Despite all of the concerning news and potential black swans, I note in talking to a variety of people that they just assume Europe will muddle through, Spain and Greece will not be a major issue, and the US will also muddle thru. They completely ignore Iran, Syria, Egypt and the rest of that part of the world as though they could not even have any influence on America. While it is clear that finally the Europeans and the IMF are seeming to wake up, and are discussing some new, and possibly good solutions, they are far from solutions, and even if they do create a European FDIC, or some other Europe wide bank pool, or if they create some way to better integrate fiscal decision making, it will take time to make any real difference. As we have seen time and again, muddling along only exacerbates a crisis, and then fixing it is that much harder. Just look at the deficit in the US, the tax code mess, jobs and all the other issues that are not getting addressed for many years here. Now the US creeps nearer to a similar crisis to Europe. In short, this attitude of some of my friends to make believe and assume all will be OK is what the US did in World War I, World War II, and many other crisis situations. Eventually things explode and the bubble of happy thinking ignorance blows up in your face.

There are no magic bullets. Muddling along is not helpful to the US economy and so not helpful to US real estate values or financing. Muddling does not make new job growth. It is stagnation. That equals high unemployment and greater pressure on the middle class. It may mean low rates for a few years which is nice if you are a borrower, but I prefer to pay a little higher rate and have a good solid growth economy which drives up values. It seems pretty clear we are not going to have another Lehman in the US maybe for 20-30 years, but there will be more financial crisis. There always will be a new crisis, and there always has been since there was any form of money and lending. The major US banks are in good shape now, and will stay that way, even though making profits is getting much harder and will get even harder if the current regulatory bent continues. For small banks it is getting near impossible for them to make real profits and many are going away by merger or close down. Less liquidity for small business and homeowners in small cities and towns. Not good. A country’s standard of living only increases when the economy is growing and the middle class shares in that employment and income growth. It seems to me there are a lot of people with the view that somehow it will all work out. Well it will, but you need to be alive to enjoy it. In the interim muddling is very painful for most and does not make many people rich.

I continue to suggest you not just continue to take whatever happy pills you are talking. Bad things do happen, and then a lot of people seem surprised and lose a lot of money. In May of 2007 a small group of us had lunch and all agreed we were on the edge of the cliff, and we were going over it starting in late July 2007. We unanimously predicted the financial markets were about to totally collapse and a major crisis was about to occur. None of us could understand how everyone did not see it coming. Even though Alan Greenspan said only five people saw it coming, I knew many more who did, and said so, in 2006 and 2007. I am not saying don’t do deals, nor don’t make loans. Just be well aware of all the things happening in the world, and all the huge potential things that could impact the US economy, and assume one or more will happen. Invest carefully, don’t chase the price in a bid, don’t over lever, and project for the negative and the positive will take care of itself. It is all in the buy.

The economic trend will change in January, but even if Romney wins nothing much will really change for awhile until he and Congress can take legal actions. He can ease up on regulations and suspend enforcement actions, and shut down Cordray, but it takes time to really turn around the US economy. So we have a long way to go even if he is elected.

Wake up. Pay attention to Iran, Syria, Egypt, and Pakistan which just declared that its prime minister is not allowed to remain in office. Before the year is out there will be a major very bad surprise in one or the other of those places. Stay safe and careful and look to the long term.

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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.