While almost all of us in this business are inherent optimists, we need to be realistic about the economy and the world in order not to get ourselves into trouble again and to make sound investment decisions. First, Europe is still going round and round and not solving its problems. Greece remains a disaster and Spain is now in almost as bad shape. With unemployment in Spain in excess of 25%, and the government not working with the ECB as well as it should, things in Spain will likely get worse before they get better. France is in worsening shape and the new government is headed in completely the wrong direction with the lowering of the retirement age and the large tax increases just imposed. Italy bumbles along not fully tackling its core issues. The end result is Europe has many more years of crisis and potentially a complete reordering of the Euro. Whatever happens, it is going to be seven to ten or maybe more years before Europe is again a real engine of economic vitality. The real worry is that the standard of living will decline substantially and that will lead to major social unrest and the rise of far left or far right governments who then create even worse issues. Bottom line, Europe is not where investors are going to want to be for a long time. It may appear like a potential bargain, but it is not Japan, and the risks are huge.

China remains with major issues in banking and real estate as well as massive corruption. The new government seems to recognize the problems and the long term deleterious effects it would have on the political and social system. Whether they can do what is needed to fix the problems and get the country back on a growth path is possible, but unclear. People with a strong knowledge of China say there are major social and demographic problems in addition to the other issues and that long term China may not become the world power it seeks to be. The risk is the massive effort to build up its military and the historic philosophy of the Chinese to protect its near area, could lead to a military confrontation with the US over the next 5 to 10 years. There is simply no way to know but it is why Obama has made a policy decision to shift many US military assets to the Asia Pacific region.

India is mired in severe corruption and bureaucracy to such a degree that it will take a generation or more to make major progress in correcting the situation. It is inherent in the culture. As a result the economic growth of India will be severely limited for so many years that it is not going to be a major factor in world growth or investing for the foreseeable future.

The rest of the world will grow, but there is nowhere else that has the depth of population and the education and other infrastructure to be a economic driver like Europe and China. Latin America will grow, but it has so far to go to catch up that it will help, but it has the same issues of major corruption and lack of roads and other infrastructure that it will take a very long time to really affect the world economy.

Then there is the Middle East. That area will only get more violent, see more upheaval and will be a major disruption to the world. Iran must be stopped in 2013 and Israel will do it with or without the US. We now see that the fears of the Muslim Brotherhood acting badly were all true, and they really will attempt to get control of the area as Morsi is now trying in Egypt. Unfortunately Obama still is totally naïve about the Arabs and he still thinks he can just sit and talk to them like he does with westerners. They are very different. As the deputy speaker of the Israeli parliament said, the speech in Cairo in 2009 set a bad precedent and Obama is viewed as weak in the area. That has led to what we now see happening. Add to that the Arab Spring in Syria, near revolution in Jordan, near civil war in Lebanon, and the dissembling of all we accomplished in Iraq, and add in Afghanistan and Pakistan and you have a recipe for a major war very soon. The interesting lessons from the Israeli battle with Hamas is unreported and very significant. It completely changed the Israeli situation for the good. Israel after the last Lebanon incursion, went on a massive effort to produce military technology that changed the entire military calculus. Note that Iron Dome took down 90% of all the rockets that could have caused damage. It is believed they tested even more advanced defensive technology. Note that they were able to find and destroy all of the long range rockets that were hidden in bunkers plus 40% of all the rest of the rockets. In a few more days they would have destroyed most of the rest. Had they sent in the tanks the Hamas fighters would have found that they had an equally hard time doing any material damage to the tanks and were unable to stop them. Take note of the drones that were able to kill Hamas commanders. Israel was able to locate and precisely kill most of the top military commanders of Hamas. Hamas has a real vacuum of able commanders in the next level. Note also that Israeli drones were able to select floors of certain buildings and destroy that floor, which in one case was a Hamas intelligence center, and leave the rest of the building intact with the foreign journalists unharmed. Pay attention to the technology this required and how effective it was.

What is now in works is even more advanced drone, defensive and other technology that the US and Israel will be able to use against Iran and Hezbollah. That changes everything in the calculus of attacking Iran. This new military technology has been shared with the US and it changes the whole situation worldwide.

In the end the US is the best place to invest for many years to come. On the other hand, the world economy has many years before it is again growing at a rate that is even good, let alone strong. The US under Obama is facing the same issues of the past four years. Severe regulatory constraints, higher taxes, Obamacare causing unemployment and underemployment, and severe deficit constraints on the economy. Obama has not changed his government centered approach and his left leaning base is strongly resisting entitlement cuts and expansion of fracking. Utilities are under attack.

Bottom line. The US remains the best place to invest, but investors must revise their forecasts to accept slow growth, lower returns, and potentially major eruptions of violence and war in the Middle East in the near term, disruption of oil, and slow growth or even recession in Europe for several years. Good cash flowing real estate with moderate leverage, and good location, will in the end, be where to invest for many years ahead. A solid asset in a good secondary market, with good location is an excellent investment. It will cash flow well, and provide a nice capital gain in five to seven years. Short term flips are going to be unusual. 20% IRR returns will be very hard to achieve. Invest solidly for the long term, accept mid teens returns as being very good, and just be happy you own US based real estate instead of shooting for outsized gains in foreign countries where the risk is not worth taking.

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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.