Investing Offshore Is Filled With Growing Risk

The entire Mid East geopolitics has changed this past month and it is largely due to Iron Dome combined with the Shiite threat to the Sunni rulers. Egypt is now closely aligned with Israel and is key to making certain Hamas is decimated and unable to rearm. It is also key to keeping the funding from Qatar and Turkey out of Gaza which they have been doing lately. Hamas can demand whatever it wants, but Israel and Egypt and Fatah will not allow them to rise again. Egypt essentially wiped out the Muslim Brotherhood and will kill any new Brotherhood leaders who try to emerge. What is so different is that now Israel is closely aligned with the Saudis, Jordan, the Emerates, as well as Egypt. Fatah has a good relationship with Israel and stands to gain control of Gaza once the war stops. All Hamas can promise the people is more destruction, while Fatah can point to the West Bank and the lack of any destruction, a growing economy and a relatively peaceful relationship with Israel. You might notice there was almost no disruption in the West Bank during the Gaza war. No anti Israel demonstrations in Egypt, Saudi Arabia and Jordan. Meanwhile Gaza lay in ruins. Point counter point. It is there for all the Muslims to see how cooperating with Israel against the Iran backed terrorists is good for their lives. They also see how ISIS brutally kills Shiites.

So what does all this mean. The war between Sunni and Shiite is just getting underway in Iraq, it is full on in Syria and now it is spilling into Lebanon. That will go on for several years and thousands on both sides will die. Turkey is on the wrong side of this battle as is Qatar and they will pay a big price for that with the Sunni Arab states. The US must become oil independent. We must have Keystone and a lot more fracking and offshore drilling. Wind and solar barely make a dent now that Obama has decided to kill coal. Coal was 40% of US power production. Wind and solar are less than 5%. It is hard to know yet how energy costs in the US will be impacted, but likely for the good vs Europe and China if fracking and Keystone are allowed to go full out. That will mean more factory production in the US if they ever change corporate tax rates.

In Europe, Putin is not backing off. The Europeans and Obama have shown him they are afraid to take him on in any real way. They do nothing of material significance because the “don't want to provoke him”!! I am not sure what invading another country and shooting down a civilian airliner is if Obama is afraid to provoke Putin. Russia is a serious threat to European growth and stability. It may become a threat to the stability of the Euro one day. It is hard to know where all this goes from here since Obama has not done what needs to be done to speed up LNG shipments to Europe. Merkel has shut the nuke plants and banned fracking for ten years. Combined these actions mean Putin has control over Europe via the gas lines. He will use that to lever them to be less punishing to Russia than they might otherwise be. Putin will now not back down and so it is hard to judge what investing in Europe might look like when you go to exit in five years.

Africa is where the offshore action is ramping up rapidly. China is pouring in billions to help it develop. That is where the real opportunity might lie if you have the stomach for it. In contrast to Europe, there is potentially unlimited resources and growing demand in Africa. It is corrupt, hard to do things there and risky, but my point is what consider less risky-Europe and maybe parts of the Middle East may become more risky then they have been.

China is going through a major transition with a major effort to reduce corruption which is rampant, but the Chinese are also now waging a subtle battle against large US companies like Microsoft, Qualcomm and McDonalds in order to help grow their own companies.

Bottom line to all this is that the US remains a far lower risk for investing than Europe or anywhere else if you look at a five year exit date. Asset prices in Europe may be more attractive, but risk adjusted it is much less clear. The rest of the world is a mess of huge proportions, as Madeline Albright said recently. The US has a foreign and defense policy of appeasement and an inability to protect American interests in various places where we never had that worry before. The just released defense analysis says the Obama defense cutbacks are leading to a dangerous level of inability for US forces to respond. I know from sources inside the Pentagon that this has already become very serious. If you are investing in a place where US military power is potentially needed one day, don't count on it because it will not be there. More reason to invest in the US and be exposed to much less risk over the next five years.

The world is extremely uncertain and getting much more so by the day. The terrorist in Iraq will try to come here with some new 9-11somehow, one day in the near future. You need to be insured for that. While it is true that during several other war scenarios like Korea and Vietnam, the US economy was relatively unaffected, this is a much greater risk scenario and it is ramping up.

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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.