The just released jobs figures reinstill a caution flag to where the economy is headed. If you look at the real unemployment and underemployment figure at 14.5% and the labor participation rate which is at approximately 63% and the lowest in decades, then you need to also look at other indicators. House prices continue down. Credit card debt went down last month. The brokers say over 30% of potential homebuyers fail to close due to not being able to get a mortgage. The price of gasoline is rising and summer is coming. That likely means $4.50 or in some $5.00 or more. An Iranian official just stated that Iran could now produce a weapon if it chose. Maybe it is true. Panetta said months ago that Israel will be ready to attack in April. Syria goes on massacring its people and the world sits and just wrings its hands. The election is really underway now and it is clear Obama has absolutely no intention of dealing with the deficit or entitlement spending. Cities continue to go bankrupt or are still using bubble gum and baling wire to make believe they are balancing their budgets. EPA has effectively ended the future of the coal industry in the US. Spain is once again raising serious issues about the European debt crisis.
I could go on and on, but the point being what appeared to be a growing recovery may not be one at all. Or if it is, then it will remain very fragile and could be knocked off the rails at any time. It is very possible that the hiring over the prior three months was simply a positive combination of weather and the over firing that occurred in 2008-2009, and companies now hiring back just enough to restabilize their staffing. We will have to see what the next two months brings to be sure what the real trend is. Maybe the stock market got a bit ahead of itself and all of us started to get too optimistic. We need 6-8 more weeks to really know.
Jamie Dimon put it well and very clear. The coming rules from Dodd Frank make no sense in some areas and will cause confusion in the markets. Confusion does not make for efficiently functioning markets and so capital remains constrained as capital sources try to figure out what they can and cannot do and how to even try to comply with some of the idiotic new rules being proposed. Cordray is just getting warmed up and has been told by the White house to not go full force yet until the election. (Recall what Obama said to Medvedev-just wait until I am reelected).
It is not that I want to be negative, but this past week I happened to have lunch with a smart, sophisticated senior executive of a major servicer who took the view that all is OK and Iran is not an issue. I have heard this from many people on CNBC lately, and I am concerned that there is a growing view that all is going well and the sun is shining. My purpose is simply to say, stop and look carefully at what is really going on, and you may have another more cautious view. While I do not believe that this is 2008 or anything remotely like that, I do believe there are so many black swans flying around that this is a time for caution and careful analysis of risk. This is not the time to go leaping off the diving board again.
The housing market is not going to all of a sudden get better. Prices in Las Vegas and some other devastated markets may be stabilizing, but that is because investors are moving in very strongly and buying up many of the foreclosed houses at steep discounts. All of that is good, but that is not a recovery. It is simply a market reaching such low prices that buying and renting out is now economically sensible in many places. Keep in mind that due to all of the massive litigation and attacks by government agents, the banks are still sitting on huge numbers of foreclosures and potential foreclosures and short sales. The supply of houses to be cleared by the market remains in the millions and that will take considerable time. We are not in a sudden housing recovery, and people who think we are will find it is not so robust as they are predicting. There is a difference between a stabilizing of prices and a real recovery. With the mortgage market severely constrained by all of the government rules and lawsuits, and employment staying weak, and high gas prices, there simply is not going to be a robust house price recovery.
The message is simply, be aware of the whole world and all that is happening, and don’t go way out on a limb. Investing and lending is fine now, but be realistic, and don’t go back to buying into hockey stick projections and pie in the sky appraisals. If you are careful, then in the long run you will do very well, but there are many disruptions along the way, so be in for the longer term. 2012 is going to be a historic year, and the history may get ugly.
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Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
