Election Ramifications

What should we conclude from the election and the latest employment data. First the employment numbers. While the data seem good they are not great when you look at U6 and participation. Participation still has a ways to go to be vibrant. There are now a lot of people collecting money from the taxpayers and not paying taxes. It is clear that this is not sustainable and raising taxes is clearly not the solution, but would in the end be a loss of revenue. U6 has another 300 basis points to drop to be in line with an average good year in the US historically. That is a long way to go. At current levels of job growth, it is just beating population growth, so to get where we need to be will require substantially better job growth. The latest Challenger data suggest that large companies have slowed hiring and anecdotal reports suggest employees are being stretched to the limit. It is going to take awhile and some indication that Washington can actually accomplish something useful before employment steps up to where it needs to be.

GDP may grow at 3% plus or minus which is Ok but not what we need to really get a vibrant economy. Much more is unlikely with Europe on the edge of deflation or a real recession, and China slowing. The demand drivers are simply not there and won't be for maybe a few years. With housing continuing to be slow, and the vast over regulation of banks, new mortgages are simply not going to be available to really grow the new home market. The major big bank mortgage lenders are simply not going to expose themselves again no matter what the administration says it is doing to reduce the hurdle for a qualified loan. Obama and Holder have managed to prove to the banks that government lies and cannot be trusted not to change the rules when it is deemed politically expedient. Major lenders are simply never going to believe anything the government says, and they are not going out aggressively to make mortgages. Multi may be good but single family is in for a very long ride. In addition to the regulatory issues related to banks, there are millions of homes now owned by funds and investors which will come back to the market in the next few years. There will be an excess supply for an extended period and then rates will rise.

Next we get to can there really be any opening for compromise between t Obama and Congress. I have my doubts it can be anywhere near what is needed. He clearly is so blinded by his own image of himself that it is a real question what can get done. To come out right away and say I am issuing my own rules on immigration and screw you, is about as dumb as one can imagine and sets a terrible tone. The secret letter to Iran just compounded the sense of incompetence and desperation to do a deal that it just feeds the justified belief that Obama cannot be trusted on anything, and is desperate to do anything he in his mind will create a legacy even if it is bad for the world.

Then we have the Fed. There will come a time when QE will cost us with inflation. It may be years before we see it, but it is lurking. There is also the problem that real estate and stack values are somewhat inflated beyond a real value by the Fed doing QE and holding rates 60-70 basis points lower than a free market rate. In time everything reverts to the mean and values will do so as well. You need to realize we have inflated values in CRE today and the day of reckoning will come. There is no way to know when. Maybe in three years when refinancing is required for all the deals done in the 2013-2015 period, except that they will then need to carry a materially higher rate and a higher cap rate. Not a good scenario for value. Mostly it is likely the US economy will continue its modest growth and then one day inflation and value diminishment will happen. You should think about being a seller in 2015. Remember the old saying about pigs and slaughter. Waiting for the extra dollar of perceived value often can turn into no value. We just do not know when it is too late, so being a little too early is sometimes the more profitable strategy.

I believe Obama and some Democrats still don't get what just happened. The country is done with the experiment in socialism and over regulation. The Obama generation grew up believing the government knows best, and corporations and real estate developers are crooks along with bankers and Wall St people. Hilary just said corporations do not create jobs. Just imagine if she were to get elected and fulfills the rumors that she would appoint Elizabeth Warren as Secretary of Treasury. We would all be toast. It could happen. Elizabeth Warren is far more dangerous to your net worth than Obama has been.

Bottom line, things are better but not great. The risks are still there and growing with Obama still not doing anywhere what is needed to destroy the terror threat. Give good consideration if the risk of missing a little more upside in a rising rate market is greater than the risk of a downside black swan event.

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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.