Colas: No Arbitrage In New York City

Tyler Durden's Photo
by Tyler Durden
Saturday, Feb 19, 2022 - 12:00 AM

By Nick Colas of DataTrek Research

This week’s Story Time is about New York City 2 years on from the onset of the pandemic. The first confirmed case was on March 1st, 2020, which means 24 months ago – perhaps to the day – is when the virus first started to circulate here. I (Nick) live in midtown Manhattan and did not spend a night out of the city until Thanksgiving 2021. Being a native New Yorker and aside from college and grad school never living anywhere else as an adult, I thought it was important to stay and support the city that has given me, well, everything.

My long history in this town has taught me one thing: there is no arbitrage in New York. Every form of capital (intellectual, physical, financial, whatever) is properly priced at any given moment. And, like the efficient market theory for stocks, even if there are mispricings there is no way to systematically find them. A few examples of what I mean by “no arbs in Gotham”:

  • If an apartment for sale is priced cheap to the comps, it is always because there is a problem with the location.
  • If you see a 20-something in a Ferrari, it’s most likely because they’ve made a killing in virtual currencies or at a hedge fund. Maybe they were lucky, and maybe they are brilliant. No way to tell, but you do know it’s new money. Old money keeps their nice cars in Palm Beach.
  • If a gaggle of attractive, lively young women ask you to go to a club with them, it’s not because they think you are handsome. It’s because you are driving a bright yellow Porsche 911 (true story, if a short and rather dull one because I waved my wedding band and drove on).

This “no arbitrage in NYC” rule makes the city an ideal vantage point from which to consider the current state of a post-pandemic world. New York marks everything to market, efficiently and quickly. Again, this doesn’t mean all “prices” (what’s visible today) are right over the long term. It just means they reflect today’s realities accurately.

Five vignettes that show what this “no-arb” market is saying just now:

#1: My friend “J”, 28 years old, is an up-and-coming recruiter specializing in management consulting. Hiring in this area has been white hot for over a year. Any consultant with a decent resume and 3-5 years of name-brand experience is in huge demand and routinely offered $300 - $500,000 to switch jobs. One of “J’s” clients, a well-known firm, recently offered him $4 million to work exclusively with them for the next year. He turned it down. “It’s nowhere near enough to make up for all the business I would lose”, he told me.

#2: I recently had a conversation with someone best described as an archetypal “tech bro” in his early 30s. He runs an online business that helps independent contractors handle billing and other paperwork. This “bro” just leased some lovely new office space for $10,000/month in downtown Manhattan, just for show. His VCs wanted to see some office space, and a few large operational partners did as well. “I don’t know…” he told me, “none of my guys want to work in an office… but whatever. I’m going to Dubai for a break next week … I can afford the rent. It’s fine.”

#3: “M”, a senior banker in leveraged finance working at a very large non-US financial institution, has repeatedly told me of his plan to leave the city once his kids are in college. “No one in my office cares where I live. My market works like a light switch – it’s either on or off. When it’s on, I’m on the road and visiting clients. When it’s off, there’s nothing to do in the office anyway.”

#4: “P”, my favorite waiter at my favorite French restaurant, got omicron while working the Christmas Eve 2021 dinner shift. “I was wearing 2 masks, but the place was packed and I knew I was going to get it. Sure enough, I did. I was sick for a week. My son got it too – he was fine in a day.” He went on to say, “We’re sold out every night, often lunch as well. Good spenders, too… This summer will be crazy if the tourists start coming back.”

#5: Mixing in a little data with these anecdotes, here are the latest MTA mass transit ridership numbers (workweek averages though this past Tuesday):

  • Average subway ridership: 55.5 percent of the pre-pandemic (2019) comparable week
  • Average bus ridership: 62.0 pct of comparable 2019 week
  • Long Island Railroad: 48.8 pct of comparable 2019 week
  • Metro-North Railroad: 43.8 pct of comparable 2019 week
  • Bridges and tunnels into/out of 5 boroughs: 99.5 pct of comparable 2019 week

The bottom line to those numbers is that, two years after the start of the pandemic’s spread, mass transit usage is still only about half of 2019 levels and when people do come into the city it’s more often in their cars. New York may never be a driving city like Los Angeles, but it is closer to that reality than any point in my +50 years living here.

Taken as a whole, these anecdotes tell a story of dramatic societal change powered by two drivers. The first is an overheated US economy, which is always on maximum display in New York when we hit such points in a cycle. The second, which is unique to right now, is that the last 2 years of hybrid/at home work have fundamentally changed how people think about employment. Simply put, they want more freedom and choice about where they live, how they live, and in many cases what they do.

Perhaps I’ve seen too many cycles and have become jaded as a result, but I can’t help but wonder if the next recession will push things back closer to pre-pandemic norms of work. Living in Montana but keeping your job and pay structure as a NYC investment banker only works if every other banker who could replace you also wants the same flexibility and, crucially, that your employer needs someone to execute deals. When deal flow dries up and companies cut back, the NYC job market becomes like a game of musical chairs just after the music stops. The same, I think, is true for many jobs here. And there is no “arb” to keep the current high-flying, work from anywhere ethos in place once the national economy slows.

I’ll close with one last story, courtesy of a friend who has made a very good living working at high-end Manhattan watch boutiques since the 1990s. “Nick …”, he once told me in his lilting Russian accent, “I want to be like a clam. Clams don’t swim around looking for food. They park themselves in the current and pump away. The food comes to them.” That’s what New York and cities in general do – sit in one place and wait for sustenance. Perhaps the current shifts for a while, but as long as it returns the city continues to survive and prosper.