-term.” John Fath at BTG Pactual: “Markets might view that as desperation… deficits are not going away.” If intervention reads as distress, it raises the risk premium it was meant to lower.

Or nothing — because it’s too small. The honest third possibility, and I weight it heavily. Twenty-eight billion against thirty-two trillion is a gesture. The long end may simply be doing what long ends are doing everywhere: the UK thirty-year at 5.82%, near its highest since 1998; the German thirty-year at 3.76%, highest since the 2011 euro crisis; the Japanese thirty-year near a record. That is not an American story and no American debt-management maneuver touches it.

The tell to watch is escalation. Escalation converts a gesture into a commitment, and commitment is what opens a valve. If Treasury goes meaningfully bigger, or the Fed gets drawn in, this stops being Operation Twist and starts being 1942.

And the underlying arithmetic is not improving. FY2026 deficit through July: $1.8 trillion, past all of FY2025. Net interest year to date: $931 billion, up nearly 11%. CBO’s February baseline assumed a 4.1% ten-year; it’s 4.74%. The CRFB’s framing is the one to hold: “With average interest rates on debt approaching expected growth rates (R>G), there is growing risk of a debt spiral or even fiscal crisis.”

The part that actually matters for your balance sheet

Here’s what I want you to take from four episodes across eighty years, and it is not “buy gold”, and sure as heck isn’t a rate forecast.

Key Point: financial repression is a transfer. Transfers have two sides. Your balance sheet decides which one you’re on.

The 1946 war bond holder was on the paying side. He held a nominal claim — a promise to be handed a fixed number of dollars on a fixed date — during a period when the government was quietly reducing what a dollar was worth. He was right about everything he thought he was being asked to judge. He was right about his country, right about the war, right about the credit of the United States. Every promise on that certificate was kept. He lost a fifth of his money because he was holding the wrong kind of claim in the wrong decade.

Now flip it. Who was on the receiving side of that transfer in 1946?

Anyone who had borrowed at a fixed rate against a real asset. The farmer with a mortgage. The manufacturer with long-dated debt against a plant. Every one of them watched inflation quietly extinguish a fifth of their obligation while the thing securing it kept producing.

Same policy. Same decade. Opposite outcomes. And the difference was not intelligence or information — it was structure.

So, concretely, three things:

One. Treat the yield curve as a political object. For eighty years, whenever servicing the debt became politically intolerable, governments leaned on the price of money. Underwrite as though someone will try — and as though it will work about as well as it has always worked. Which is to say: partially, temporarily, and at somebody’s expense.

Two. Prefer being the borrower to being the lender in any decade a government spends trying to hold its own yields down. Long-dated, fixed-rate debt against a real, cash-producing asset is not merely a financing choice — in a repression regime it is the position that receives the transfer rather than funding it. This is the single strongest argument for the way we finance buildings, and it is an argument from the actual arithmetic of 1942 to 1951, not from a slogan.

Three. Understand that “conservative” is not a synonym for “safe.” The British pension schemes in September 2022 were the most risk-averse investors in that market. Fully hedged. De-risked. Following the regulator’s own framework. And they became the forced sellers inside six days — because their hedge was leveraged and somebody else held the right to call it. Ask not how much risk you’re taking. Ask who has the option to end your position, and on what notice.

Remember, friends, the yield is not yours to control. Your basis is. Your term is. Your reserves are. Whether somebody else’s margin call can force your hand is entirely, unglamorously yours.

Four governments tried to hold down the price of money. All four succeeded, for a while. The bill arrived every single time — through inflation, through the currency, through a market that stopped functioning, through a government that fell.

The pressure is conserved. You don’t get to close the valve. You only get to choose whether you’re standing under it.

Think Well. Act Wisely. Build Something Timeless.

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We are actively raising capital to deploy into supply-constrained Pacific Northwest multifamily — acquired below replacement cost from motivated sellers, financed with long-dated, fixed-rate, and increasingly seller-carry paper. If you’re an accredited investor who thinks in decades, let’s talk.

For more on the philosophy behind all of this, my book Timeless Wealth is where it starts.

Sources

United States, 1942–51: Jonathan Rose, “Yield Curve Control in the United States, 1942 to 1951,” Chicago Fed Economic Perspectives (2021) · Kenneth Garbade, “How the Fed Managed the Treasury Yield Curve in the 1940s,” NY Fed Liberty Street Economics (2020) · Hetzel & Leach, “The Treasury-Fed Accord: A New Narrative Account,” Richmond Fed Economic Quarterly (2001) · Federal Reserve Board staff memo, “Targeting the Yield Curve,” FOMC (2003) · OMB Historical Tables 3.1 and 7.1 · BLS CPI-U

Financial repression: Reinhart & Sbrancia, “The Liquidation of Government Debt,” NBER WP 16893 (2011) and IMF WP/15/7 (2015) · Brunet, Hilt & Jaremski, “Inflation, War Bonds, and the Rise of Republicans in the 1950s,” NBER WP 31969 (2024)

Japan: Bank of Japan policy statements, Sept 2016 – March 2024 · Nakazawa & Osada, BOJ Working Paper 24-E-10 (2024) · BOJ, Market Operations in Fiscal 2022 · Japan MOF intervention data · Reuters, Oct 11 2022

United Kingdom: BoE gilt market operation announcements, Sept 28 and Oct 11 2022 · Cunliffe letter to the Treasury Committee, Oct 5 2022 · BoE Quarterly Bulletin 2023 · Pintér, BoE Staff WP 1019 · Chen & Kemp, IMF SIP/2023/049 · House of Commons Library CBP-9643

Twist and the MEP: Swanson, Brookings Papers on Economic Activity (2011) · Modigliani & Sutch, AER 56:2 (1966) · Li & Wei, FEDS 2012-37 · Bonis, Ihrig & Wei, FEDS Notes (2017)

August 2026: U.S. Treasury press release, Aug 19 2026 · CNBC, Aug 20 2026 · Federal Reserve H.15 · BLS CPI, July 2026 · CRFB · Wolf Street, Aug 19 2026

This week I put out a post on Threads (my new least favorite platform ever) that attracted (via the algorithmic tendency to promote controversy and hate) what I’d categorize as a “progressive” hate mob. Replete with some particularly vile death threats in my DM and prompted me to both a) cancel my Threads account and b) try to scrub all family or personal references off the internet out of concern for my family’s personal safety.

Now, if you have followed me for awhile, you know I’m fairly apolitical. I just read it as it is (in my perspective, which is of course colored by my own life and beliefs, so reasonable minds may disagree if I’m truly impartial). However, I was completely taken aback by the vitriol and hatred directed at me (and my family) for a fairly innocuous statement about a SpaceX sweatshirt and that despite his politics Elon has had some impressive business achievements. Doesn’t seem controversial (to me) but I get why it may be for others.

This, however, does not mean that I am therefore a thousand other things that people assumed. Which brings me to my point. Tribalism is as natural as water for humanity. We thrive on it. But in normal times, you didn’t have this wild echo chamber of social media. You had to look people in the face and say what you thought. You also have to, as a human, reconcile what you say with the visual cues of the person across the table from you. Most people, when confronting say a distressed or upset person, will tone back what they’re saying or see humanity.

Social media doesn’t really allow that nuance. Or even to permit the humanity of our fellow men.

So consider this a PSA, to lead off my return to producing our Timeless Five series. When we construct caricatures in our minds of what or who a person is, we strip them of humanity. Yes, there are people on the right and the left who are caricatures, in some shape or form. But by and large people are people, and they are nuanced.

Democracy really doesn’t function well if we “otherize” everybody, and hate one another. if we give into the desire for group-think and tribalism, we cease to view one another as fellow citizens and have instead created a particularly toxic and hateful environment. Which, to be frank, folks on both sides of the political aisle bear some responsibility for.

Be kind to one another. And “try” to respect one another, please.

Now … onto your regularly scheduled programming.

New Premium Section

Firstly, I want to thank a certain paid subscriber for asking me where they could find all the “premium” materials. Wild enough, I had never segmented or built a place one could go. Crazy.

Anyhow - we have now organized our Substack Page to include two segments. If you navigate to the Timeless Investor, you’ll now notice a “Timeless Premium” dropdown at the top, and within that we have a) deep research articles and b) a video library.

On that note, we dropped our first “Video Diary” style premium content piece. Check it out below (free subs, you may redeem for one view if you like).

I’ll end this little segment with a reiteration on our email from last week. We will be incresaing pricing on our premium tier and “founders tier” pricing for the newsletter come September 15th. If you subscribe before then you’ll be grandfathered in at the “old-world” pricing. So if you’re on the fence, join us please!

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Most Viral Video Ever … (for me)

Social media is funny. You just never know what’s going to click. This particular video is (for me) my most unbelievably successful video I’ve ever produced for The Timeless Investor YouTube.

1 million impressions, 90,000 views, and 2,000+ new YouTube Subscribers. See what all the buzz is about for yourself.

My main take-away is that people recognize that modernity has come with many benefits, but seems to be coupled with a steady moral degradation of character and ethics. Now before you accuse me of being a “gosh, things were wonderful in the 1940s and today’s a mess”, I do recognize that society has made major advancements in terms of civil rights, etc.

What has degraded, though, is our sense of duty to our fellow man. And our sense of duty, writ large. And more. This is all, by the way, trying to rationalize why this particular video blew up. Let me know what you think.

The Sufficiency Problem

This week’s article focused on what modern day investors can learn from the incredible rise and tragic fall of Sam Insull. The man many of you have probably never heard of, who helped build our utility industry that we all know and “love” today.

Check it out here.

The Lost Decade, Reconsidered

And because I haven’t dropped a Timeless Five in a little while, this was last week’s article. What if - shocking - there were people that were big real estate investors in Japan in the boom times, AND they survived (and thrived). Wouldn’t it be great to understand HOW that happened?

Well here you go.

Deal Updates

We’ve successfully closed two deals this year. Both are performing exceptionally well. The first (The Imperial Arms) is literally producing a north of 10% annualized cash yield to investors. The second (Crown Point) is brand new, but just hit 100% occupancy with a 10% lift on rent for those two units (we didn’t raise the person’s rent 10%, we just leased the two new units at a 10% higher rate than building averages), which speaks well for the future of the deal.

So here’s a shameless plug. If you are an accredited investor and are interested in cash flow first deals, please DM me here on Substack, or reach out to schedule a call with our in-bound investor tool (here).

That’s a wrap folks. Stay safe, spread respect and love, and have a greaet weekend.

Think Well. Act Wisely. Build Something Timeless.

Arie

This is episode ONE in our new Premium Video Library for your enjoyment.

Today I dig into a crazy story of prudent risk-management in an overblown, hot sunbelt market and WHY Sponsors often make the decision to over-leverage their investment.

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Note to our paid subscribers: I end this article with some serious take-aways for any investor worth their salt, and include a personal war story that matters (a great deal) for how to think about investing (and how it could have [but did not … ] given me a serious case of personal bankruptcy).

Also: we also recorded a stand-alone YouTube video for this. That article is linked at the end. Let me know what you think!

I want to start with an uncomfortable observation about the people who got destroyed in multifamily between 2022 and 2024.

The kicker here is that almost nobody was wrong on their long-term thesis.

They believed America had a structural housing shortage. Which, I would argue, was and is true. They believed rents in the Sun Belt would grow. They did, for a time. They believed apartments were among the most durable cash-flowing assets available to a private investor. Also true, and still true today (I think). If you had handed their 2021 investment memos to a disinterested analyst and stripped the dates off, most would read as sober documents making defensible claims about the physical world.

The assets performed (some better, some worse), but the sponsors were wiped out anyway in many cases.

I’ve watched this from close range for four years now, and the thing that stays with me isn’t the schadenfreude. It’s how little the quality of the thinking mattered. The people who survived and the people who didn’t held nearly identical views about apartments. What separated them was something more intrinsically important to successful real estate investing.

Look - in life and investing, we are usually proven right (eventually). What separates the survivors from the losers is simply a matter of whether they can afford to wait until they’re proven right.

I’d argue this is a sufficiency problem. We spend a lot of our analytical effort on the question of is this particular thesis correct? Less time, unfortunately, is spent analyzing what is the maximum pain duration this position can survive. The second one determines a lot more outcomes than people want to admit.

This is why Sam Insull’s story is particularly informative. As always, on The Timeless Investor, we try to mine history for particularly informative stories that can strengthen us in the here-and-now as investors.

You see, Sam Insull was right in a bigly way. He just couldn’t endure.

And a man who had once been one of the wealthiest and most powerful men in America died on a subway platform with eighty-four cents in his pocket. And they had to use his laundy receipt to figure out who the heck he was.

This is one of the epic rise and fall stories in American history.

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Perhaps the most successful prediction in American business history

At the core, Samuel Insull’s problem was that ultimately he was correct about everything.

He arrived in New York in 1881 at twenty-one, a London clerk’s son whose one marketable skill was shorthand, and that skill got him hired as Thomas Edison’s private secretary. Eight years later he was running Edison General Electric’s operations. When Morgan engineered the merger that created GE and pushed Edison aside, Insull was offered a senior role in the new company and turned it down for the presidency of a struggling Chicago utility — one of twenty competing stations serving five thousand customers in a city of a million.

And the man had what I would call a “visionary” insight. The industry, as he saw it, misunderstood its own economics.

It’s sort of hard to grasp in our present era, but in 1892 electricity was a luxury good: high price, few customers, fat margins. But electricity has an odd property. Electricity is produced and consumed in the same instant and cannot be super effectively stored — so a plant sized for peak demand is a colossally expensive asset that idles most of the day.

Said slightly differently - the variable that governs profitability wasn’t actually price. It was all about utilization.

So he put his insight to work. Insull chased customers whose demand peaked when others’ didn’t — streetcars running all day while houses sat dark, industrial users pulled off their private generators. He made power cheap on purpose, wiring homes for nearly nothing, giving appliances away, cutting rates and watching volume more than compensate. Five thousand customers became fifty thousand became four million across thirty-two states.

Then, his “masterstroke”, if you will. A move that will look markedly similar to our current crop of AI executives.

Insull stood in front of his own industry association and argued that electric utilities should be regulated — that competition in wires was wasteful, duplicated infrastructure was insane, and the correct structure was an exclusive franchise with rates supervised by a state commission.

Didn’t Peter Thiel make a similar argument in Zero to One, arguing that competition is actually contrary to the good of a company? Which makes sense. Just maybe makes less sense for the consumer.

Now, to be clear, Insull was NOT being altruistic. He was buying something: protected territory, a guaranteed return, and above all permission to build on a forty-year horizon.

The reality is that when you have to outlay massive amounts of money, your enemy isn’t regulation. It’s uncertainty. Remove the uncertainty, and you are permitted to make 40+ year investment bets.

That bargain became the architecture of American utilities and outlived him by ninety years. You are using his grid, under substantially his rules, in order to read this article.

Insull had a great thesis. He correctly read that electricity would be the defining infrastructure of the twentieth century, executed it for four decades, and built the physical thing.

But if being right were sufficient, he would likely have a national monument today.

How do you pay for this thing?

Infrastructure at that scale eats capital. In 1930 alone, Insull’s companies put $197 million into new facilities.

That number needs converting properly, because inflation calculators badly understate what it represents. US GDP in 1930 was roughly $92 billion. So a single year of capex ran about 0.21% of the entire American economy — call it $60 billion in today’s terms, from one man’s group of companies.

The issue with infrastructure buildouts is they almost require bubble economics. They are enormous, costly, and prohibitive. We’ve hit upon the following articles, which if you want a refresh I’ve linked below. You could say infrastructure is a passionate interest of mine, because it’s a) so useful and important and b) such a horrific quagmire.

So back to the capital source. Insull could have raised it on Wall Street. But, he had a complicated relationship with Wall Street.

He’d watched Morgan take Edison’s company away from him, and he wanted capital that didn’t come with New York attached. So he built his own channel: he sold stock and bonds directly to his own ratepayers and employees, on installment plans, through salesmen in the field. A Chicago schoolteacher could own a piece of the company that lit her classroom for a few dollars a month.

He called it customer ownership. At peak, roughly 600,000 people held Insull equity and another 500,000 held the paper.

Now, there’s a charitable and an uncharitable reading of this.

The charitable read: he took an asset class that had been the private preserve of the wealthy and handed it to machinists and schoolteachers, twenty-five years before anyone used the word “retail investor.” He said publicly and often that a shareholder who is also a ratepayer understands the business better than any institution.

The other reading: he manufactured a permanent bid for his own securities among buyers with no capacity whatsoever to evaluate them, resting entirely on a trust relationship that had nothing to do with the merits of the paper.

I don’t think he was lying. I think he believed the first version completely, and I think that’s precisely what made it dangerous — a man selling securities he was certain were good, to people who trusted him rather than the analysis.

Arguably, most major asset management groups today are running the same playbook, almost verbatim. Democratization of access. Giving the “everyman” access to the domains of the rich and ultra-affluent. Good? Bad? I’ll leave it to you to decide. Personally, I am suspicious.

The Structural Flaw

Now, what doomed Insull wasn’t necessarily that electricity was a bad investment or that his thesis was incorrect. His thesis was (ultimately) extremely right.

It was the structure (as it always is).

The operating companies were fine. Commonwealth Edison, Public Service of Northern Illinois, People’s Gas — real businesses, real customers, real bills, for a product nobody could stop buying. Most came through the Depression intact. Several are still operating today!

What failed was the thing built on top of them.

To retain control of an expanding empire while committing almost none of his own money, Insull stacked holding companies. Power stations at the base. An entity holding their shares. Another entity holding that entity’s shares. Control the top and you control everything below. Insull Utility Investments in December 1928; Corporation Securities Company of Chicago a year later, created substantially to hold the first one’s securities.

By January 1932: more than ninety-five holding companies sitting on two hundred fifty-five operating companies.

The family’s own money in the structure was under one million dollars. It directed two and a half billion in assets — about $2,500 of other people’s capital per dollar of their own.

None of that was illegal. It wasn’t concealed; the filings existed and were transparently disclosed. It was a capital structure, and it had one property that mattered more than every other feature combined: it converted any decline in asset prices into an immediate demand for cash. Particularly when you’re heavily indebted against said stock.

The event that caused the downfall was when Cyrus Eaton, a Cleveland investor, began quietly accumulating Insull shares — at some point holding more than Insull himself. Whether Eaton wanted control or merely wanted Insull to believe he did is unknowable and irrelevant. What matters is the response.

Insull’s Chicago bankers proposed what seemed an obvious solution to his control predicament: borrow roughly $48 million and buy Eaton out.

Four times, Insull refused. He deeply understood the risk of taking on a massive leveraged position against his stock.

Then in June 1930, he said yes.

Why? Two primary reasons. Firstly - as the Great Depression was settling in, Insull’s supply of retail investors essentially evaporated. And secondly - he feared (with or without merit, it’s unclear) that Cyrus Eaton was angling to take away his life’s work.

More critically, though, consider othe position he had just constructed. A fixed obligation, in dollars, on a hard schedule. Collateralized by equity in holding companies whose only assets were shares in holding companies whose assets were power plants. The obligation measured in months, against stock positions that could (and would) decline precipitously in value.

That gap is the whole story. Not leverage — mismatch. Leverage is survivable when the term of your money exceeds the term of your plan. It is lethal when it doesn’t, and it becomes lethal on a date somebody else chooses.

The Depression didn’t destroy the operating businesses. Revenue fell; people used less electricity and rode fewer interurbans. The structure didn’t need a catastrophe. It needed a pause and a resumption of market liquidity, and it did not get one. Insull pledged his remaining stock, then pledged more, and on April 8th, 1932, the debt came due. Insull Utility Investments went from $160 a share to twelve and a half cents.

He resigned in June 1932 owing roughly $16 million more than he was worth — too broke, as one banker put it, to be bankrupt.

Roosevelt ran against him by name that autumn. He fled to Greece, was arrested in Turkey, came home in handcuffs at seventy-four, took the stand in his own defense, and was acquitted. Then acquitted again. Then a third time.

Three juries found no crime, and I think all three were right. A million people lost their savings anyway.

Our categories have room for fraud and room for innocence and no room at all for what Insull actually did — which was to build a structure so fragile that being right was not enough to protect the people who trusted him.

Congress wrote the Public Utility Holding Company Act in 1935 specifically to outlaw the shape of what he’d built. He died three years later in the Métro with eighty-four cents and a laundry bill, which is how they identified the body.

A brutal ending to an absolutely legendary career.

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The Shape of Infrastructure Bubbles

What makes this worth your attention isn’t that it happened. It’s that it keeps happening, in the same form, to people who are correct.

The fiber laid in 1999 is carrying this email. The railroad buildouts were, ultimately, absolutely correct. Insull’s grid today is powering the data centers. In every case the physical thesis was vindicated and the capital structure was not, because the structures were built to require that the world cooperate on a schedule.

The pattern here is not to “beware of bubbles.” Bubbles are the easy case — you can decline to participate if you sniff one out.

The pattern I’m trying to highlight here is way harder and way more cruel: the thesis is correct, participation is rational, and the structure still kills you.

A Test

So here is what I actually do with this, and what I’d ask any sponsor you’re considering.

Not is the thesis right. Assume it is. Assume you’re Insull, correct about the century.

Ask instead: what is the longest period of adversity this position can survive, and who decides when it ends?

That second clause is the one people miss. Insull’s fate was determined by a margin clerk. The 2021 sponsors’ fate was determined by whoever set SOFR and whoever priced their rate cap renewal. If the answer to “who decides when this ends” is anyone other than you, then you’ve got yourself a precarious position.

Three things follow logically from this:

Term is a feature you pay for. Longer, fixed, non-recourse debt costs real yield in every good year. That cost is not inefficiency. It’s the premium on the only insurance that matters, and you will feel stupid paying it for years at a stretch.

Reserves are not idle capital. They’re the mechanism that converts a forced decision into a chosen one. Every dollar of dry powder is a dollar that lets you say “no thank you, I’ll wait” on a date you didn’t pick.

Being unforced is a strategy, not a temperament. It (often) shows up as underperformance in bull markets and as survival exactly once, at which point it’s the only thing that ever mattered.

Insull built the American electrical grid. He was right about the most important infrastructure question of his century, for forty years, and he could not wait eighteen months.

Don’t be a forced seller.

Think well. Act wisely. Build something timeless.

— Arie

The full story — Insull’s rise, the four refusals, the trials — is this week’s video:

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Below: the four questions I now run on every deal I underwrite, the 2021 deal I turned down and what it would have done to me, and the specific tells I’m watching in AI infrastructure credit right now.

I’ll be in the comments all week my friends.

And then, within a short span, he blew himself up with ill-advised land acquisition across the new nation. And wound up in debtors’ prison.

In fact, my fellow “in-debt” people, we have Robert Morris to thank for Debtors’ Prison no longer existing.

One of the great and fascinating stories of the rise and fall of a great man that history barely remembers.

Companion video to the full write-up below.

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In 1991, the richest man in the world was a soft-spoken Japanese business professor who had not developed a single major building until he was past fifty.

His name was Taikichiro Mori. He had spent the first half of his life as an academic — a commerce professor, of all the unglamorous things one could be — before turning, late, to the family property business in central Tokyo. By 1991 the land under his buildings had inflated to a value so absurd that Forbes ranked him the wealthiest human being on earth, ahead of every oil sheikh and software baron alive.

Perhaps a solid indicator of the insanity of the period.

And he held the title in 1992 as well.

Now, ironically, Mori topped that list at the exact moment Japanese real estate began the most famous collapse in modern financial history — a slide so deep and so long that thirty-five years later the country is only now, arguably, out of its shadow. It’s a rather ignominious achievement. On the proverbial eve of THE apocalypse, he earned the title.

And yet Mori Building did not die. Unlike most of the Japanese real estate industry, they kept buying land and putting up towers straight through the wreckage, and in 2003 — near the very bottom, when every rational Japanese investor had sworn off real estate for a generation — it opened Roppongi Hills, a $2.3 billion mixed-use complex in the heart of Tokyo. They had been told they were insane for pursuing it, but they finished the decade owning some of the most valuable real estate in all of Asia.

So how in the world, posits this piece, did the man who went through this admittedly catastrophic downturn end up doing well when everyone around him was eviscerated by the crisis?

Japan is always and forever the universal cautionary tale. Everybody knows the tales. Lost decades. The Nikkei not reclaiming its high point for something like 30 years. And all of that is true.

But the thing about markets, and the tyranny of averages, is that an average is just that. An average long-term return over a long period of time. A lot of things can and did happen during the “lost” periods.

Over these “lost” thirty-five years, the identical asset — Tokyo land — utterly ruined some owners, and enriched others. And as I often point out in this newsletter, the land/building/asset didn’t choose. Their structure more often than not did.

Leverage, the durability of the funding, and whether someone else’s fear could force you to sell: that is the entire difference between the men who were destroyed in the first twenty-four months and the men who managed to not only survive but thrive.

Longtime readers know the line this newsletter keeps returning to: the asset never fails; the capital structure does. The “Lost Decade” is maybe one of the purest laboratories ever built by history for this exact claim.

The premise of this article is two-fold. Who thrived? And who died? And what distinguished them, and critically - how can you avoid the fate of the latter, and embrace the fate of the former.

But first, how the land became a religion

After the 1985 Plaza Accord drove the yen sharply higher, Japan’s exporters got squeezed, and the Bank of Japan responded the way central banks always do — it cut rates and flooded the system with cheap money. And as always, money (like the force, or water) found its way to the place that made the most sense for it.

In this particular case, it found land. Between 1985 and 1991, commercial land prices in Tokyo roughly tripled. At the peak, the total value of all Japanese real estate was estimated at four times the value of all real estate in the United States — a country twenty-five times its size. The grounds of the Imperial Palace in Tokyo were said to be worth more than the entire state of California.

Now, of course, everybody could see that the prices were high. It was clear as day. And obviously, at some point, the land and the assets stopped producing any conceivable cash flow benefit. Which then leads to an important question.

How exactly are these high prices being financed?

Because that’s the critical question here. And it always is, in a leveraged asset like this.

What you’ve got to figure out in this moment is:

1. Who borrowed to own it?

2. What did they borrow against?

3. And who can call that loan?

Everything else, at this point, is basically a moot point in my opinion.

Archetype One: the zaitech corpses

Here is who financed it, and here is who died first.

The signature sin of the Japanese bubble had a name: zaitech — literally “financial engineering.” It worked like this. A Japanese company — often a real manufacturer with a real business — would borrow cheaply against its rising land and stock holdings, use the proceeds to buy more rising land and stock, and book the paper gains as operating income. Rising collateral funded new speculation, which lifted reported profits, which lifted the share price, which lifted the collateral again. At the peak, an estimated forty to fifty percent of the earnings of major Japanese corporations came not from making things but from these financial-engineering gains.

In short - borrow against the asset, buy the asset, count the gain, repeat. And like every carry trade, it had one catastrophic flaw: it works right up until the collateral stops rising.

Which makes sense, by the way, to most people on an intuitive level. Nobody anticipates their collateral to rise and rise and rise and never stop once. The issue is that in this sort of environment common sense goes out the window. Or, more accurately, a lot of very intelligent people become “captive” to the system, they need it to keep working, and they create very wise and very profound justifications for why this time is different.

In late 1989, a new Bank of Japan governor, Yasushi Mieno, decided to break the mania on purpose. He raised rates hard. On the last trading day of 1989 the Nikkei touched 38,915 — a peak it would not see again for thirty-four years — and then the whole edifice began to fall. Land followed stocks down. And the zaitech balance sheet, which had been a perpetual-motion machine on the way up, ran violently in reverse: falling collateral triggered margin calls, which forced sales, which drove collateral lower still, which triggered the next call.

Those who died hard were the speculators and leveraged corporations who had used land as earnings and allowed that to effectively become their business. And of course, the banks that had financed the whole mess got buried under a veritable landslide of non-performing loans.

Archetype Two: the patient patriarch

Which brings us back to Mori.

The thing that saved the Mori empire was not vision, though Minoru Mori — Taikichiro’s son, who ran the company through the collapse — had plenty of it. What saved them was the shape of their capital. Mori Building was, and remained, one hundred percent owned by the Mori family.

Well, sure, that’s helpful, I guess. But being privately owned doesn’t actually protect you from excessive indebtedness.

But, my friends, it kind of does. Here’s why. When you’re a public company, you are often forced to do what the market is doing to defend stock prices. So for instance, imagine you’re running a public company and everybody around you is using Zaitech, and absolutely crushing it. Stock prices are running up. Everybody except yours.

It’s rather like Chuck Prince, former CEO of Citigroup, describing the period before the GFC as a game of musical chairs. What stood out to me was him describing the period as one in which he had to play the game.

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

— Chuck Prince, CEO of Citigroup (July 2007)

Why did he say this?

Because his actual job depended on it. So did many others.

But your job does NOT depend on it when you’re privately owned.

So what did they do differently?

Around 1975, well before the 1980s bubble started inflating, Taikichiro Mori started systematically changing how Mori Building borrowed money. While the standard playbook was to pledge a specific building or land as collateral, Mori instead withdrew physical land/buildings as collateral and spent two years negotiating with banks to lend against the earning power / cash flows of the entire group.

Key point here - by the time the bubble popped, almost all of Mori’s debt was unsecured. So while they could margin call other borrowers, they could not actually touch Mori.

Separately, Mori exercised strict self-imposed debt constraints. Critical stuff here. While many competitors would take on leverage equal to, say 10 or 20x revenue (or buy land and hope the rising gains alone would cover the debt), Mori held to a very strict internal accounting rule - their net debt should never exceed 5x operating revenue. So they only invested in projects where the current cash flow from existing income could cover service obligations. Even if the value fell to zero.

This is absolutely critical stuff. It’s not like they were immune to the broader market conditions. By 1994 Tokyo rents had dropped, and their net debt hit about 7x operating revenue - temporarily exceeding their own internal target. Likewise, their unrealized land gains dropped from nearly ¥1.5 trillion (!) to near zero.

But recognize this.

They could not be forced to sell for all the above reasons. And because they could not be forced to sell, they were free to do the opposite — to buy while everyone else was a seller, to spend the 1990s patiently assembling the land parcels for Roppongi Hills while capital fled the asset class, and to open that project into the teeth of the country’s pessimism in 2003. Minoru’s brother, Akira Mori, split off to run Mori Trust and did the same thing on his own balance sheet, building a second fortune from the same wreckage.

Archetype Three: the vultures with dry powder

Now for the people who did not merely survive Japan — who got rich off it. They were, almost to a firm, foreigners who showed up late with cash.

For most of the 1990s the distressed Japanese market was effectively closed: the banks would not recognize their bad loans, the legal machinery for foreclosure was slow and alien, and the government kept the corpses on life support. Then, in the late 1990s, deregulation finally cracked the door, and Japan built its own version of America’s Resolution Trust Corporation — the Resolution and Collection Corporation — to drag nonperforming loans off the banks’ books.

The patient capital was waiting at the door. Lone Star, Cerberus, Goldman Sachs, and Morgan Stanley moved into Japanese nonperforming property loans and distressed real estate, buying assets at prices the sellers of 1989 could not have imagined in a nightmare. One transaction tells the whole story: in October 1999, Los Angeles-based Kennedy Wilson paid under $20 million for a portfolio of nonperforming loans with a face value of $250 million — roughly eight cents on the dollar of the original claim.

This is a wild figure, by the way. Eight cents on the dollar for loans secured by real buildings that were, in most cases, perfectly functional.

Morgan Stanley kept pressing the theme for a decade. As late as 2007 it was buying thirteen Japanese hotels for $2.4 billion and, alongside Starwood, taking the 802-room Sheraton Grande Tokyo Bay. And the exit door for all of this patient capital opened right on cue: Japan launched its first REITs in 2001, creating exactly the liquid, public market these buyers needed to sell stabilized assets into.

Archetype Four: the old houses that took the write-down

There is a fourth group, quieter than the rest, and they matter because most of us will never be a billionaire patriarch or a distressed-debt fund. They are the old blue-chip landlords: Mitsubishi Estate, Mitsui Fudosan, Sumitomo Realty.

These firms got hurt. Badly. They had bought land in the bubble like everyone else, and they spent years — in some cases more than a decade — grinding through the write-downs. Mitsubishi Estate did not turn its first profit increase in three years until well into the recovery. This was not a painless hold.

But they did not die, for two structural reasons. First, they owned the irreplaceable core — Mitsubishi Estate essentially is Marunouchi, the district next to Tokyo Station that will never be reproduced — carried on the books at low historical cost and financed conservatively enough to hold through the storm. Second, they were institutions built to think in generations, not fund cycles. They took the accounting pain, kept collecting rent on assets that could not be replaced, and waited. Decades later, the properties they carry at 1970s and 1980s acquisition cost are worth multiples of book — value that simply does not appear on any statement until the day it is realized.

They are the case for durable asset plus durable structure: not spectacular, not fast, but unkillable.

Four owners, one asset, thirty-five years

Same asset. Same country. Same thirty-five years. Four completely different fates, and not one of them was decided by the quality of the buildings.

The Bit You Simply Cannot Sugarcoat

The zaitech speculator was destroyed by his structure — too much short-term leverage, no ability to hold. That failure mode is fast, universal, and avoidable, and it is the one I harp on constantly. But the owner who did everything right on structure — low leverage, irreplaceable asset, patient capital — still faced something the American cycles never really tested: a genuine, grinding, thirty-plus-year deflation, layered on top of a shrinking population. The Nikkei did not reclaim its 1989 high until February 2024. Japan’s government debt climbed past 230 percent of GDP holding the whole thing together.

What that means is uncomfortable and important: in Japan, low leverage bought you survival, but it did not, by itself, buy you riches. Simply holding a great asset with a great structure got you through — for thirty years — but the fortunes were made by the people who bought the distress at the bottom, not by the people who merely held from the top. “Just buy quality and hold forever” would have kept you solvent and left you waiting three decades to break even in nominal terms.

So the real lesson has two layers, not one.

Structure is what lets you survive the collapse.

Vintage — buying the wreckage at a distressed basis — is what makes you rich on the other side of it. I’ve written on this before, we call it the Second Owner Thesis.

The Moris did both: un-callable capital to survive, and the nerve to buy and build at the bottom to prosper. That combination, not either half alone, is the thing worth copying.

The rhyme you’re standing in

The United States is not Japan in 1989. We have demographic growth Japan lost, immigration Japan refused, and — in the supply-constrained coastal markets I actually operate in — a structural housing shortage that no deflationary spiral is going to erase. I am not forecasting a lost decade for American real estate. The setups are genuinely different.

But the pattern rhymes exactly, and that’s what matters.

The 2021–2022 vintage was America’s zaitech moment in miniature: operators using the cheapest debt in history not as a tool but as the profit engine itself, buying at record-tight cap rates on the assumption that rising collateral would keep the machine spinning. Rates reset, the collateral stopped cooperating, and now the forced sellers are appearing — bridge loans maturing, rate caps expiring, the maturity wall cresting into 2027. That is our slow-motion RCC. That is the distressed-basis window creaking open, and patient capital is once again waiting at the door.

The difference between the people who will be ruined by this and the people who will be enriched by it is not going to be the quality of their buildings. It is going to be the same four-way split it was in Tokyo: who was over-levered and forced to sell, who had un-callable capital and could hold, who had dry powder and could buy, and who owned something irreplaceable at a basis they could carry.

The operator’s takeaway

Thirty-five years of Japanese real estate collapse into three key take-aways.

Survive. Structure the book so that nobody else’s fear can force your hand. No short-dated debt against long-dated assets. No capital that can vote to sell at the bottom. The zaitech speculator and the Sun Belt syndicator died of the same disease, forty years and six thousand miles apart, and it was never the building.

Buy. Keep dry powder for the vintage that the wreckage manufactures. The fortunes in Japan were not made in 1989 by the brilliant; they were made from 1999 by the present and solvent. When the forced sellers arrive — and in this cycle they are arriving — the patient bid sets the price, because it is the only bid left.

Hold. Own things that cannot be reproduced, at a basis you can carry for decades, so that time is working with you instead of against you.

Taikichiro Mori did not get rich by predicting the bottom of the worst real estate market of the twentieth century. He got rich because he had built his house so that he never had to guess where the bottom was. He simply could not be forced out — and so, when everyone else was, he was the one still standing there to buy.

Build it so you can’t be forced out. Then go be the buyer.

Think Well. Act Wisely. Build Something Timeless.

─────────────────────────────────────

We are actively raising capital to deploy into the distress this cycle is manufacturing — supply-constrained Pacific Northwest multifamily, acquired below replacement cost from motivated sellers, with sensible long-term debt. If you’re an accredited investor who thinks in decades, let’s talk.

For more on the philosophy behind all of this, my book Timeless Wealth is where it starts.

Think Well. Act Wisely. Build Something Timeless.

Arie

The Chase Manhattan Mortgage and Realty Trust — Chase’s name over the door, Chase’s people advising it, Chase’s reputation underwriting the whole enterprise — declared $1.15 per share on quarterly earnings of $1.20. It was the last quarter before the losses started.

But while the check looked good, it didn’t share a critical detail. As of the last day of February 1974, seventy-one percent of that trust’s assets were on nonaccrual — loans that were still, technically, assets, but which had stopped producing a dollar of income. The trust was paying out cash it had booked but was never going to collect, because the tax code required it to distribute ninety percent of earnings, and the earnings were an accounting artifact.

In this case, the buildings were standing, the land was fine, and the half-finished towers bankrolled by this mortgage REIT would eventually get finished and leased up by somebody else.

What broke was something fundamentally different. It was (and nearly always is, my friends) the financing structure. It was a structure so wildly elegant on the way up, and savagely lethal on the way down, that it took the industry more than a decade to rebuild after the firestorm.

This is clean proof of the thesis this newsletter keeps returning to: the funding structure fails before the asset does. And the beauty (and tragedy) of this story is that it is probably still in the working memory of a good number of Americans.

How a tax break vehicle became a machine

The REIT was born in 1960, tucked into a cigar excise tax bill. The bargain was simple and, on its face, admirable: a trust that paid out substantially all of its income to shareholders would owe no corporate tax. Congress wanted to give the small investor a way to own income real estate the way they owned stocks.

For eight years, almost nothing happened.

Then, at the tail end of the 1960s, somebody noticed the vehicle could be pointed in a direction Congress had never contemplated. Instead of owning buildings and collecting rent — the slow, unglamorous equity REIT — you could use the tax-free wrapper to lend. And then not pay taxes on that, but pass it right through to your investors.

Nice.

The mortgage REIT was born in 1969, and its most aggressive strain was the construction-and-development lender: raise equity, borrow hard against it, and make short-term floating-rate loans to developers throwing up apartments, offices, and condominiums across the Sun Belt.

The growth was violent. Total REIT assets went from roughly $1 billion in 1969 to nearly $20 billion by 1973, of which some $15 billion sat in mortgage loans. Of the roughly 200 trusts then in existence, about 130 were mortgage trusts. By 1973 REITs were supplying something like twenty percent of every dollar loaned for new construction in the United States.

That, my friends, is a wild statistic. A vehicle that essentially didn’t exist in 1968 in any substantive way was, five years later, funding a fifth of American construction.

No way that ends poorly.

The man who got paid to make it bigger

There is a villain in this story, and it is not a person so much as a compensation agreement — though the people who signed it knew exactly what they were signing.

Almost all of these trusts were externally advised. The REIT itself was a shell with a board; the actual work of originating loans was done by an adviser, very often an affiliate of the sponsoring bank or mortgage banker whose name was on the letterhead. And the adviser was not paid on the performance of the loans. The adviser was paid a fee calculated on the income and the asset size of the trust.

Incentives matter. Consider this.

The person deciding whether to make the loan got paid more if the loan got made, got paid more if the loan was bigger, and — critically — was insulated from what happened when the loan went bad, because it wasn’t the adviser’s balance sheet. The scholarship on the era put it plainly: the structure gave the adviser “a strong incentive to expand the size of the REIT as rapidly as possible” and “a vested interest in the growth of the REIT.”

The numbers on that arrangement are obscene in retrospect. In one year, a single bank adviser collected $19.9 million in fees from a trust whose entire net income was $59.6 million. In short, a third of the trust’s earnings walked out the door to the people whose only job was to make it larger.

And it worked exactly as designed. Between June 1972 and June 1974, gross income at the fifty-eight largest short-term mortgage REITs a bit more than doubled. Interest expense on their non-convertible debt rose more than sixfold — from about a quarter of gross income to over seventy percent. Over the same window, the share of net income actually distributed to shareholders collapsed from nearly fifty percent to two percent!

To put it succinctly - this brilliant tax machine had ceased to serve the equity owners and instead fed the operators.

So how did this work (and blow up)?

The mechanism here is really the whole story (and it’s a story that repeats itself, constantly, throughout history):

The construction mortgage REIT funded itself with the cheapest, shortest money available: commercial paper, IOUs measured in days and weeks, backstopped by bank lines.

It then made construction loans, which are long, illiquid, and don’t pay off until a project is built, leased, and refinanced into a permanent mortgage. The loans floated at a spread over prime, so on paper the trust was “matched” — if funding costs rose, loan yields rose with them.

The spread looks like free money to most people and investors. You borrow at a tiny cost, you lend at a big premium, you pocket the difference, distribute it, watch the stock soar on the yield. Then, you issue more equity into the soaring stock, borrow more against that, and do it again.

And around and around we go.

It’s effectively a carry trade (more on the Yen Carry Trade below, one of the most important forces in all of global finance).

But here’s the thing. Every carry trade contains the same hidden and unspoken clause: it works until the day you cannot roll the short side. Then the maturity you never think about — the maturity of your funding — becomes the only maturity that matters.

And the “matched” floating rate was nice on paper, but meaningless in reality. Why?

A construction loan that goes bad stops paying entirely.

The rate reset mechanism here is meaningless on a loan that isn’t performing. The commercial paper, meanwhile, didn’t reset. It matured, constantly, and had to be re-sold to a market that was under no obligation whatsoever to show up.

The market had already given the warning. In June 1970, Penn Central defaulted on roughly $80 million of commercial paper and briefly froze the entire CP market; investors refused to roll paper at completely unrelated issuers, who were shoved into their banks for emergency cash. The lesson was noted at the time and, as always, filed away.

December 21, 1973

Every collapse has a name attached to the first domino, and this one belongs to Walter Judd Kassuba.

Kassuba was a Wisconsin-born, Florida-based apartment and condominium developer who had assembled one of the largest privately held real estate operations in the country — apartment buildings, townhouses, and motels scattered across a dozen states. He was, in the parlance of the day, exactly the kind of borrower the trusts fought each other to fund: fast, ambitious, and enormous.

On December 21, 1973, Kassuba and his controlled entities filed for protection with roughly $420 million in liabilities (approximately $3.6 - $4 billion today). At the time, it was the second-largest bankruptcy in American history, behind only Penn Central. He owed something on the order of $130 million to twelve separate real estate investment trusts.

Critical insight here. Kassuba’s filing did not merely impair the twelve balance sheets he was tied to. It told a broader story to the commercial paper market (a market you do NOT want to have panic or start looking sideways at what you’re doing). The concern was - what’s the collateral?

And Kassuba’s filing revealed that the collateral was mostly speculative, half-built complexes across the country that were highly dependent on the developer’s ability to actually sell condos going into a recession.

One trustee, doing diligence on a rival trust’s portfolio that December, discovered its Kassuba mortgage payments were months in arrears with overdue taxes stacked on top. A life insurance executive who held first mortgages on the same properties described the situation in one word: “a shambles.”

The fuse was lit. Now the environment did the rest. The Arab oil embargo detonated inflation, Arthur Burns’s Fed chased it, and the prime rate marched toward 12% by the summer of 1974. Two things happened at once, and they were fatal in combination:

1. The cost of funds exploded. Short-term rates ripped higher and the trusts had to re-sell their paper into that every few weeks.

2. The collateral stopped performing. Developers died. Projects halted mid-build. Kassuba was joined by John Jamail Builders in Texas, Urbanetics in California, and a long tail of smaller builders. A half-finished condo tower generates no rent, cannot be refinanced into a permanent loan, and cannot service a construction loan. The floating yield floated to zero.

And then the thing that actually killed them: the commercial paper market looked at a construction REIT and said no. Not “at a higher rate.” Just no. The paper became unsellable at any price, while the buildings securing those loans stood exactly where they had stood the week before.

New mortgage REIT construction commitments in February 1974 came in at $359 million, against $766 million a year earlier. The valve was turning the wrong way.

The carnage

What followed was a bank run in slow motion with incredible carnage (as these things always do).

The industry. REIT share prices fell more than 85% in a single year between 1973 and 1974. Associated Mortgage Investors filed in March 1974, reportedly the first trust to go. Fidelity Mortgage Investors followed in January 1975 with $182.4 million in liabilities. Continental Mortgage Investors — at one point the second-largest trust in the country, NYSE-listed, its portfolio almost entirely construction and development loans — lost $106.6 million in the fiscal year ended March 1975, defaulted, and filed for reorganization on March 8, 1976. Nine trusts ultimately went bankrupt outright. Many more spent the back half of the decade as workout vehicles.

The flagship. Chase Manhattan Mortgage and Realty Trust is the whole crisis in one entity. At its February 1974 peak, shareholders’ equity stood at $137.7 million against borrowings north of $925 million — call it 5.5 to 1, aggressive but not insane. One year later: loans and investments of $989.2 million, borrowings of $896 million, and equity of $30.1 million. The leverage ratio had gone to roughly thirty to one, not because it borrowed more, but because the equity evaporated underneath the debt.

The composition of the wreckage is absolutely wild to behold. Of nearly $150 million the trust had tied up in condominium projects, exactly one loan — $317,000 — was still earning income. Of $28 million lent against office development, $1.5 million was earning. Remember the carry trade here? Floating rate protection? Poof.

The buildings. Chase Trust had $18 million out to Colony Square in Atlanta, a $100 million mixed-use development that filed for bankruptcy — two condominium towers, one of which never came close to filling. Atlanta, the Sun Belt’s showpiece, went from boom to a bust so total that it was still being written about as a cautionary tale four years later.

The sponsors. Here the conflicts nobody minded in 1972 became front-page problems. Chase Manhattan Bank — whose 1972 annual report had cheerfully explained that with corporate loan demand soft, “domestic real estate lending provided one such opportunity” — found itself trying to save a trust wearing its own name. It bought poor-quality assets off its REIT at prices that flattered the REIT. It extended more credit into the hole. In September 1974 it helped assemble a $700 million bank facility from forty-one institutions to keep the trust breathing. In October 1975 it took $160 million of the trust’s loans onto the bank itself. The trust was finally forced into bankruptcy in 1979 anyway, and Chase — the third-largest bank in the country — ate the losses and the reputational damage both.

The system. This was never contained to real estate. In October 1974, Franklin National Bank failed — the largest bank failure in American history to that point — brought down in part by its holding company’s inability to redeem commercial paper amid concerns about real estate exposure. Bank net loan charge-offs went from $2.0 billion in 1974 to $3.2 billion in 1975. Workout bankers spent two solid years on airplanes restructuring syndicates in which some of the lenders themselves were close to failing. The Fed was on the phone throughout.

And the buildings? Mostly fine. New owners bought them for cents on the dollar and did beautifully. It was the lenders — the elegant, tax-advantaged, brand-name lenders — who were carried out on stretchers.

The genius of the species

I want to pause on something larger than real estate.

Congress wrote a tax exemption in 1960 to help a schoolteacher own a piece of a shopping center. Within a decade, that exemption had been reverse-engineered into a tax-free, off-balance-sheet, externally managed, thirty-times-levered maturity-transformation vehicle funding a fifth of American construction with paper that came due every three weeks.

Nobody set out to build that. There was no conspiracy. There was simply a structure sitting there with an unpriced advantage in it, and a large number of intelligent, well-compensated, individually rational people who found the advantage and pushed on it until it broke.

This is what our species does. It is, honestly, our best trait — the same restless commercial creativity that produced the corporation, the mortgage, the container ship, and the index fund. But it operates without a governor. Every genuine financial innovation is discovered by a few people who understand it, adopted by many who understand the shape of it, and finally mass-produced by a crowd who understand only that it has been working. The innovation does not fail because it was a bad idea. It fails because it gets scaled past the point where the original insight still holds, by people paid on volume.

The mortgage REIT itself was not a scam. It was a real idea, arguably a good idea — matching institutional capital to a genuine construction financing need — that got industrialized until the funding side of it became the core bet. That plus the perverse incentive structure.

Expect this. Whatever the structure of the next decade turns out to be, it will be sold to you as new, it will be genuinely clever, and it will be dismantled by the third wave of people using it.

Bonus Content: parallels to the GFC and today … for paid subscribers to The Timeless Investor.

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What actually failed

Strip away the era and the autopsy reads the same every time:

• The asset was never the problem. The dirt, the concrete, and eventually the rents were fine. The financing on top of them was the fragile thing, and the fragile thing broke first.

• The mismatch was the poison. Funding years-long illiquid loans with days-long money is a bet that the short-term market will always be open to you. That is not a spread business. What you’re really making here is a liquidity bet. Not a fun bet to make, when the music stops.

• The floating rate was theoretically great, in reality didn’t work. Matching the rate did nothing to match the duration or the liquidity. The issue is that a performing-loan hedge is worthless against a non-performing-loan reality.

• The fee structure chose the outcome. Pay someone on asset growth and you will get asset growth, right up to and past the point of insolvency. This is not a moral failing of 1970s bankers. It is arithmetic.

• The sponsor’s name was borrowed respectability. A great brand over the door tells you nothing about whether the paper underneath can be rolled in a panic. (Longtime readers will recognize the Banco Ambrosiano lesson wearing a different suit.)

The rhyme you’re living in

I’m not writing this as an antiquarian. The 1974 machine has been rebuilt, renamed, and re-marketed, and it is running right now.

We have spent this newsletter’s whole life on the maturity wall and the duration trap: trillions in commercial real estate debt written at generationally cheap rates, coming due into a cost of capital that has doubled. That debt was underwritten as though the funding environment of 2021 was a permanent condition of the universe. It was a moment.

And the construction REIT has a direct lineal descendant: the explosion of private credit and non-bank real estate lending, much of it funding long, illiquid development and bridge loans with facilities that are shorter, more confidence-sensitive, and more re-priceable than the marketing admits. The spread looks like free money. The floating rate is offered as the hedge. The managers are paid on assets under management. The sponsors have wonderful names.

I am not predicting a repeat. I am pointing out that every input is identical.

So ask the 1974 question of any lender you deal with — and of yourself: what is the maturity of your funding, and who decides whether you can roll it? If the answer is “a market that can simply decline to show up,” you do not own a spread business. You own a liquidity bet, and the buildings will outlive you.

The operator’s takeaway

The developers who survived 1974 were not the ones with the best projects. Kassuba had wonderful projects; most of them got built and leased and made somebody a fortune. He just wasn’t there for it.

The survivors were the ones whose funding could not be yanked mid-cycle — long-dated, committed, un-callable capital that let them stand still while the leveraged players were forced to sell into the panic. That is the entire difference. Not vision, not underwriting, not location. Whether someone else’s fear could call your loan.

In a maturity wall, patient money doesn’t just earn a return. It sets the price, because it is the only bid left standing when everyone else is a forced seller.

Build the book so that no one else’s panic can call your loan. The vintage that follows a massacre is the best one there is — but only for the capital still solvent enough to buy it.

Think Well. Act Wisely. Build Something Timeless.

Arie van Gemeren, CFA

And the bloody history of banking crises rhyme. A lot. And the effect on investors of all stripes are (often) disastrous, save for the sharp eyed few that somehow avoided them (and bought from the wreckage). So today - let’s dive into a classic and brutal banking crisis I all but guarantee that you haven’t heard of.

On February 25, 1797, the Bank of England stopped paying gold.

Recall that in the pre-fiat world, a banknote was little more than a stand-in for gold. An englishman could walk up to the counter at Threadneedle Street and exchange their note for gold. But when the BoE ceased doing this, the entire system was thrown into chaos.

You suddenly discovered, to your horror, that your banknote wasn’t convertible into anything. The same week that the BoE stopped paying gold, the Bank Restriction Act suspended convertibility. The satirist James Gillray drew the Bank as an old woman in a dress made of paper notes being assaulted on her strongbox — “the Old Lady of Threadneedle Street” — and the nickname stuck for two hundred years.

And this suspension was supposed to last a few weeks. Except it lasted until 1821. Such is how “emergency measures” often play out. Sounds like “temporary shelter-in-place” for COVID!

Now what’s fascinating about this is it was one of the first truly global panics.

Three thousand miles away, in Philadelphia and in the Genesee country and in the half-built streets of the new capital on the Potomac, American land barons were already drowning.

And these two events were no coincidence. You could argue that they were the same event, viewed from opposite ends of a single rope. Understanding how that rope was strung — how a swamp lot in Washington City and a gold window in London ended up tied to the same knot — is perhaps one of the great lessons a modern-day investor can learn from the 1790s.

Why?

Because the mechanics don’t look that different from today. They never do, by the way!

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The first global margin call

We tell the story of 1796 as an American land bubble. In fact, I wrote on this topic exactly in “The Financier of the Revolution” (see below). That is where the most visible wreckage was.

But the mechanism was transatlantic from the first day, and it ran in a sequence worth studying.

Step one: cheap money manufactures confidence.

The newly chartered Bank of the United States and a rash of state banks expanded credit aggressively in the early 1790s. Money was easy, nominal returns looked fat, and real interest rates were low. As Curott and Watts document, that credit expansion “unleashed a bout” of inflation and low real rates that spurred a speculative boom in exactly the two places booms always go: real estate and capital-intensive build-outs. Cheap money often seems like a great opportunity. It is usually anything but.

Step two: the smartest operators lever into the most illiquid asset.

The largest single scheme was a partnership of the Boston merchant James Greenleaf with the Philadelphia financiers Robert Morris and John Nicholson. By late 1793 the three of them had acquired something like 40 percent of the building lots in Washington, D.C. — land in and around the capital that did not yet exist. Their North American Land Company would eventually issue on the order of $10 million in notes backed by speculative western land. Paper claims on dirt, circulating as if they were money.

Step three: the funding was foreign, and therefore beyond their control.

Greenleaf’s plan was to finance the whole edifice with loans from Dutch banks. Then the French Revolutionary armies invaded the Netherlands in 1794–95, and the Amsterdam money simply never came.

This is the part Americans always leave out of the American side of this story: the plug pull happened in Europe. The operators in Philadelphia had built a structure whose survival depended on a credit decision made by people they would never meet, in a country about to be overrun. Sounds similar?

Again … history never ceases to amaze with all its rhyming.

Step four: specie flees, and the tide goes out everywhere at once.

The domestic inflation of the early 1790s had made American goods expensive; net exports fell; and by 1795 gold and silver were flowing out of the country. The money supply contracted, prices fell, and real interest rates spiked. In that credit crunch, as the economists put it with lovely understatement, “businesses reliant upon rolling over short term debt were rendered unsustainable.” Every position that depended on refinancing died at the same moment — not because the assets went bad, but because the rolling stopped.

Step five: the core protects itself, and the periphery is sacrificed.

When English depositors, terrified of a French invasion, began demanding gold instead of notes, the Bank of England did what every core institution does in a panic: it protected itself first. It slammed the gold window shut. That act — rational for the Bank — sent a deflationary shockwave through every market downstream of London, which in 1797 meant the coastal United States and the Caribbean. The center pulled in its horns; the edges were amputated.

That, right there, is basically the entire bloody machine.

Easy credit builds confidence; confidence funds illiquid assets with borrowed and foreign money; a shock somewhere in the chain reverses the specie flow; refinancing stops; and the core survives by cutting the periphery loose. Morris, Nicholson, and Greenleaf were the periphery. And they all went to debtors’ prison.

This had already happened — twice

Here is what elevates 1797 from an anecdote to a law. Because here’s the rub. This entire event was actually a re-run of an earlier panic.

In 1763, a credit crisis swept northern Europe from Amsterdam to Hamburg. Schnabel and Shin call it “an early instance of contagion on the asset side of the balance sheet” — highly levered merchants, tied together by interlocking short-term credit, forced into distress sales that fed on themselves. In 1772–73, the first genuinely modern banking crisis hit London, Scotland, and the Dutch Republic, when — in Adam Smith’s own lifetime and in his own account — a mania of speculation financed by buying “on margin” collapsed and took down banks from Edinburgh to St. Petersburg.

Three crises — 1763, 1772, 1797 — in thirty-four years. Different assets, different cities, same disease: short-dated, interlocking leverage against illiquid or speculative collateral, funded through a credit chain nobody at the bottom controlled. The asset is usually blamed, but I point my finger at the funding mechanism.

And out of the wreckage came the rules, exactly as they always do.

Duer’s 1792 collapse produced the Buttonwood Agreement, the seed of the New York Stock Exchange. The failures of 1796–97 produced the federal Bankruptcy Act of 1800 — America’s first — modeled on English practice and, tellingly, available only to merchants, bankers, and brokers. It is the rhyme this newsletter keeps returning to: the rules written in the ashes of one mania build the fortunes of the people disciplined enough to still be standing for the next one.

Which raises the only question that matters for an operator reading this in 2026. When the rolling stops — and it always, eventually, stops — do you want to be the periphery that gets cut loose, or the balance sheet that cannot be called?

Most people never decide. They inherit their balance sheet by accident, one “market-standard” loan at a time, and discover its true shape only in the one week it is tested. The rest of this piece revolves around understanding the exposure of your own balance sheet to lenders and sovereigns that you have no control over.

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The Timeless Five — Saturday, July 18th, 2026

Five things worth your attention this week — from The Timeless Investor

Good morning, friends.

I’ve had two genuinely slow weeks in a row, and — as some of you noticed — three Saturdays without a Timeless Five landing in your inbox. So consider today a catch-up issue: I’m wrapping all three of those pieces into one letter, alongside what actually mattered in the market this week.

And this week the market handed us a perfect Timeless Investor set piece of stories.

Story one is the inflation print. On Tuesday, the June CPI came in soft: the all-items index actually fell 0.4% on the month — the largest single-month decline since April 2020 — and the annual rate dropped to 3.5%, down from a scorching 4.2% in May and below the 3.8% the Street expected. The financial press did what it always does and ran the word “cooling” across the top of every screen.

Now read the machine underneath the headline.

Nearly the entire decline was energy. The energy index fell 5.7% on the month and gasoline dropped almost 10% — and that drop was itself a mirage, the mechanical unwind of an oil spike that had nothing to do with the underlying trend in prices. Strip food and energy out and core inflation was flat on the month and still running 2.6% over the year.

On top of all of this, rate-hike voices on the FOMC are getting louder, not softer; futures now price roughly a 15% chance of a hike as soon as this month and about 65% by September!

And then the other foot falls. The reason gasoline could fall 10% in June is that oil had spiked in the first place — and this week the whole thing lurched again. The Iran ceasefire that markets collectively breathed a sigh of relief over totally broke down, the administration moved to reinstate a blockade on Iranian shipping through the Strait of Hormuz, and crude whipsawed on the news.

I won’t get into politics (and being married to an Iranian woman, I can tell you that the removal of this regime in Iran would be wonderful, but how is the rub), but I do want to say that this war seems ill-advised from inception, and is having massive and deleterious impacts on markets.

That much is obvious.

More critically, energy price swings are having massive impacts on spending. And on inflation. I still take the view that high energy prices are ultimately deflationary, but we will have a lot of pain to get there (and the deflation I’m talking about is ultimately also recessionary). So it isn’t like the resulting deflation is “good”.

And lastly - AI and SpaceX. The AI complex wobbled again. Semiconductors got absolutely hammered — the chip index led the major indexes to weekly losses — even as the mania machine kept manufacturing new fuel: a record-shattering foreign IPO on a U.S. exchange and China’s Moonshot unveiling one of the largest open AI models yet. Same pattern we flagged with SpaceX and the delayed OpenAI listing: the story keeps getting bigger while the structure holding it up keeps getting more brittle.

I particularly enjoyed a piece earlier this week about whether SpaceX is the thing that popped the AI bubble. I wrote about SpaceX and its irrational valuation and the irrational exuberance around it in a prior Timeless Five piece. Obviously, with stocks, you just never know how things will ultimately end up. But as of today, the story seems to be playing out mostly as anticipated.

So, you’ve got a cool headline that’s really a hot core, a war premium / war pain, and a mania adding weight to a structure that’s already creaking. Three stories, one lesson — stop trading the headline and read the structure underneath it. That happens to be the through-line of all three essays I’m about to hand you, written across these last quiet weeks.

Now — onto your Timeless Five.

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🏢 Crown Point Apartments — Last Call

Our latest deal is slated to close shortly, and we have about $200,000 left on the full equity raise. It should fill quickly, so we’re circulating this out to the Timeless Investor community (accredited investors only) to see if anybody is interested in reviewing further.

This is a 34-unit SE Portland building bought at $141K per door — about $131 a rentable foot, well below replacement cost. Seller-financed at a fixed 5.0%, interest-only, 60 months, covering 69% of the capitalization — no bank, no rate-cap cost, no refinance risk inside the hold. An 8.8% cash-on-cash yield in year one climbing toward 11%, an in-place 7.1% going-in cap, and a projected 18.2% net LP IRR at a 2.06x equity multiple on a five-year hold.

This is a well-located vintage Pacific Northwest asset at a basis that survives a 5% long bond and a Fed that isn’t coming to help — cash flow from day one, fixed-rate seller paper, basis below the cost to build. And it isn’t a hope; it’s the fourth run of a proven playbook. Across Goldie, Grandview, and the Imperial Arms, we’ve already returned more than $445,000 in cash to investors, every asset paying, every one bought below replacement cost. Crown Point is cut from the identical cloth — same submarket, same team, same discipline.

And the special sauce. We built an in-house management company primarily to handle our Portland based assets, and our group’s results are exceptional. Nearly 98% occupied, less than 0.5% bad-debt portfolio wide, leasing times within 30 days, and seeing ~4% renewal and trade-out increases across the portfolio.

This is the last call. If you’re an accredited investor and you want to see the underwriting before the final allocation closes, now is the moment to raise your hand.

📩 See the full Crown Point opportunity →

🇺🇸 The Financier of the Revolution Who Died in Debtors’ Prison

In the winter of 1781 the American cause was, on paper, bankrupt — the Continental dollar so worthless that “not worth a Continental” entered the language. One man closed the gap on the strength of his own name: Robert Morris, the richest merchant in America, who signed personal promissory notes to move and feed the army that won at Yorktown. Fifteen years later, that same man — a signer of the Declaration, the Superintendent of Finance who kept the Revolution solvent — sat in the Prune Street debtors’ prison in Philadelphia, ruined. George Washington visited him there.

He wasn’t brought down by the British or by bad luck. He was brought down by land bought on borrowed money — America’s first great real estate bubble. Morris bought staggering tracts on the frontier — millions of acres — not with cash (no one had that much cash) but on credit, refinanced by selling paper claims to European buyers who were also using borrowed money. The whole edifice depended on one thing: that the paper kept moving. In the mid-1790s, the French Revolution dried up European capital and the Panic of 1796–97 froze credit on both sides of the ocean. The paper stopped moving. Morris owned millions of acres and couldn’t raise a few thousand dollars.

The comparisons to today are uncanny: an operator buys real, durable, genuinely valuable assets, finances them with short-dated or refinancing-dependent debt because that’s how everyone does it and the credit is cheap right now, and assumes he can always roll the paper — until the regime changes and the paper stops rolling. The asset was never the problem. He loses it anyway.

Being right about the asset does not save you. Surviving until you’re proven right does — and survival is decided not by what you own, but by the terms on which you owe.

🎲 The Bloody History of (Sports) Betting

It starts with a hanging. In August 1812 a crowd climbed Cambridge Castle hill to watch Daniel Dawson die — not for murder or treason, but for poisoning racehorses at Newmarket on behalf of a betting syndicate that understood a brutal truth: it’s far easier to profit on a race when you already know which horses won’t finish it. That crime tells you almost everything about the true nature of betting markets, which have always been a mirror of the financial plumbing of their age — and every era’s plumbing springs a leak in exactly the same three places.

Counterparty risk — will the other side actually pay when you win? Custody — where is your money while you wait, and can you get it back? Information asymmetry — does someone know something you don’t, and have they arranged the outcome accordingly? Rome gave us the impulse (and emperors who wrote the rules and seized winnings at will). Victorian Newmarket gave us manipulation in its purest form — when you can alter the asset itself, your “edge” is an illusion sold to you at fair odds. Antigua’s WSEX and then FTX gave us the custody leak: a balance you cannot withdraw is not an asset — it is a promise, and promises default.

So the next time you look at a betting line, a brokerage balance, or a yield that seems too smooth, ask the old, bloody question Dawson’s victims never got to: not whether the odds are good, but whether my money will be there to collect — and who decides if I win.

🌾 The Master’s Eye and the Phoenician Ship

Around 360 BC, on an estate in the western Peloponnese, an exiled Athenian walked his fields. Forty years earlier he had led ten thousand stranded Greek mercenaries out of the heart of the Persian Empire — the march he immortalized in the Anabasis. But this piece isn’t about the march. It’s about what Xenophon did afterward, when the adventure was over and he had an estate to run: he wrote Oeconomicus, the root of the word economics and, as far as I can tell, the first asset-management manual in the Western canon.

Its hinge lands in the first pages, via Socrates: wealth is not a pile of things — it is what you can use well. A flute is wealth to a man who can play it; to a man who cannot, it’s dead weight. Translate that into our language and it is heresy against the entire industry:

A building is not an asset. A building you can operate well is an asset. They are not the same thing, and the gap between them is where fortunes are made and lost. Two identical buildings on the same street, bought at the same basis, diverge by hundreds of basis points of yield over a decade — not because of the bricks, but because of the operator.

Then the line I love most in the whole book, folk wisdom Xenophon clearly treasured: asked what fattens a horse, a Persian nobleman answered, “the eye of the master.” The master’s eye fattens the horse. The animal isn’t fattened by the owner doing the feeding — a groom does that. It’s fattened by the owner showing up, walking the stable, catching what the groom lets slide precisely because no one is checking. Presence changes behavior. Attention is a nutrient. What gets inspected gets fed. Absentee ownership is a slow-motion transfer of your wealth to whoever is paying attention — the contractor, the manager, the broker. It’s why I run in-house management: somebody’s eye is on your asset every day, and Xenophon’s only question is whether it’s yours.

📖 Currently Reading — On Character, General Stanley McChrystal

A recurring slot: what’s on my desk, and why it belongs in an investor’s hands.

Every so often I’ll share what I’m actually reading. Right now it’s retired four-star general Stanley McChrystal’s On Character: Choices That Define a Life — a book that reads less like a memoir and more like a modern Meditations, which is exactly why it belongs in this newsletter.

McChrystal distills a lifetime of command into one deceptively simple equation:

Character = Convictions × Discipline.

Convictions are the deeply held, pressure-tested beliefs that give a life direction. Discipline is the daily will to act on them. It’s a product, not a sum — multiply either term by zero and you get zero. Beliefs you won’t act on are worthless; relentless discipline in service of nothing is just motion. And because it’s what you do, not what you say, “character is what God and angels know of us — reputation is merely what men and women think.”

Sit with why that lands for an investor. Every essay above is, underneath, a story about the same equation. Robert Morris had the conviction — he was right about American land — and lacked the discipline of a survivable balance sheet. The bettor across two thousand years has the conviction he’s found an edge and no discipline about the structure holding his money. Xenophon’s whole manual is a treatise on discipline: the master’s eye, the order of the ship, the willing effort drawn out of good people. Conviction without discipline is Prune Street prison. Discipline without conviction is a groom feeding a horse for an owner who never shows up.

McChrystal’s blunt verdict — “in the end, character is the only metric that matters” — is the same thing I keep saying about capital in clumsier words. The discipline to act on a real conviction, quarter after unglamorous quarter, is the edge — the one that compounds when everyone leaning on the headline gets carried out.

Highly recommended.

A closing thought

The deeper read of this week is an old one.

The operators who come through are never the ones with the best forecast.

They’re the ones who kept the basis low, took the fixed-rate paper, built the order in the calm, honored the duty when silence was cheaper, and refused to need the future to cooperate. Convictions × discipline. The structure was always the edge. Not the story. That is the entire game.

Think well. Act wisely. Build something timeless.

— Arie van Gemeren, CFA

The Timeless Investor | Lombard Equities Group

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Lombard Equities Group is actively deploying capital into supply-constrained Pacific Northwest multifamily — vintage assets, fixed-rate (and increasingly seller-paper) debt, replacement-cost basis, cash flow from day one. In a regime where the rescue cut is off the table and inflation’s “cooling” is a mirage, basis and structure are everything.

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Scillus, in the western Peloponnese, around 360 BC. A few miles from the sanctuary at Olympia, on an estate the Spartans granted him after Athens threw him out, a middle-aged exile is walking his fields. He plants, he hunts, he trains horses, he raises his sons. It is a quiet life, and he has earned it — because roughly forty years earlier this same man did one of the most improbable things in military history.

His name is Xenophon. As a young man he marched into the heart of the Persian Empire with ten thousand Greek mercenaries, hired to help a pretender seize the throne. The pretender was killed. The generals were lured to a parley and executed. And the Ten Thousand found themselves stranded a thousand miles from home, leaderless, surrounded, in hostile territory, with winter coming.

Xenophon — not a general, not even formally a soldier, just an educated young man who had come along for the adventure — stood up, got himself elected, and led them out. Across mountains and rivers and through every tribe that wanted them dead, until the day they crested a ridge and the men at the front started screaming a single word down the line: Thalatta! Thalatta! The sea. The sea.

They were going to make it home.

He would write that story down as the Anabasis, and it has been read for twenty-four centuries. But this piece is not about the march. It is about what the man did afterward — when the adventure was over and he had an estate to run — because that is where he wrote the book that is decisively less famous but decidedly more useful for our study.

This is the next installment in a series I call Applied Classics — books written for one domain that turn out to be essential reading for another, and particularly for timeless investing principles. We began with Hesiod, the 700 BC farmer who wrote the first manual for patient capital. We sat with Cicero on duty and the fiduciary standard the West forgot.

This week belongs to Xenophon — and to a small, strange dialogue he titled Oeconomicus.

You already know the word, even if you have never seen it. Oikos — the household, the estate. Nomos — law, management, the ordering of a thing. Oikonomia: the management of the estate. It is the direct ancestor of the word economics — and the original meaning is not abstract at all (particularly as compared to modern day ‘economics’).

It is intensely practical. It means: how do you actually run the thing you own so that it grows instead of rots?

Twenty-four hundred years ago, a soldier turned farmer sat down and answered that question. What he produced is, as far as I can tell, the first asset-management manual in the Western canon.

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The Socratic Method Applied to Economics

Oeconomicus is a Socratic dialogue. Socrates is questioning a young, ambitious Athenian named Critobulus — the kind of man who has money and status and assumes that means he is rich. And Socrates, in his maddening way, immediately takes the assumption apart.

Critobulus owns roughly a hundred times what Socrates owns. And yet Socrates claims he is the wealthy one, and Critobulus is the poor man. How?

Because, Socrates says, wealth is not a pile of things.

Wealth is what you are able to use well.

His own modest possessions are more than enough for his needs, so he has a surplus. Critobulus, by contrast, has enormous holdings and enormous obligations — a public reputation to fund, horses to keep, festivals to sponsor, a lifestyle that devours everything the estate produces and then some. His property does not serve him. He serves it.

This is the hinge of the whole book, and it lands in the first few pages: a possession is only wealth if it produces a benefit for its owner. Everything else — no matter what it cost, no matter what it would fetch — is either neutral or a liability.

Socrates makes the point with a great and simple example (as most great examples are). A flute, he says, is wealth to a man who can play it. To a man who cannot, it is wealth only if he sells it — and while he keeps it, it is worth nothing to him at all. The same object is an asset or a dead weight depending entirely on the capacity of the person holding it.

Then he pushes it further, into a realm we here know quite well. Property you manage badly, he argues, is worse than useless — it is actively harmful. A farm that loses money each season, a venture that drains you, an enemy you keep fed: these are not assets that happen to be underperforming.

They are liabilities you have miscategorized because they look like the things rich people own.

A Building Is Not an Asset

To succinctly incorporate the ‘flute’ argument into modern investor parlance…

A building is not an asset. A building you can operate well is an asset. They are not the same thing, and the gap between them is where fortunes are made and lost.

The entire industry speaks a language that seeks to obfuscate this. We say we “own assets.” We put “assets under management” on the pitch deck. But Xenophon would ask the only question that matters: can you use it well?

Because a mismanaged apartment complex — deferred maintenance, angry tenants, a manager who never visits, a rent roll nobody has scrubbed in a year — is not a smaller version of a well-run one. It is a different thing entirely. It is a flute in the hands of a man who cannot play.

The market clears this distinction constantly, and rather violently. Two identical buildings on the same street, bought at the same basis, will diverge by hundreds of basis points of yield over a decade — not because of the bricks, but because of the operator. One owner turned a possession into wealth. The other owns a liability that is drowning them.

This is why I have never believed that real estate is a passive asset class, no matter how many people sell it that way. The land is passive. The ownership is anything but.

Xenophon knew this in 360 BC, doing the real work there in the fields with his own dirt-covered hands.

The Master’s Eye Fattens the Horse

Which brings us to my favorite line in the entire book.

In the second half of the dialogue, Socrates recounts a conversation with a man named Ischomachus — a kalos kagathos, the Greek ideal of the gentleman who is both admirable and useful, a man who actually runs his estate well and has the results to prove it. Ischomachus is Xenophon’s model of the competent owner, and much of the book is simply Ischomachus explaining how he does it.

At one point they discuss what makes an estate thrive, and Ischomachus quotes a bit of folk wisdom that Xenophon clearly loved, because he uses versions of it more than once:

“The eye of the master does more work than his hands.” And elsewhere, the barbed version a Persian nobleman supposedly gave: asked what fattens a horse, he answered, “the eye of the master.”

The master’s eye fattens the horse.

Think about what that means. The horse is not fattened by the owner doing the feeding himself — a groom does that. It is fattened by the owner showing up, walking the stable, noticing which animal is off its feed, catching the thing the groom would let slide precisely because he knows no one is checking. Presence changes behavior. Attention is a nutrient. What gets inspected gets fed.

I run an in-house property management operation for exactly this reason. We did this in part because, at the core, Xenophon is right, and every operator eventually learns it the expensive way. The portfolios that quietly decay are most often done in because “The Master” stops watching. They are the ones where the owner stopped walking the buildings. Stopped reading the reports closely. Stopped asking the second question after the first answer sounded fine. The master put his eye elsewhere, and the horse got thin, and by the time it showed up in the numbers that horse is nearly dead.

It’s harder to get your horse back to full health than to just keep him there. The same principle, of course, applies to active investing.

Absentee ownership is a slow-motion transfer of your wealth to whoever is actually paying attention — a contractor, a manager, a tenant, a broker (in real estate, most often, it’s a transfer of wealth to your property manager). Somebody's eye is on your asset every day. Xenophon's only question is whether it is yours.

The Order of the Phoenician Ship

Ischomachus has one more obsession: order. Taxis. Everything in its place, and a place for everything.

He describes touring a great Phoenician merchant ship and being astonished by it. In a hull no bigger than a large room, the crew had stowed an enormous quantity of gear — rigging, tackle, weapons, cookware, cargo, the belongings of every sailor — and every single item had a fixed and known location. In a storm, in the dark, a man could reach for exactly what he needed and find it, because nothing was ever left where it did not belong. The boatswain, Ischomachus marvels, knew the position of every object even when he could not see it.

Then he brings it home to the estate: a well-ordered household is beautiful the way that ship is beautiful — not decoratively, but functionally. When tools are where they should be, when records are kept, when every person knows their role and every thing its place, the estate runs at a fraction of the friction. Disorder is not just ugly. It is a tax you pay on every single transaction, forever.

Here is the timeless part: the order is worth the most at the exact moment it is hardest to maintain. Anyone can find the right rope in calm weather. The Phoenician system existed for the storm.

The discipline you build in the good years is the only thing that functions in the bad ones.

Every well-run investment operation is a version of that ship. The reporting cadence, the standardized rent roll, the reserve accounts, the file where every lease and loan doc actually lives — none of it feels urgent when the market is calm and money is cheap. It feels like overhead. And then the storm comes — a rate shock, a maturity, a bad quarter, an insurance renewal that doubles — and the operators who built the order sail through it while the ones who didn’t are tearing the hold apart looking for a rope they can’t find in the dark.

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Why He Chose the Land

There is a reason Xenophon set all of this on a farm.

Running through the whole dialogue is an unabashed argument that agriculture is the best and most honorable foundation for wealth — and his reasons are not sentimental. They are the reasons a real-asset investor gives today, almost word for word.

Farming, he argues, is the most reliable form of wealth because it rests on something that does not lie and cannot be faked: the land, and the labor you put into it. It rewards diligence and punishes neglect with perfect fairness. It cannot vanish in a paper panic the way a merchant’s fortune can — Xenophon watched plenty of Athenian traders get rich and then get destroyed by a single bad voyage or a rumor in the agora. And crucially, he says, farming trains the owner: it hardens the body, teaches justice (you reap what you sow, literally), and develops the exact habits of command and endurance that a man needs to lead anything larger.

This is the case for real assets over financial engineering, made in 360 BC. Tangible over abstract. Cash-producing over story-producing. The thing that survives the panic over the thing that is the panic. Hesiod said it first from behind a plow; Xenophon said it as a man who had watched empires and marketplaces both, and still chose the field.

I am not going to pretend this maps perfectly. I don’t grow wheat. But we own the modern version of Xenophon’s estate — physical assets, in real places, that produce real income from real people who need what is provided by that asset. And the case for that, against the endlessly clever paper structures that dominate finance, has not changed in twenty-four hundred years. When the music stops, you ultimately really want to own the field (or the productive asset).

The Willing Obedience of Others

There is a final thread, and for a book supposedly about farming it is startlingly modern: Oeconomicus is, in large part, a book about managing people.

Xenophon — who, remember, got ten thousand terrified men to follow him out of Persia — knew that no estate of any size is run by its owner alone. It is run by stewards, overseers, laborers. And the whole thing rises or falls on one thing: whether those people will work when the master is not watching.

His answer is the same one he learned on the march. You cannot beat willing effort out of people; you can only draw it out.

The best overseer, Ischomachus says, is the one who can make the workers want to succeed — who praises the diligent openly, who is scrupulously fair in reward, who takes a genuine interest, who leads from in front. Xenophon believed some men had a near-royal gift for inspiring this, and that it was the single most valuable capacity an owner could possess, because it was the only thing that scaled. The master’s eye fattens the horse — but the master cannot be everywhere, so the real trick is building people who act as if his eye were always on them.

This is the entire art of building an operating team, and I have nothing to add to it except my agreement. You do not get a great property manager, or a great overseer of anything, by writing a tighter job description. You get one by making a person want the outcome as much as you do — and then getting out of their way. The willing obedience and excellence of good people is the highest-yielding asset there is.

An Operator’s Read

Let me pull the twenty-four centuries down into the world I actually live in — buildings, tenants, capital raised from people who trusted me with it. Here is Xenophon’s manual, translated:

• A property is not an asset until you can operate it well. Before you fall in love with a basis, ask the harder question: do we have the capacity to turn this possession into wealth? If not, it is a flute we cannot play, and we should either build the capacity first or sell it to someone who has it.

• Walk the buildings. The master’s eye fattens the horse. The single cheapest form of yield in this business is the owner who actually shows up, reads the reports closely, and asks the second question. Decay is what happens when attention leaves.

• Build the Phoenician ship in the calm. Reporting, records, reserves, standardized systems — the order that feels like overhead in the good years is the only thing that functions in the storm. Build it before you need it, because you cannot build it during the thing it was built for.

• Own the field. Real assets, real income, real basis. The clever paper structure wins the quarter and dies in the panic. The field endures. It has for twenty-four hundred years.

• Draw out willing effort; don’t demand it. Your returns are ultimately produced by people whose eye is on the asset when yours can’t be. Make them want the outcome. It is the only thing that scales, and it is the one line item that never shows up on the statement.

What the Exile Knew

Xenophon had every excuse to write a book about glory. He had led the Ten Thousand. He had seen the sea. He could have spent his exile polishing the legend.

Instead he wrote about horses and rope and stewards and the eye of the master — about the deeply unglamorous work of taking a possession and, through attention and order and patience, turning it into wealth that lasts. He wrote it, I think, because he had learned the same lesson twice: once on a battlefield and once in a field. The heroic moment is not the thing. The management is the thing. The march home was won the same way an estate is won — by the person who kept his order when it was hardest, who kept his eye on what mattered, and who could make others follow him toward an outcome they had decided to want.

The terrain today would be unrecognizable to him. The rope is now a rate cap; the Phoenician ship is a data room; the steward is a regional property manager with a phone. But the question the old soldier built his quiet second life around has not moved an inch:

Do you actually know how to run the thing you own — or do you just own it?

Think Well. Act Wisely. Build Something Timeless.

— Arie van Gemeren, CFA

The Timeless Investor | Lombard Equities Group

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Lombard Equities Group is actively deploying capital into supply-constrained Pacific Northwest multifamily — targeting distressed acquisitions, value-add repositioning, and structured equity with asymmetric return profiles. We are, in the oldest sense of the word, estate managers: we buy the field and then we actually run it.

If you are an accredited investor and want to learn more about our current deal flow, reach out here.

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The genesis of this piece is the World Cup and sports betting (which, for the record, I have never participated in as I don’t like losing money on random chance events). But it is a game as old as time itself. What if there are lessons to be learned from the bloody history of (one of) mankind’s favorite pastimes? Let’s get INTO it my friends.

On a cold morning in August 1812, a crowd climbed the hill at Cambridge Castle to watch a man die. His name was Daniel Dawson, and his crime wasn’t murder, nor theft, nor treason. Instead, he had poisoned racehorses.

Dawson had crept onto the training grounds at Newmarket — the beating heart of English horse racing — and laced the water troughs with arsenic. The horses that drank died in agony. Dawson was a contractor. He had been hired by a betting syndicate that grasped a simple, brutal fact: it is far easier to profit on a race when you already know which horses will not finish it.

He was caught, tried, and hanged in front of an enormous crowd. People came from miles around because a) human nature seems to love this sort of thing, but also b) because somebody was finally being punished for horse-poisoning (which was not rare).

This is where I want to start, because it tells you almost everything about the true nature of betting markets. We like to imagine sports betting as it looks today — a clean app, a glowing screen, a spread calculated by a model. But that polish is a costume. Underneath it is something much older and much bloodier: a market that has always been a mirror of the financial architecture of its time. And every era’s architecture, it turns out, springs leaks in exactly the same three places.

The three leaks

If you strip away two thousand years of technology you discover that every betting market — Roman, Victorian, or digital — fails in one of three ways.

Counterparty risk. Will the person on the other side of your bet actually pay when you win? For most of history, the honest answer was: only if they feel like it, and only if they can.

Custody. Where is your money while you wait? Who is holding it, what are they doing with it, and can you get it back? Having a balance with your bookie or betting house is not the same thing as getting cash in your hand. Surprising, maybe, but true.

Information asymmetry. Does someone know something you don’t — and have they arranged the outcome accordingly? Markets price randomness. The most profitable move has always been to remove the randomness in the back-end, but let you (the bettor) think that randomness exists.

Sports bettors, writ large, love to believe they are engaged in analysis. Data, edges, models, closing lines. But the house has never been a neutral referee of probability.

The house is whatever the prevailing financial system allows it to be. In Rome, that meant political leverage. In Victorian Britain, criminal syndicates. In the internet age, an offshore server and a wall of silence (and probably criminal syndicates). The game may change its face over time, but the core remains the same.

Let me show you how each era illustrates one.

The Roman Way

Before London, before Wall Street, there was the crowd in the stands.

The Romans were compulsive gamblers. They bet on dice, on knucklebones, on board games — and above all on the two great spectacles of the arena: gladiatorial combat and, even more furiously, chariot racing. Betting was so entangled with vice in the Roman mind that gambling was formally restricted to specific festival occasions, and legally sanctioned mainly during the games themselves. The laws existed. But they were, predictably, ignored.

This is the era where storytelling tends to outrun the evidence. You have likely read colorful claims that Romans placed elaborate wagers on precisely how a gladiator would die, or which weapon would land the killing blow, using tokens as a kind of ancient derivatives contract. That makes for a great scene, but is mostly invention. The little clay and bone tesserae that survive were more likely tickets, tallies, or gaming pieces than a structured betting instrument. And the bigger money moved not on gladiators but on the chariot factions — the Reds, Whites, Blues, and Greens — whose fans rioted, sabotaged, and occasionally killed over the outcome of a race.

What Rome actually gives us is not a sophisticated market. It is the origin of the impulse: the deep human urge to formalize risk, to turn a spectacle of blood into a position you can hold. And it gives us the first great lesson in counterparty risk, delivered from the top. The emperors who staged the games were not disinterested.

Ancient writers describe Caligula manipulating the spectacles, cheating those around him, and seizing the fortunes of wealthy citizens when it suited the treasury. When the most powerful counterparty in the arena is also the one writing the rules, “winning” is a temporary condition he permits.

And therein you get the heart of the matter.

Newmarket: when you can alter the asset itself

Rome gives us the impulse. The 19th-century English turf gives us the mechanics of manipulation in their purest form.

By the 1800s, betting on horses had become a vast, largely unregulated economy, run by bookmakers and syndicates and patronized by aristocrats who wagered fortunes (which they sometimes did not have, or shortly lost). There was no meaningful regulatory body, no integrity unit, no drug testing. There was only opportunity — and where there is opportunity without oversight, capital does what capital always does: it looks for the surest possible edge.

The surest edge is not a better prediction. It is a fixed outcome.

Which brings us back to Daniel Dawson and the poisoned troughs at Newmarket. Think about what that crime actually represents in market terms. In a normal market, you cannot change reality; you can only forecast it. But when the underlying asset is a living animal standing in a stable overnight, a bad actor can walk up and liquidate it. Ideally in a way that it appears random on the tracks (the horse dying mid-race of exhaustion). The randomness the market exists to price simply… disappears, on command, for whoever paid for the arsenic.

This is information asymmetry taken to its violent extreme. It is one thing to know something the market does not. It is another to be the one who made it true. The efficient-market crowd would tell you this is a story about pricing breaking down. I think that framing is too polite. Nothing broke. The market worked perfectly — for the syndicate that had removed the uncertainty and priced the certainty accordingly. Everyone else was simply trading against a rigged reality and calling it luck.

Hold that thought, because the modern era doesn’t get rid of this problem. It just moves it from the stable to the balance sheet.

Antigua: the balance that wasn’t there

Fast forward to the 1990s. Two floor traders from the Pacific Exchange in San Francisco, Jay Cohen and Steve Schillinger, looked at the primitive world of sports betting and saw something familiar: an inefficient market crying out for real market-making. They took their trading-floor instincts, moved to Antigua where it was legal and licensed, and in 1995 launched World Sports Exchange — WSEX. For a while, they were pioneers and kings of a brand-new internet frontier.

The U.S. government did not see innovation. It saw illegal bookmaking crossing its borders by wire. In 2000, Jay Cohen became the first American convicted of internet sports bookmaking under the Wire Act. His partners stayed in Antigua as exiles rather than come home to prosecution, giving interviews on nearby islands and golfing in the sun while their legal world closed in.

And here is where the popular version of the story gets the timeline wrong, so let me correct it, because the truth is actually more useful. WSEX did not collapse in a single dramatic crackdown. It limped on for years. It survived the founder’s conviction. It survived the 2006 U.S. clampdown on payment processing. What finally killed it was mundane and familiar: on April 19, 2013, WSEX ceased operations, posting a notice that it had been forced to halt “due to inadequate capital resources.” That same day, co-founder Steve Schillinger was found dead at his home in Antigua of a self-inflicted gunshot wound. He was sixty.

“Inadequate capital resources” is the sound of the third leak — custody — finally giving way. For years, customers had complained that they could not withdraw the money sitting in their accounts. The balances on the screen were real numbers. The cash to back them was not fully there. Player deposits and corporate operations had become blurred, and the enterprise ran on the oldest bet in finance: that new money coming in would always cover old money trying to leave. A ponzi scheme, in other words.

The moment that stopped being true, the whole thing was revealed for what it had become — an IOU that could never be covered.

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The pattern doesn’t age

In 2022, a very online, very sophisticated crowd of speculators watched a company called FTX evaporate. Customer balances that people believed were theirs — sitting safely in an account — turned out to have been commingled, lent out, and gambled on the assumption that withdrawals would never all come at once. When confidence cracked, the money wasn’t there. Same failure. Different costume.

Strip the decorations off all four stories and you are looking at one continuous lesson:

• Rome taught us that when your counterparty writes the rules, your winnings exist only at their pleasure.

• Newmarket taught us that when someone can alter the asset itself, your “edge” is an illusion sold to you at fair odds.

• WSEX taught us that a balance you cannot withdraw is not an asset. It is a promise, and promises default.

• FTX taught us that none of the above requires a Colosseum, a racehorse, or an offshore server. It only requires that you trust someone else to hold your money and tell you the truth about it.

The sports bettor squinting at analytics and the crypto trader charting a token and the Victorian gentleman studying the racing form all share the same blind spot. They obsess over the bet — the odds, the edge, the read — and pay almost no attention to the structure underneath it. Who is my counterparty? Where is my money right now? What does the person on the other side know that I don’t?

These are, perhaps, some of the only questions that truly matter.

Polymarket: the latest twist

Which brings us, finally, to the present — and to the most sophisticated getup we’ve seen, as yet, for gambling.

Polymarket looks like the answer to every complaint in this essay. A way to get around a lot of the issues that have plagued betting markets historically.

How?

It is a prediction market built on a blockchain, where you can wager on almost anything — an election, a rate decision, whether a war ends by a certain date. Your money does not sit in some offshore operator’s commingled account. It sits in a smart contract: visible to anyone, withdrawable by code rather than by permission. Custody — the leak that killed WSEX and FTX — appears, at last, to be sealed.

No one can quietly lend out your balance, because there is no they holding it. The chain holds it, and the chain does not blink.

So the modern bettor exhales. Counterparty risk? You are trading against a transparent pool of other users and a contract that cannot change its mind, not a bookie who may or may not feel like paying. Custody? On-chain, and yours. Two of the three leaks, apparently welded shut. Surely this time the tools are finally sophisticated enough to make it safe.

And here is what makes this moment genuinely different.

In two thousand years of betting markets, Polymarket is the first architecture to weld two of the three leaks shut at the same time — no system in this entire history had ever managed even that. Which is exactly why people trust it. And it is exactly why the third leak, when it opens here, is more dangerous than in any market that came before: the reassurance is real, and it points your attention away from the one crack that never closed.

Here’s the issue.

A prediction market does not settle itself. Someone — or some mechanism — has to declare what actually happened. Polymarket resolves its markets through an oracle: a process by which a real-world outcome is reported back to the contract, often with a dispute window in which large holders can challenge the result.

An oracle is, in my opinion, another form of market asymmetry. Whoever controls, contests, or games the resolution controls the payout — no arsenic required. We have already watched markets curdle into open warfare over how an outcome “should” be read, with the biggest positions holding the strongest motive to bend the answer their way. This recent article highlights the risk exactly - in this particular case, the timing of the first missile strikes in the recent Iran-US-Israel war.

If you don’t think people with significant funds and capital to deploy are not actively manipulating stuff on the back-end, then I have a bridge to sell you.

The randomness the market exists to price no longer disappears in the stable. It may disappear at the moment of resolution, where the final truth is actively bent by those with the most capital at stake.

To put this more concretely. If an outcome is up for debate (since the nature of this style of betting is that the outcome is debatable), then the voters can and do influence the outcome. A whale investor who has a lot of money on a particular outcome may try (and could succeed at) manipulating the outcome here.

And then there exists the huge information assymetry advantage that some bettors on this market have. And utilize, happily, to fleece retail investors.

For instance, earlier this year a US Army Special Forces Master Sergeant (Gannon Ken Van Dyke) was arrested and indicted by the DOJ. Why? He allegedly had access to classified intel regarding a planned raid against Venezuela. He opened a polymarket account, dropped roughly $34,000 on longshot bets, then cleared over $400k in profit and tried immediately to delete his account. He clearly did this poorly, and in an obvious way.

Try this one. The blockchain analytics firm Bubblemaps tracked a cluster of nine interconnected anonymous accounts that bet heavily on the Iran War. These accounts bet almost exclusively on highly specific military timelines - and they had a completely improbable 98% win rate. I mean c’mon.

Please notice what happened here. We spent two thousand years and an extraordinary amount of engineering brilliance closing the custody leak — and the water simply found the third crack. Information asymmetry is not a defect of primitive markets that better technology sands away. It is the permanent residue of a single unavoidable fact: someone always has to decide what is true, and that someone can (and will) make sure they are paid, and people with the right edge can and will exploit that for profit.

The house, as ever, is whatever the prevailing financial system allows it to be — now rendered in code and ingeniously solving some of the structural issues, but still fails to stop the oldest incentive there is.

The takeaway

Sports betting (and gambling writ large) was never really a game. It has always been an alternative asset class — volatile, opaque, occasionally fatal, and utterly dependent on the financial plumbing of its age. The Romans formalized the human urge to bet. The Victorians industrialized the art of rigging it. The offshore operators digitized the failure of custody. Polymarket purports to have solved some of the major issues. But ultimately, each generation of bettors arrived convinced that this time, the tools were sophisticated enough to make it safe.

The technology improves every century. The three leaks never close.

So the next time you look at a betting line, a brokerage balance, a yield that seems too smooth, or an app that makes it all feel frictionless and modern, ask the old, bloody question that Daniel Dawson’s victims never got to ask: not whether the odds are good, but whether my money will be there to collect, or if I am betting against the house (which, to be frank, you always are). And who makes the rules, and decides if I win or lose.

That question is two thousand years old. It has never once gone out of style.

Think Well. Act Wisely. Build Something Timeless.

Arie van Gemeren, CFA

The Continental dollar had collapsed so completely that “not worth a Continental” entered the language as a synonym for worthless. Congress could not pay its soldiers. It could not feed them. The army that would soon march to Yorktown and win the war was, on paper, an utterly insolvent enterprise led by a government that had zero (or negative) credit.

One man closed the gap on the strength of his own name.

When the French fleet arrived and the Yorktown campaign hung on whether Washington could move and supply his army, it was Robert Morris who signed the notes. “Morris notes,” the army called them: promissory paper backed by nothing but the personal credit of the richest merchant in America. He pledged his own fortune, his own signature, his own good name against the debts of a nation to enable the revolution to finish.

And it worked. The notes circulated. The army moved. Cornwallis surrendered.

Fifteen years later, the same man sat in the Prune Street debtors’ prison in Philadelphia, ruined, writing letters to friends who no longer answered. A signer of the Declaration of Independence. The Superintendent of Finance who had kept the Revolution solvent. Broke.

He was not brought down by the British, or by bad luck, or by the ingratitude of the republic he helped build. He was brought down by land bought on borrowed money — the first great American real estate bubble.

This, my friends, is the story of Robert Morris. And the timing (publication date July 1st, and the 4th nearly upon us) is highly intentional.

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The most useful man in America

Before the war, Morris was the senior partner in Willing, Morris & Co., one of the largest trading houses in the colonies. He knew ships, bills of exchange, marine insurance, arbitrage across a dozen ports. He understood credit the way a great sailor understands weather — not as theory but as a live thing that could turn on you.

When the Continental Congress needed to arm itself, Morris ran the procurement. When the currency died, Congress made him Superintendent of Finance — effectively a one-man central bank, treasury, and quartermaster general. He founded the Bank of North America, the first chartered bank in the country, largely to give the government a functioning credit facility. He mixed public and private accounts in ways that would horrify a modern auditor, but the machine ran, and the war was won on the fumes of his reputation.

His deep genius was the use of leverage. His entire life’s work was the art of making a limited amount of hard capital do the work of a much larger amount by pledging credit, name, and future cash flow against present needs.

In the desperate days of the Revolution, with the gallows beckoning, it was the right tool and skill. But, it was the entirely wrong instinct for what came next.

The greatest land grab in history

After the war, America had two things in abundance: land and optimism.

The new nation stretched to the Mississippi, most of it “unimproved” — unsurveyed, unsettled, held in vast paper tracts. To the generation that had just won the war, and was buoyed by a growing sense of destiny, buying frontier land didn’t look like speculation. The population was exploding. Europeans were coming. Every acre bought cheap today would surely sell dear to the settlers of tomorrow.

Morris believed it more than anyone. And he had the credit — or thought he did — to act on it at scale.

He bought staggering quantities of land. Six million acres in Georgia. More than a million acres in the Genesee country of western New York. Enormous tracts in Pennsylvania, Virginia, the Carolinas. At his peak he may have been the largest private landowner in the United States, holding paper title to territory the size of a small European country.

He did not pay cash. Critical point. Because he could not have paid cash — no one could. He bought on credit: notes, mortgages, partnerships, and installment obligations, secured against the land itself and against his still-glittering name. He co-founded the North American Land Company to bundle millions of acres into shares and sell the paper to European investors.

The structure here, and the throughput, matters a lot. Because we have, on The Timeless Investor, seen this repeatedly. It rhymes with the Sword Blade charter and the South Sea Company. It resembles John Law’s Mississippi shares. It is akin to the Florida binder boys. What we had here was an illiquid asset, bought with borrowed money, refinanced by selling paper claims to someone further down the line who is also using borrowed money.

The whole bloody edifice depends on one thing and one thing only: that the paper keeps moving.

And then …

In the mid-1790s, the paper stopped moving.

The reasons were the usual ones, and they arrived in the usual order. The French Revolution and the wars that followed dried up the European capital that was supposed to buy Morris’s land shares (an “exogenous” shock). The Panic of 1796–97 — a genuine transatlantic credit contraction — froze lending on both sides of the ocean. Land that had been “worth” fortunes on paper suddenly had no buyers at any price, because the buyers had all been financed by the same credit that had just vanished.

Morris owned millions of acres and could not raise a few thousand dollars.

This is the mechanism that is quite hard to see when you’re standing inside the bull market: an asset’s price and an asset’s liquidity are not the same thing, and leverage is a claim on liquidity, not on price.

His land had value. It genuinely did — the tragedy here is that much of it would be worth immense sums within a generation. But his creditors did not want land in 1797. They wanted to be paid in 1797. And the gap between what he owned and what he owed was denominated in a currency — ready cash — that had simply ceased to exist.

The interest compounded. The notes came due. He sold what he could into a market with no bids, which only confirmed to everyone that the paper was falling, which killed the bids that remained. He borrowed from Peter to pay Paul until both Peter and Paul stopped answering.

Prune Street

In February 1798, Robert Morris was arrested for debt and taken to the Prune Street prison in Philadelphia.

He stayed for three and a half years.

George Washington — who had dined at Morris’s table, who had lived in Morris’s house when Philadelphia was the capital — visited him there. The Superintendent of Finance of the United States, the man whose signature had once been better than the government’s, received the Father of the Country in a debtors’ cell. His stated liabilities ran to something on the order of $3 million, (roughly $79.8 million today) an almost unimaginable sum for the era before fiat printing.

Because it’s valuable to remember a few things here. In the era of trillionaires that we now live in, for one of the “wealthiest men” of his era to owe $79.8 million in modern equivalent seems … almost paltry, no? It did to me, anyways. But this hits on a really important point. There is a serious limitation to modern inflation calculators.

Let me explain. There are other scales necessary here to grasp the issue.

1. In 1800, the total GDP of the United States was roughly $480 million, which would mean that Morris held debt equal to about 0.6% of the entire US economy.

2. We have a principle I refer to as the “Multiplier of Financialization”. In short, in the late 1700s/early 1800s, wealth was mostly bounded by tangible, physical limits. You owned land, ships, a business, or physical barrels of flour (or tea). There were no public equity markets the way we have today, no global bond market, and very few banks. So today financialization acts as a massive leverage multiplier on top of real assets. A modern billionaire can borrow billions against a sliver of volatile tech stocks that are trading 24/7 globally. Morris, by contrast, was building a massive leverage structure on top of handwritten notes and physical acres of dirt. The sheer velocity and availability of capital that exists today was structurally impossible in 1800.

3. And lastly. To belabor this point. In 1800 the US population was 5.3 million people. The market of eligible, wealthy buyers for land was an incredibly tight, insular little group of transatlantic merchants. So when liquidity dried up - it truly dried up, and fast.

He was finally released in 1801, not because he paid, but because the new federal Bankruptcy Act of 1800 — legislation his own catastrophe helped inspire — allowed his discharge. Recall, my friends, that we no longer have debtor prisons. We can thank Robert Morris for that.

He lived his last few years quietly, on a small annuity his old business partner had quietly secured for his wife, beyond the reach of creditors. He died in 1806, largely forgotten by the republic he had kept solvent at its most desperate hour.

The rules written in the wreckage of a mania went on to protect the people who came after — a pattern this newsletter keeps returning to. Morris did not get to benefit from them. He only got to inspire them.

What the Financier got wrong

It would be easy, and wrong, to file this under “greed.” Morris was not a fool and he was not a con man. He was one of the most financially sophisticated people the young country produced. That is precisely why the story matters.

This is not a lesson about stupidity, or greed. It is a lesson about how the instincts that might serve you in one era kill you in the next. And as always, the immense and proverbial dangers of leverage.

Three things killed him, and all three are alive and well today:

1. He confused a good asset with a survivable position. He was right about American land. Genesee, Georgia, western Pennsylvania — the settlers came, the values rose, exactly as he predicted. Being right about the asset did nothing for him, because he could not survive the distance between his thesis and its payoff. The graveyard is full of people who were right too early with borrowed money.

2. He owned the illiquid and owed the liquid. His assets were land — unsurveyed, unsold, unmovable in a panic. His liabilities were cash, due on dates he did not choose. That mismatch is the oldest killer in finance. It is the maturity wall. It is the duration trap. It is every over-levered operator who owns something real and valuable and still goes under because the calendar does not care what a thing is worth.

3. He was a node in a credit chain he did not control. His refinancing depended on European buyers, who depended on European credit, which depended on a peace that ended. When the structure seized, the asset was irrelevant. The funding vehicle fails before the asset does — every single time.

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The modern mirror

Strip away the powdered wigs and the story is this week’s headlines.

An operator acquires real, durable, genuinely valuable assets. He finances them with short-dated, floating, or refinancing-dependent debt because that is how everyone does it and because the credit is cheap and available right now. His model assumes he can always roll the paper, because he always has. Then the regime changes — rates, liquidity, a war, a panic three thousand miles away — and the paper stops rolling. The asset is still good. The asset was never the problem. He loses it anyway.

We have spent months in this newsletter on the same idea from a dozen angles: income is truth and price is a monetary mirage; 50% LTV built more lasting wealth than 80% ever did; the financialization of demand quietly redefined “prudent” until maximum leverage became best practice. Robert Morris is the founding American case study for every one of those arguments. He is patient zero (American style).

He had the best information, the best relationships, the correct long-term thesis, and the most sophisticated financial mind in the country. He still went to prison — because he financed permanent assets with impermanent money and staked his survival on a credit market’s willingness to keep saying yes.

On the eve of the nation’s birthday, that is the uncomfortable inheritance worth remembering. The man who made American independence possible could not make himself independent. Real independence — for a country or for an investor — was never about how much you owned. It was about owning it in a way that no one else’s panic could take from you.

The timeless lesson: Being right about the asset does not save you. Surviving until you are proven right does. And survival is decided not by what you own, but by the terms on which you owe.

Think Well. Act Wisely. Build Something Timeless.

Arie van Gemeren, CFA

A quick deal update, since as you all (should) know my primary business is real estate investing. Our Crown Point deal is proceeding well, with hundreds of thousand more committed to the project over the last 7 days. Projected to close end of July. Capacity remains for accredited investors. We’ve created this landing page to further explain/explore the deal - check it out HERE. Offering is for accredited investors only. This is NOT an offer for investment. Please review the full PPM and schedule a call with me before doing anything.

Good morning, friends.

We got a rough inflation read this week, and bond yields fell. Odd?

Let me translate that into plain English.

On Thursday we got the Fed’s favorite inflation gauge (PCE), and it was hot. Core inflation came in at 3.4% — the highest since October 2023. The broader headline number punched through 4% for the first time in over two years. Whatever you’ve been told about inflation being “back under control,” the actual data this spring says the opposite: it has ticked up five months in a row. So far, no surprise — hot inflation, scary headline.

Now here’s the complicating factor. When inflation runs hot, the price of borrowing money — the interest rate on government bonds, the thing that quietly sets your mortgage, your car loan, and the cap rate on every building in America — is supposed to go up. Lenders see rising prices and demand to be paid more. That’s the rule.

This week it broke the rule. The 10-year Treasury yield fell, from about 4.50% down to roughly 4.38%.

Why?

One: the bond market drives by looking through the windshield, not the rearview mirror. That 3.4% was a May number — it’s the road behind us. And everybody knows what caused it (or at leaset, we think we do): the spike in oil and gas prices from the Iran war. Well, this week the war premium simply evaporated — the ceasefire held and oil collapsed about 8%, all the way back to where it sat before the first missile flew, near $69. So the bond market looked at the scary rearview number, looked at oil falling out the windshield, and made a bet: the thing that caused that inflation is already reversing. You don’t demand higher interest to protect yourself from a fire you think is going out.

Two: when stocks get nervous, scared money parks in bonds. It was a jumpy week in the stock market, and when investors get nervous they reach for the boring safety of government bonds. More buyers for bonds pushes their yield down — the same way a crowded auction pushes a price up.

In short, the headline and the market disagreed this week. The number on the front page told you about the past. The bond market (all markets, actually) look towards the future. When those two things point in opposite directions, the disciplined move isn’t to panic at the scary headline or to celebrate the falling rate. It’s to notice that the “reported” reality and the “priced” reality have come unglued — and to ask which one you’re actually underwriting your life and your balance sheet against.

Now — am I going to tell you the storm has passed because rates dipped for five days? No. Way too soon to tell. You can only tell how these things played out maybe 12 months later, or more.

And, of course, as I’m writing this I’m simultaneously reading about renewed fighting in the Strait of Hormuz. So all of the above may very well be a moot point come Monday. Such is life, right now.

As an investor, you can and should try to look through the headlines and towards a core strategy that protects you regardless of what the market wants to do.

That’s where we should spend our energy this week: not on predicting the next print, but on the difference between a price and a return, the duties we owe each other when the cycle turns, and the structures that survive whichever way the wind finally blows.

Now — onto your Timeless Five.

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🏛️ The 400-Year Real Estate Lie

Substack · Premium · this week’s pillar

There is a house on the Herengracht — Amsterdam’s grandest canal — that has been bought and sold for nearly four hundred years. It survived tulip mania, the fall of the VOC, two occupations, and a famine winter. And in real, inflation-adjusted terms, it was worth only about twice as much in 1973 as in 1628. Three and a half centuries. A doubling. Roughly 0.2% a year — a rounding error stretched across eleven generations.

That is not a quirk of one house. The longest price series we have — the Herengracht index, the 14-country No Price Like Home data, Shiller’s U.S. record — all say the same thing: for centuries, real house prices barely beat inflation. And yet real estate has minted more durable fortunes than any other asset class. How?

Because price is not return. The return was always somewhere else — in the rent, in the principal the tenant pays down, in prudent leverage, and in the patient ownership of genuinely scarce land. The headline appreciation of the last fifty years was something else entirely: a melting dollar after Nixon closed the gold window in 1971, and a forty-year collapse in the discount rate from 15.8% to 0.5%. A monetary mirage — pleasant while it lasted, dangerous to extrapolate.

And here is why it lands this week, with the 10-year stuck near 4.4% and inflation reaccelerating: both of those tailwinds are spent. You cannot run rates from 15.8% to 0.5% again. So the return comes back to where the first 345 years of data always put it — income and scarce land. The operator who underwrites flat real prices, makes the income carry the load, buys below replacement cost, and uses debt to multiply a real signal rather than manufacture one is underwriting the next decade correctly.

⚖️ Cicero’s De Officiis

Substack · Free deep dive · Applied Classics

Rome, 44 BC. The Republic is dying and Cicero doesn’t yet know how few months it — or he — has left. So the greatest orator Rome ever produced goes home and writes a letter to his son about the only question he thinks worth leaving behind: what do we owe one another, and what happens to a society when it forgets? He called it De Officiis — On Duties. When Gutenberg’s press changed the world, the second major work it printed, right after the Bible, was this book. The Founders read it as an operating manual. And then, somewhere in the last century, we put it down.

Cicero’s core claim is radical to the modern ear: the honorable (honestum) and the useful (utile) can never truly be in conflict. When something looks advantageous but is dishonorable, the appearance is a lie — the bill simply hasn’t arrived yet. His famous case: a grain merchant sails into a famine-stricken city knowing a fleet of grain ships is days behind him, prices about to collapse. Legally, caveat emptor — he owes the starving buyers nothing. Cicero says the man who harvests the famine price by concealing the fleet has done something dishonorable, and therefore — in the only accounting that finally matters — something against his own interest.

We have institutionalized the famine price. We call it information asymmetry and we feel clever about it. But fides — good faith — is not a nicety layered on commerce; it is the foundation commerce stands on. Your LP agreement, your loan covenants, your leases: none of them work because of the enforcement clause. They work because almost everyone honors them without anyone ever going to court. The documents define your liability. They do not define your duty — whether you call the LP before the bad quarter, whether you disclose the conflict in plain language, whether you phone the lender while the DSCR is drifting and silence is still legal. The sponsors who blow up this cycle will mostly be legally fine. And their investors will never call them again. The expedient man wins the year; the honorable man wins the millennia. We don’t print Antony’s letters. We printed Cicero’s.

🕯️ God’s Banker

The Show · YouTube

On the morning of June 18th, 1982, a postal clerk crossing Blackfriars Bridge in London looked down and saw a man hanging from the scaffolding beneath it, a rope around his neck and his pockets stuffed with bricks. His name was Roberto Calvi. One week earlier he had been chairman of the largest private bank in Italy. The press called him God’s Banker — because the institution standing behind him, lending him its accounts, its access, and above all its name, was the Vatican. When his bank collapsed, there was a $1.3 billion hole where the money used to be.

The mechanics were not exotic. Banco Ambrosiano funneled over a billion dollars to anonymous offshore shells, which used the money to buy the bank’s own stock — propping up its share price with its own borrowed money, the same countdown clock that bankrupted railroads in 1873 and medieval super-companies in 1343. And when regulators circled, the Vatican Bank issued letters of comfort vouching for the shells — while Calvi, on the very same day, handed back a secret counter-letter releasing it from any actual liability. The document that reassured the world was quietly cancelled, in private, by a document nobody was ever supposed to see.

Strip away the cassocks and the conspiracy and what’s left is a diligence checklist still being ignored with real money today: borrowed respectability is not due diligence — prestige is a prior, not proof. A letter of comfort is not a guarantee — if it isn’t a hard, enforceable obligation that survives the other party’s worst day, it’s a feeling, and feelings pay out at zero. Opacity is the risk, not a byproduct of it. The cleanest modern echo is FTX — but in my world it’s every investor who leans on “the sponsor would never let a deal fail” instead of a hard right in the operating agreement. The asset rarely kills you. The structure wrapped around it — and the respectability draped over the structure so you don’t look too closely — does.

📈 How Cheap Debt Inflated the Price of Your Entire Life

The Show · YouTube · last week’s major piece

Here’s a trick your brain falls for every time. A phone costs $1,000 in cash — you flinch. The same phone is $1,200 but only $100 a month — suddenly it feels reasonable. The price went up by $200 and you felt better about paying it. Now stretch that exact trick across forty years and aim it at the biggest purchases of your life: the car, the degree, the house, the apartment building.

That is the whole architecture of the modern economy, and it is not an accident. In a fiat system, money itself is debt — most money is created when banks make loans — so the only way to have more money is to have more debt outstanding. The system has a mathematical imperative to keep credit expanding, and a 2% inflation target that quietly punishes savers and rewards borrowers. The result is the collateral loop: expanding credit bids up asset prices → higher prices create more collateral → more collateral supports more borrowing → which bids prices up again. The snake eats its own tail.

You can watch it work in any market with a measured link. College: the NY Fed found that for every extra dollar of federal loan availability, tuition rose about 60 cents — the aid didn’t pay the price, the aid became the price. Real estate is the biggest version of the same loop: every new debt source — FHA, the GSEs, CMBS, agency multifamily, private credit — expanded the capital chasing the same finite set of buildings, compressing cap rates and levitating prices. And deleveraging, when it comes, never arrives because wisdom broke out. It arrives because hands got burned. You don’t have to play the game at maximum leverage just because the table is set for it. Use less debt than the system begs you to, and when the next reset comes you’re not the forced seller — you’re the one with dry powder buying what the burned hands let go.

Bonus Videos

Because I was on a family camping trip last week, we didn’t do a Timeless Five. As such, here’s the videos dropped last week on The Timeless Investor.

A closing thought

It is tempting to look at this week — a record-shattering mania taking its first real questions, a war premium that evaporated overnight (and which is likely coming back), inflation climbing back into a Fed that won’t move — and feel like everything is unprecedented. It isn’t. A sword-maker became a shadow bank in 1720. A canal house in Amsterdam taught eleven generations the same lesson about price and almost none of them learned it. A Catholic bank borrowed the Vatican’s halo and hid a billion-dollar hole behind it. And a dying Roman wrote down, two thousand years ago, the one question every fiduciary still has to answer.

The operators who come through are never the ones with the best forecast. They are the ones who kept the basis low, took the fixed-rate paper, underwrote the income instead of the chart, honored the duty when silence would have been cheaper, and refused to need the future to cooperate.

The structure was always the edge. Not the story. That is the entire game.

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Think well. Act wisely. Build something timeless.

— Arie van Gemeren, CFA

The Timeless Investor | Lombard Equities Group

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Lombard Equities Group is actively deploying capital into supply-constrained Pacific Northwest multifamily — vintage assets, fixed-rate (and increasingly seller-paper) debt, replacement-cost basis, cash flow from day one. In a regime where the rescue cut is off the table and inflation is reaccelerating, basis and structure are everything.

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The thesis in one line: Home prices have NOT been an engine of wealth creation for the majority of data-tracked history. The thesis for investing in real estate, in short, is at least in one major area completely inaccurate. Except, as it turns out, for the last fifty years or so — and why that exception happened changes quite a bit about what comes next.

So what can we project about the future for real estate investing? That’s what we are going to get into here. And if you want to connect about real estate deals with my Firm, reach out here.

The House on the Herengracht

There is a house on the Herengracht, the grandest canal in Amsterdam, that has been bought and sold for nearly four hundred years. It watched the Dutch Golden Age crest and break. It survived tulip mania, the collapse of the VOC, the French occupation, the Nazi occupation, and the Hunger Winter of 1944. Generations of merchants, regents, and widows held the deed, each one presumably confident that Amsterdam’s finest address could only grow more valuable.

But here’s an uncomfortable fact, and a piece of the premise of this article: in real terms — adjusted for the cost of living — that house was worth only about twice as much in 1973 as it was in 1628. Three and a half centuries. And you got a doubling. That works out to roughly 0.2% per year of real appreciation, a rounding error stretched across eleven generations.

We know this with unusual precision because of one of the most remarkable datasets I’ve come across. In 1997, the Dutch economist Piet Eichholtz reconstructed the transaction prices of the constant-quality buildings on the Herengracht from 1628 to 1973 — the longest continuous real estate price index ever built.

The canal’s houses have always been maintained at the same high standard, which makes them a rare clean sample: the same quality of asset, the same prime location, measured across four centuries.

The original chart is illustrative of one major point. From ~1600 AD to 1973, house prices roughly doubled. But when you factor in inflation, it didn’t do much of anything.

The Longest Charts in Existence

In No Price Like Home, Knoll, Schularick, and Steger built real house-price indices for 14 advanced economies back to 1870. Their finding is what they call a “hockey stick”: from 1870 to roughly the mid-twentieth century, real house prices across the developed world were essentially constant. For three-quarters of a century — through industrialization, two world wars, and the Depression — real housing prices barely moved.

The American record says the same. Using Robert Shiller’s data back to 1891, U.S. home prices rose about 3.4% per year in nominal terms but only ~0.5% per year in real terms. Strip out inflation and the great American house — the centerpiece of the middle-class balance sheet — has been, to a startling degree, a machine for tracking the price level and almost nothing more.

Except - as you can see below and above - something started changing in the 1970s. And for US home prices, things got really weird after 2000.

Now listen - if this were the end all of the argument, that home prices barely kept ahead of information, then real estate would have historically been a terrible business. But it is one of the best businesses in the world. The reconciliation of those two facts is the entire point of this letter — and it is the foundation of everything we do.

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So Where Did the Money Come From?

If real prices barely move, yet real estate has minted more durable fortunes than any other asset class, then the returns must be coming from somewhere other than the tape.

The most authoritative answer we have is The Rate of Return on Everything, the Jordà–Knoll–Kuvshinov–Schularick–Taylor study that tracked returns across major asset classes in 16 countries from 1870 to 2015. Their headline findings are illustrative: over the full sample, housing and equities delivered almost identical real total returns — about 7% per year — but housing did it with dramatically lower volatility.

How does an asset whose price barely beats inflation produce a 7% real total return? Because price is not return. The total return on a property is the sum of four engines, and the loud one that we all know and love — appreciation — is the weakest:

The lesson is, I should say, fairly brutal in its simplicity. The return is the income. And notice what the institutions are now acknowledging: CBRE’s 2026 outlook concedes that this year’s commercial real estate total returns will be “income driven.” Four hundred years of data on the Herengracht said so first.

But Then Something Broke

Everything you have just read describes one world: the world of the gold standard, when money was anchored to something real. In that world, for three and a half centuries, the price of a building was a story that barely kept pace with inflation — and the return came from the income.

Then, right around 1971–1973, the line went vertical.

The American data does the same thing the Herengracht does, and so does nearly every developed economy: a flat line for generations, then a near-vertical ascent in the final stretch. This is like one of the most important structural break in the history of real estate prices. They look at the vertical line, assume it is normal, and underwrite the next forty years as if the last forty were the rule rather than the exception.

They were the exception. And once you understand why the line broke upward, you understand precisely where returns can — and cannot — come from next.

Two forces drove that vertical line. The first is structural and durable. The second is monetary, and — I will argue — largely spent.

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Rome, 44 BC. The Republic is already dying; Cicero simply does not know how few months it has left, or how few he has himself. Caesar is five months dead, stabbed on the Senate floor. Mark Antony is consolidating power. The old constitutional order — the one Cicero has spent his entire life defending in the courts and on the Senate floor — is coming apart in real time.

And so the greatest orator Rome ever produced does something strange. He goes home, and he writes a letter to his son.

Young Marcus is in Athens, ostensibly studying philosophy, but mostly drinking. The letter that arrives is a book. Three of them, in fact — written in a matter of weeks, at speed, by a man who knows the walls are closing in.

He titles the work De Officiis — On Duties — and its central question is the only one he thinks worth leaving behind:

What do we owe one another, and what happens to a society when it forgets?

Within eighteen months, Antony’s men would track Cicero down on the road, cut off his head and his hands, and nail them to the speaker’s platform in the Roman Forum — the hands that had written the letters, displayed where he had given his speeches. He died, in the end, for the exact thing De Officiis is about: the obligations a man cannot abandon without ceasing to be himself.

This is the next installment in a series I am calling Applied Classics — books written for one domain that turn out to be essential reading for another (and particularly, in this case, for timeless investing principles). We started with Hesiod, a 700 BC farmer who wrote the first manual for patient capital. I have promised you Sun Tzu, and I will deliver him eventually.

But this week belongs to Cicero. Because of everything I have written about this spring — the hidden books at Banco Ambrosiano, the letters of comfort that turned out to be fiction, the leverage that quietly rewired how an entire industry defines “prudent” — every one of those stories is, at its core, about the same thing.

A broken duty. A trust that someone decided was optional.

And two thousand years ago, a dying man at the end of a dying republic wrote the manual on exactly that.

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The Second Book Ever Printed

Here’s an incredible historic fact for you.

When Gutenberg’s press changed the world in the 1450s, the first thing printed was the Bible. The second major work — among the very first secular books to roll off a printing press — was Cicero’s De Officiis.

Of all the texts in the Western canon, of all the philosophy and poetry and history available to the first printers, the one they reached for right after scripture was a Roman statesman’s letter to his son about duty.

For roughly seventeen centuries, De Officiis was treated as the single most important guide to practical ethics in the Western world. It was the book you read to learn how to be a person of standing — how to hold office, manage an estate, conduct business, and carry obligations without disgracing yourself.

The American Founders read Cicero as a literal operating manual. John Adams quoted him constantly. Jefferson called him the master. The vocabulary of the entire founding generation — virtue, duty, the public good, the difference between a republic and a faction — is downstream of this exact text.

And then, somewhere in the last century or so, we put it down.

We replaced duty with compliance. We replaced what is honorable with what is permitted. We built a civilization of operating agreements and disclosure schedules and arms-length terms, and we assumed that if a thing was legal, it was therefore fine.

Cicero would have recognized the disease immediately.

He watched his republic die of it.

The Useful and the Honorable

Cicero wrote that when a man (I use the word man, but of course I mean all the members of humanity) faces a decision, he tends to weigh two things: the honorable (honestum) — what is right — and the useful (utile) — what is advantageous, profitable, expedient.

And the entire moral life, he argues, comes down to what you do when these two appear to be in conflict.

Here’s the core of his argument.

Cicero argues that the honorable and the useful can never truly be in conflict. When something appears genuinely advantageous but is dishonorable, the appearance is a lie. The conflict is an illusion produced by looking at too short a time horizon. What is dishonorable can never be truly useful — because the cost simply hasn’t arrived yet.

This is a man in 44 BC describing the thing that destroys capital in every cycle: the trade that looks useful in the quarter and turns out to be ruinous across the decade. The expedient that prices in zero cost for the broken trust it requires.

Every story I cover here around financial fraud, deceit and bank failures is, at its core, about a man (in this case, almost always men, except for Theranos so far as I am aware) who bet that the utile and the honestum had come apart — that he could grab the advantage and the bill would never come. Calvi with his secret counter-letters. The sponsor who tells his LPs what they want to hear. Elizabeth Holmes faking the efficacy of her blood-testing devices.

They are all making the same wager Cicero says is impossible to win: that you can separate what pays from what is right, pocket the difference, and never settle up.

The Republic that surrounded Cicero as he wrote was the proof of concept. Rome had become spectacularly good at the utile — conquest, plunder, the expedient alliance, the strategic betrayal — and had hollowed out the honestum that held it together. Within a generation it was an empire with an emperor, and the thing Cicero died defending was simply gone.

Legal, Clever and Dishonest?

There is a passage in Book III that I think really drives home the point here.

Cicero poses a hard case — a genuine ethics problem, the kind a Roman of standing would actually face in real life. A merchant from Rhodes sails to a city gripped by famine. The people are starving; grain is scarce; prices are sky-high. The merchant knows something the buyers do not: a whole fleet of grain ships is right behind him, days away. Prices are about to collapse.

Does he have to tell them?

Legally — by the law of the market, by the standard of arms-length dealing — the answer is no. He found out fairly. He owes them nothing. He can sell at the famine price, take the fat margin, and sail away before the fleet arrives. Caveat emptor. The buyer can (and should) look out for him or herself.

Cicero’s answer is that the merchant who conceals the coming fleet to harvest the famine price has done something dishonorable — and therefore, in the only accounting that finally matters, something against his or her own interest. To withhold what the other party needs to decide well, purely to extract advantage from their ignorance, is to treat a fellow human being as prey.

This notion is fairly radical, I will admit. Even writing this, I can feel the pull of modernity.

The entire architecture of modern finance is built on the opposite principle.

We have institutionalized the famine price. We call it information asymmetry, and we have decided it is not just legal but clever. The whole game, in many corners of this industry, is to know the fleet is coming and to sell at the famine price anyway — and to feel sophisticated about it. Perhaps even brag at drinks to your friends about your genius.

But consider this.

You cannot know, in advance, how such actions will aid or harm you. Something being “technically legal” doesn’t mean it doesn’t extract a cost from you later. Cicero is pointing out the space between the utile and the honestum, and it’s an evaluation that modern investors, business owners and people of good standing should consider.

You develop a reputation for standing in the grey zone, it will have a cost. It may not be evident. Not for some time. But it will eventually come.

Warren Buffett built a reputation, in my opinion, of doing both what was high utility but also what was honorable. It’s why he was, ultimately, given the opportunity to invest in Goldman Sachs Pref at the bottom of the GFC.

Consider - a lot of people had money. What Goldman wanted was his reputation.

In modern parlance, disclosure law tells you the floor.

It tells you what you must reveal to stay out of court. Cicero is describing something the operating agreement will never fully describe: what you owe the person across the table even when you could legally stay silent or obfuscate the truth.

Why a Fiduciary Is Older Than the Word

We think “fiduciary duty” is a modern legal invention — a thing the SEC bolted on in 1940, a thing your fund counsel papers up with a few defensive paragraphs.

People talk about owing fiduciary duties to their investors. To others. But we don’t mean it in a deep sense, at all. We mean it in a strictly legal sense. And most fiduciaries practice being fiduciaries in the context of abiding by the law. Not in the deep meaning.

It is not a shallow concept. It is one of the oldest ideas in Western law, and the word itself gives it away.

Fiducia. Latin. It means trust — specifically, a thing handed to you on the understanding that you will hold it as faithfully as if it were the other person’s own. The Romans had the concept fully formed: the tutor who managed a ward’s estate, the friend who held property in fiducia for another, bound not by a contract that spelled out every contingency but by fides — good faith — itself.

Cicero’s whole argument is that fides is not a nicety layered on top of commerce. It is the foundation commerce stands on.

“Fundamentum autem est iustitiae fides” — the foundation of justice is good faith, the reliability and truth of promises and agreements. Take it away and there is no contract, no partnership, no estate held for an heir, no capital entrusted to a manager. There is only the famine price, charged by everyone, to everyone, forever.

This is the part of this concept that I believe has been mostly lost in our modern, capitalist, winner-takes-all society.

Your LP agreement, your loan covenants, your lease, your operating agreement — none of them actually work because of the enforcement clause. They work because the overwhelming majority of the time, everyone honors them without anyone going to court. The legal machinery is the backstop.

The thing that actually runs the system is fides — the expectation that the person holding your money will treat it as if it were their own.

Every fraud I have ever written about is about a leader who figured out he could exploit fides — borrow against the trust, spend it, and run before the bill came due. Calvi borrowed the Vatican’s. Ponzi borrowed his investors’. The reputation lags the reality precisely because trust, by design, is extended in advance of verification. That’s what makes it valuable. It’s also what makes it lootable.

Cicero understood this in 44 BC. And he died for it, because the concept was treacherous to the men who would overturn the Republic.

Because if they chose what was honorable, they would have not done as they did.

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The Fiduciary’s Reckoning: An Operator’s Read

Let me bring this all the way home, into the world I actually live in — real estate, syndications, capital raised from people who trusted me with it.

Here is the uncomfortable truth Cicero forces on anyone who manages other people’s money: the documents define your liability, not your duty. They are not the same thing, and confusing them is how good operators slowly become bad ones.

The operating agreement tells you what you can be sued for. It is silent on almost everything that actually matters:

• It does not tell you to call your LPs before the bad quarter, while there’s still time for them to understand it, instead of burying it in a footnote of the year-end statement. (The merchant and the fleet. Do you mention the ships?)

• It does not tell you to disclose the conflict — the affiliated property manager, the acquisition fee, the related-party loan — in plain language, when a vaguer disclosure would technically satisfy the requirement.

• It does not tell you that a tenant’s habitability is a duty, not a line item to be minimized until someone complains.

• It does not tell you what to volunteer to your lender when the DSCR is drifting and you’re still inside covenant — when silence is legal and a phone call is honorable.

In every one of those cases, the utile and the honestum appear to diverge. The expedient move is to say less, disclose later, minimize, wait to be asked. And in every one of those cases, Cicero’s claim is that the divergence is an illusion — that the trust you preserve by doing the honorable thing is the single most valuable asset on your balance sheet, and the one that never appears on it.

Reputation is the ultimate compounding machine. It is built one honored obligation at a time, over decades, at the precise moments when breaking the obligation would have been cheaper. And it is destroyed in a single quarter, by a single famine price, charged once to the wrong person.

The sponsors who blow up in this cycle will almost all be legally fine. That is the point. They will have disclosed what they had to disclose. They will have stayed inside the four corners of the document. And their investors will never call them again — because somewhere along the way they decided that technically legal was the same as honorable, and the market, eventually, will enforce the difference.

What the Dying Man Knew

Cicero finished De Officiis and within a year and a half was dead, his hands nailed up in the Forum by men who had decided that the utile — raw power, the expedient murder — was worth more than any duty owed to a republic or a citizen.

In the short run, they were conclusively right. Antony won (then lost, eaten by the system of his own creation). The Republic fell. The honorable course got Cicero killed.

And yet.

Two thousand years later, we do not print Antony’s letters. We printed Cicero’s, second only to the Bible, and handed them to the men who built the country I live in. The expedient man won the year. The honorable man won the millennia. That is the entire thesis of this newsletter, written before there was a market to apply it to.

We are at great risk, in the West, of completely forsaking these lessons. I’d argue they have been forsaken. You have only to look at the state of Western Politics to see the truth of this statement.

And I do want to emphasize this point. Cicero died for this. The honorable path is not always the easy one. But it is the right path. Because the chickens will, eventually, come home to roost.

The terrain, today, has changed beyond all recognition. The fiber and the silicon and the offshore shells and the disclosure schedules — none of it would be legible to a Roman.

But the underlying question has not moved an inch:

What do you truly owe the person who handed you their trust?

Think Well. Act Wisely. Build Something Timeless.

— Arie van Gemeren, CFA

The Timeless Investor | Lombard Equities Group

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In the 1920s, a mortgage might mean 40-50% down on your home, with a 3-to-7-year term, and a balloon payment at the end that you had to refinance. Gradually, over time, debt instruments evolved and the entire financing game changed. Radically so.

In today’s article, I want to hit upon three major points.

And as any long-time readers of me will know, I’m a staunch advocate for lower leverage when possible, and avoiding bridge debt like the plague.

Here are my three major arguments today:

1. Leverage used to be “less utilized” when judged by LTV, and the system pushed it to higher and higher usage with a “noble” rationale

2. Our entire fiat monetary system forces the proliferation of debt — by design, not by accident - and has caused an explosion of financing sources for investing

3. As debt proliferates, prices rise with it. You can watch it happen in tuition, in car prices, in real estate, and in many other goods. And almost every incentive in the system is engineered to push you toward more leverage, not less.

And when de-leveraging events happen, it often isn’t because conservatism has taken over, but rather because our collective hands are badly burnt. And burnt hands avoid fires.

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The Great Change of 1934

Before 1934, ~50% leverage was normal; after the federal government entered the mortgage market, leverage climbed and never really came back down.

The argument, in the first place, for the federal government entering the mortgage market was reasonable, as well. The goal was to make homeownership more accessible to Americans. Which is a good and noble goal.

It also enabled higher leverage (because just offering a competing leverage source isn’t enough. You’ve also got to make it less expensive to buy a house).

When the FHA arrived in 1934, it not only increased available LTVs for purchases up to 80%+, it also introduced the concept of the long-term, fully amortizing, fixed-rate loan. And the VA went a step further in 1944, offering zero-down loans to veterans.

You actually had two really fascinating things happen at once: leverage went up, and duration risk went down at the same time. An 80% loan that self-amortizes over 30 years is safer for the borrower than a 50% balloon that has to be rolled every five.

That’s the counterintuitive core — and it sets up the recurring Timeless Investor thesis: it’s all about the capital structure itself.

Why our fiat system forces debt to proliferate

Now. Another important thing to remember and bear in mind is that a “proliferation of debt sources” is not a side effect of modern finance. The system we live in, affectionately called a fiat-currency system, thrives on debt creation.

In fact, it isn’t hyperbole to call debt the circulatory system itself.

Six mechanisms to grasp here:

1. The base money is itself a liability. Under fiat plus fractional-reserve banking, most money is created when banks make loans. A new loan simultaneously creates a new deposit — money conjured against a promise to repay. The credit is the money. So the only way to have more money circulating is to have more debt outstanding. Money and debt expand together by construction. A gold standard caps money creation at the reserves you can dig out of the ground or hold in your vault; fiat removes that governor entirely.

2. The compounding treadmill. When a loan is made, the principal is created — but the interest is not. The dollars to service interest on the existing stock of debt can only come from new debt. That builds in a structural imperative: aggregate credit must keep growing, or the system tips into a deflationary debt spiral. Expansion isn’t greed; it’s a mathematical requirement of the design.

3. Inflation targeting punishes cash, rewards leverage. Central banks explicitly target positive inflation (~2%). That is a stated policy of perpetual, gradual currency debasement. The behavioral consequence is enormous: holding cash is a guaranteed slow loss, while borrowing to own assets is rewarded — your debt inflates away while the asset reprices up.

4. Financial repression manufactures yield. When real rates are pushed negative, trillions of dollars can’t sit in “safe” money — it’s melting. Capital is forced out the risk curve hunting for real yield, and that demand summons supply. The system invents new debt instruments — CMBS, CLOs, mezzanine, pref equity, private credit funds — to channel the capital. The proliferation is the market’s answer to “where do I put money that loses value if it sits still?”

5. Regulation relocates risk into new structures. Every crisis prompts a rulebook (Basel, Dodd-Frank). The rules don’t eliminate the risk appetite that fiat abundance creates — they simply send it somewhere else. Basel made leveraged CRE expensive for banks to hold, so the lending migrated to private credit funds facing no such constraint. Proliferation of structures is the visible residue of that endless game of regulatory whack-a-mole.

6. The self-reinforcing collateral loop. Expanding credit bids up asset prices; rising prices create more collateral; more collateral supports more borrowing. The research is blunt: after 1980, US debt grew not because more people borrowed but because people borrowed more — primarily by extracting equity against rising asset values — and the added debt didn’t lower net worth, because prices kept climbing. “Asset-price-based borrowing became an integral part of households’ consumption-saving decisions… at the cost of higher financial fragility.”

And as debt proliferates, prices rise

Here’s a thorny and ugly truth. Generally, we know that when people have more money, they bid the price of things up (general inflation). But what if by providing more debt options to buy a thing, you thereby spur demand and thereby drive the price higher for that particular thing?

Said more succinctly, when you make more credit available for a thing, you don’t make the thing more affordable — you bid up its price.

Look at college tuition. Education Secretary William Bennett wrote a 1987 op-ed called “Our Greedy Colleges” in a thesis memorialized as “The Bennett Hypothesis”. In short - the availability of easy-to-acquire student debt directly enabled colleges to increase prices.

Tuition has risen roughly 600–700% over 40 years, about 3x the rate of general inflation, averaging ~5.8% per year since 1983 — faster than any other household expense. Meanwhile student debt ballooned from $772B (2009) to ~$1.75T (2024), reaching $1.84T by Q4 2025.

And the causal link has actually been measured: the New York Fed found that for every $1 of additional federal loan availability, posted tuition rose ~$0.60 (about $0.65 per $1 of subsidized loans, $0.55 per $1 of Pell). The aid became the price!

Now - missing in this is an analysis of student loan terms from 1983 through to 2009. The data is illustrative. In the 1970s, student aid was overwhelmingly driven by grants. In 1975, grants made up about 80% of federal aid towards students.

But then came The Middle Income Student Assistance Act of 1978, which lifted income caps on who could take out federal loans. Suddenly, everybody qualified for leverage, and universities realized that guardrails on demand were absolutely gone.

And the rest, as they say - is history.

Now expand this logic out to a MUCH bigger market. Real estate — the biggest version of the same loop. Every new debt source (FHA, the GSEs, CMBS, agency multifamily, private credit) expanded the pool of capital chasing the same buildings, and cap rates compressed as a result. The “proliferation of debt sources” is the value-inflation engine.

More lenders, more structures, more leverage available → higher prices → the higher prices justify more debt.

The snake eats its tail. But the important thing is that real estate has the most debt behind it. The entire system is designed, almost as if by actual design, to make real estate prices go up over time.

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Everything conspires to push you into debt

Once you see the design, you see the incentives everywhere, all pointing the same direction:

• The tax code subsidizes debt (interest deductibility) and penalizes equity.

• Monetary policy punishes savers with negative real rates and rewards borrowers with debasement.

• The product economy sells you the monthly payment, not the price — homes, cars, furniture, now everyday purchases via buy-now-pay-later.

• Asset inflation makes the un-levered feel like they’re falling behind, pulling even cautious people onto the leverage treadmill just to keep pace.

• Institutions are measured on return-on-equity, which rewards more leverage almost mechanically.

The result is a system that steadily incentivizes and pushes you to take on more and more debt.

Now that’s the unconscious situation. Whether you consciously choose it is a different story - and requires a stiff spine in some situations to resist.

When low leverage is in vogue

Now it’s important to remember that leverage is a two-way ratchet. It doesn’t only insist on going up. Leverage often resets hard at every credit bust — and those resets are the important cyclical turning points worth exploring further.

Four clear episodes where low leverage came roaring back:

1. The Volcker shock (1979–1982). Prime hit ~21.5% and mortgages went into the high teens; high leverage became mathematically impossible. The cleanest “expensive money kills leverage” case.

2. After the S&L crisis (early–mid 1990s). Roughly a third of all S&Ls failed (1,043 institutions, $519B in assets); the RTC liquidated the wreckage; CRE standards tightened sharply after a decade of 1980s loosening.

3. After the GFC (2008–~2013). The biggest modern deleveraging — household debt fell from ~100% of GDP to ~76%, consumers shed ~$1.4T (2008–2012), and net new household lending went negative for years.

4. The current rate-reset (2022–present). Higher-for-longer rates pushed disciplined CRE lending back to 50–60% LTV with DSCR >2.0x; many deals now max out at 50–55% leverage on economics, not LTV caps.

So if there’s a takeaway, it’s this.

Debt levels gradually increased - particularly around real estate, but more generally around everything in the WEst - and it was often with noble or grand purposes, but the effect is the same.

Those same debt levels conspire to force asset prices up over time. It’s inevitable. It happens whenever debt proliferates. Just to hammer this point home. If I told you a phone cost you $1,000 and you had to pay cash, you might balk. But what if I told you it was $1,200 but you could pay it with monthly payments of $100. Bet you $1,200 sounds more reasonable. Now stretch that comparison out to buying a rental property or a home. Same logic.

And then, recognize that our system and the government want you in debt. Not in a nefarious, scheming man behind the curtain manner (though that’s possible if you look at the way laws are written). More like a gradual evolution to promote more and more indebtedness.

And lastly - recognize that the only real de-leveraging events come in the aftermath of getting crushed.

So here’s the question. This entire system is necessary for our way of life. Hard fact, but true fact.

However, you do not have to play the game. You can choose, within this system, to utilize less debt. To get yourself into a situation where you are not involuntarily being forced into deleveraging but instead protecting yourself, ahead of time, and not getting into a forced seller situation.

That, my friends, is the only logical take-away from this entire tale.

Think Well. Act Wisely. Build Something Timeless.

Arie van Gemeren, CFA