RE:Karma has everyone's address
The following is the transcript of the conversation with Seth Daniels, who is the managing partner of JKD Capital. JKD provides research and analysis to the Libertas Real Estate Opportunity Fund, a fund for accredited Canadian investors dedicated to protecting against a downturn in the Canadian housing market.
The Libertas Real Estate Opportunity Fund had a rough year in 2017, despite being short Home Capital and up 42% in May 2017 (the month Home Capital Crashed) but closed the year down 52%. That had to be painful for anyone who put their money on a bet that Canadian housing would crash.
You once could find Seth on twitter @jdkcap and most recently, @AnalystSkeptic
J: Could you start by introducing yourself?
Seth: Sure. I’ve been in the hedge fund business since 2000. I started off working for one of the pioneers of growth investing at the tail-end of the dot com and biotech bubble.
That’s where I gained my first experience in both growth investing (particularly at the end of a cycle) and short selling. From there I went to work for a short selling consulting firm that’s famous for publishing on Enron—that’s really where I first learned the trade of short selling.
J: How long were you there?
S: Maybe a year and half. I then went to work for one of my former bosses from my first firm who had started a healthcare hedge fund. I became very negative on the US housing market in 2006 and moved to a macro fund in Boston. I started my own firm about 5 years ago.
J: That was good timing on your part on the us housing.
S: Yeah, obviously the timing was partly luck. It’s nearly impossible to time the collapse of a bubble. I see, so it’s not like there were some indicators that you saw...
S: There were lots of indicators but that doesn’t always mean that your timing’s going to be right: short sellers are generally early. So I saw a lot of things that indicated that it was ending but that didn’t necessarily mean it needed to end right there… if the central banks had printed money then the way that they are printing money now, the bubble could easily have continued for a few more years.
J: What were some of these indicators that you saw with the US housing market?
S: Well, it was obviously a bubble. But in terms of timing, there were a couple of things. One of the big ones was something called first payment defaults and early payment defaults. People were missing their first or second or third payment on a mortgage. If you take out a mortgage and miss your very first payment on that mortgage, that’s a problem. That generally means that you’re either loaning to people who can’t afford it or it’s fraud or some combination of those two.
J: Is that different from the delinquency rate?
S: It’s a subset of the delinquency rate. So the delinquency rate will cover all of your delinquencies; this is just looking at the first payments that people are missing right after they sign the mortgage.
J: Oh I see, so when you say first or second payment, this is the first and second payment that the buyer makes...
S: So let’s say you go out and you buy a house today. Next month you have to make your first mortgage payment. You miss it.
Delinquencies can happen at any time over the course of a mortgage period. So if you have a 30 year mortgage, you can go delinquent at any time over the thirty years. First payment defaults and early payment defaults just refers to a particular subset of that. So if you’re missing your first payments or payments over the first year of the mortgage, there’s a very serious problem.
Seth’s note after our interview: I don’t have my original data handy, but here is a chart that my friend @DonutShorts (Brian Horey of Aurelian Management LLC) put together from the New Century (a failed subprime lender in the US) autopsy.