Can't Lose; Curley Effects; Zyn Tax; Homebuyer Shortage; BDC Woes

Five Idea Friday: 20 some-odd charts to carry you through the weekend

• ‘can’t lose’ alternative investment strategies

• Curley Effects and the limits of Exit & Voice

• Zyn tax

• homebuyer shortage grows

• BDCs are not ATMs (and the looming need for tech to get lean)

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5 Idea Friday

Some quick-ish hitters for your weekend reading pleasure.

1. Can’t Lose Strategies

I’ll dig into some more of this next week, but Hamilton Lane did its annual Market Update, and it’s pretty fun.

For now, I’ll just drop this one chart on the alt investment strategies that “can’t lose.”

These are the absolute worst 5-year stretches for various strategies, according to Hamilton Lane:

Hamilton Lane

There has been no 5-year period where any of buyout, private credit and/or infrastructure has lost money.

Obviously, there is nothing “can’t lose” about them, but it’s an interesting observation nonetheless. If you had asked me ahead of time, I might have guessed infrastructure, but that’s probably it.

I’m sure there are some methodological quirks here, too, so perhaps don’t read too much into it, but I thought it was fun.¹

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ICYMI

A chart dive on the PE-Direct Lending Scene

SaaS Attacked (ongoing)

5 Idea Friday: EU lags; AI payback (to whom); It's getting better (reprise); The predictors; Nothing Ever Happens Index

You got to admit it's getting better

AI everything cycle, and SaaS strikes back (maybe)

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2. The Curley Effect

One of the problems with the “Exit and Voice” framework for governance is that it can actually create negatively reinforcing feedback loops whereby elected officials are rewarded for their bad decisions.²

How so?

Well, if electeds govern poorly, for example by creating a patronage system for their base that exploits the outgroup, it will cause the outgroup to leave . . . only furthering the relative numerosity of the exploitative base.

The most famous example (that I’m aware of) is the “Curley Effect,” named after Boston’s Mayor Curley, who ruled Boston to its detriment for 36 years between 1914 and 1950. In the authors’ words:

James Michael Curley, a four-time mayor of Boston, used wasteful redistribution to his poor Irish constituents and incendiary rhetoric to encourage richer citizens to emigrate from Boston, thereby shaping the electorate in his favor. Boston as a consequence stagnated, but Curley kept winning elections.

In other words, win “voice,” cause “exit,” and then keep winning “voice,” (over and over and over again) to great ruin.

Well, there’s some evidence that the Curley Effect may be kicking into overdrive, nationwide. There have been plenty of headlines regarding the “billionaire tax” in California, and/or Mayor Mamdani’s aspirations to soak the white people rich, but it turns out poorly-governed states are doubling down on poor governance everywhere:

The top rates for state income taxes are diverging, even more so than before.

DC, Washington, MA, and NY have all determined that the solution to their respective fiscal messes is to tax their minority constituents (i.e. “the rich”), which they were already doing, but this time with feeling. At the same time, the more civilized parts of the country appear to be welcoming the high-performers with relatively open arms.

One can only imagine what happens next: wealthier people will choose “exit,” and bad problems will only get worse. Good for the states where the gettin’ was already good. Bad for the ones already dabbling with a doom loop. Norway tried it, and 25% of their wealthiest left or transferred their assets out of country. High-earner flight from NY to Florida has been going on for years. Even a proud-supporter of poor governance, like Howard Schultz, has decided to decamp from his beloved Starbucks State to Florida’s sunnier pastures.

But, hey, if your electoral base is the downwardly mobile, then driving out the high-achievers is a big W. There’s your Curley Effect, right there.

There’s actually some recent evidence that eliminating the SALT Deduction (which subsidized the high-tax-poor-governance habits of the wealthiest-but-still-poorest state governments) put the Curley Effect into overdrive.

It turns out that net-migration, and income migration specifically, is negatively correlated with higher tax rates:

Baker Institute

the estimates suggest that a 1 percentage point increase in the top marginal income tax rate is associated with a reduction in net migration by 6.1 federal taxpayers per 10,000 . . . if economic growth is roughly proportional to the population of taxpayers, it would imply a loss of nearly 1 percentage point of growth annually.

Studying AGI flows, however, suggests that the economic losses could be more severe. The estimates indicate that a 1 percentage point increase in the top marginal tax rate is associated with a reduction in net AGI flows of around $11.54 for every $10,000 of AGI in the state. For California, this suggests an annual loss of 1.5% of AGI, relative to a tax structure with no income tax.

OK, so that’s bad, but not the worst.

But what happened specifically when the SALT deduction was eliminated?

Specifically, between 2017 and 2019, the association of a 1 percentage point increase in the top marginal tax rate with net migration losses rose from 3.0 to 6.1 taxpayers per 10,000—more than double the estimated value.

For AGI, the value rose from $8.28 per $10,000 in 2017 to $11.54 per $10,000 in 2019. In 2020, these relationships steepened sharply. The association in that year grew to 8.1 taxpayers per 10,000 for net migration and $18.24 per $10,000 for AGI, indicating a surge in migration and resources from high income tax states to low income tax states.

A bad problem got even worse!

Anyways, the point, again is that “exit and voice” isn’t a terribly helpful framework for thinking through democratic legitimacy when “exit” is part of the point.

Quite the opposite really: exit becomes a reward for bad policy, by giving exploitative rent-seekers firmer control over their host. Absent some other negative consequences—e.g. tar-n-feather, as per the Colonial period—the Curley Effect is basically irreversible, at least until the host is fully exsanguinated, and there is nothing left to plunder. For locational or resource rent-seekers, that can take an awfully long time, as the IRGC will be the first to remind you.

Should you get to conquer the beautiful coastline of California via terrible policies designed to chase your best and brightest to Nevada and Texas? I mean, that doesn’t seem very fair (or an incentive that would be wise to cultivate), but maybe that’s just me.

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3. Zyn Tax

While on the subject of interstate tax competition, this too was amusing.

Washington apparently passed a wholesale tax on nicotine pouches, and the effects on consumption are pretty striking:

Consumer Edge

Sales of nicotine pouches in WA dropped by ~55% (by volume) immediately following the tax’s implementation.

My understanding is that this wasn’t a vice tax, inasmuch as it was an attempt to recapture tobacco tax revenue that had been lost as consumers shifted to the smokeless (and ordinarily taxed) nicotine pouches.

But, the lesson is pretty clear: tax it, and you’ll get less of it, whether it’s higher income people or Zyn pouches. Or, who knows, in this case maybe the pouches are just being sold under the table or out of state, so still a lose-lose, but a fun observation nonetheless.

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4. Housing Buyer Shortage

I promised a chart update on the definitely-not-shortaged housing market, and here it is, although I’ll be succinct.

On the single-family side, we have:

• a steadily rising share of markets with (measured) declining home values:

• while inventory in the South and West is finally coming down off their respective peaks, inventory in the Midwest and Northeast is steadily building:

Wells Fargo

• of the 50 largest markets, home value appreciation is basically 0—and again, the split between “markets where values are going up” v. “markets where values are going down:”

  

  ResiClub Analytics

• Indeed, for the nation’s second-largest homebuilder, Lennar LEN 0.00%↑ , margins are now in-line with the first wave of the GFC:

  

  ResiClub Analytics

On the rentals side of things:

• weighted property property values, i.e. where the index weight is commensurate with relative value (so more expensive properties count more) is basically back to where it was in 2020:

  

  What that means is that (a) there has been zero appreciation in 5 years (consistent with other data); but also (b) it’s the most expensive properties (i.e. metro core properties) that are dragging down the index.

• Absorption rates for new apartments are trending below 50%:

NMHC

• 35% of properties are now offering apartment concessions:

  

  Apartment List

• rents for new leases for the Single Family Rental giant, Invitation Homes, went steeply negative in Q4 ‘25 (in contrast to renewals, which held steady)—which is a pretty sure sign of soft demand, if I’ve ever seen one:

  

. . . and on and on I could go, but I won’t.

You get the idea.

There’s no housing shortage. There is something of a housing surplus (and elsewhere a bid-ask spread with only one fix, and it’s not zoning). There might be a ‘nice places to live’ shortage, too. Heck, there’s even yet another new paper arguing that income—not zoning—explains home values (because obviously).

But, housing is a disguised status game, and those aren’t going anywhere any time soon.

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5. BDCs not an ATM

There’s been a lot of coverage on the run on redemptions in Private Credit.

Random Walk hasn’t seen anything that would cause me to update my priors—yes, there’s clearly some distress, and defaults are rising (as expected), and recent equity devaluations aren’t helping—but overall, there’s been no evidence (that I’ve been able to find) of anything catastrophic beneath the hood.

Famous last words, I know, but it’s my story, and I’m sticking to it.

Regardless, that hasn’t stopped investors from increasingly demanding their money back from the largest BDCs:

Bloomberg

Redemption requests have increased substantially and exceeded the prescribed fund-limits . . . which is apparently a strategy that some BDCs are using to calm investor nerves:

The cap, however, isn’t hard and fast. In recent months a handful of managers have honored redemptions above the threshold, while emphasizing that their portfolios remain largely healthy and have generated high returns.

Their hope is that the flexibility will help calm investor nerves. But the decision is fueling a debate over whether short-term optics are outweighing long-term discipline, ultimately favoring those investors who rush for the exit. Some industry executives dispute characterizing the caps as “gates” because the threshold is embedded in the fund’s structure. Not holding the line, though, can weaken that argument.

“If you’re gonna panic, panic early and first” as the old saying goes.

Anyways, it is what it is.

Publicly-traded BDCs have sold off aggressively, and no one worse than the ‘PIK King’ Blue Owl:

Snacks

Blue Owl OWL 0.00%↑ is now trading at less than the value of its assets—a 25% discount, in fact.

Well, that’s not very indicative of confidence.

If I were to put my money where my mouth was, I’d snap up some Blue Owl yesterday . . . but, I’ll leave that found money for someone else.

Interestingly, and on a related note, since November of last year, IG spreads for AI enablers are now lower than spreads for AI adopters:

Odd Lots

The market used to perceive more risk in the “enabler” debt (i.e. the big AI Capex buildout). Now the market perceives more risk in the “adopter” debt (i.e. software companies, presumably).

It’s loans to software (and definitely not investment grade) that comprise a lot of Blue Owl’s book. The perceived risk is out there, and it’s not helping that growth (such that it’s there), is relatively tepid.

There’s a big “wall of maturities” coming, and not everyone is going to be able to refi:

Apollo

That’s $40B in software-related debt that will mature in 2028.

I’ve said it before, and I’ll say it again (although it gives me no joy): more tech layoffs (in private and public markets) are coming.³ The need to get lean is become more urgent, and that’s (unfortunately) what happens. It will be blamed on AI, but it’s not AI.

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Previously, on Random Walk

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1. For what it’s worth, JL is more or less making the point that it’s a mistake to count the PE bois out because the buyout bois deliver.

2. Technically, Exit, Voice & Loyalty, but no one remembers the last part.

3. Atlassian TEAM 0.00%↑ just laid off 10% of its staff.