We appear to have made it through another potential drama with the stock market gyrations of the past week, the Chinese devaluation and the continuing uncertainty of the Fed. What we need to realize is that there is a high likelihood there will be many more weeks of black swan incidents which will rattle markets, create more uncertainty, and potentially be destabilizing. When one looks around the world there are potential black swans all over the place. The new chairman of the Joint Chiefs testified recently that the threat levels have never been greater. Those were his words. The risks are exacerbated by substantially because we have a grossly incompetent president whose policies have created a lot of this instability and threats.

Brazil and Venezuela and going to collapse politically and economically very soon, dragging much of Latin America into the unknown economically and possibly politically once Venezuela collapses into possible severe unrest . Turkey is in political unrest as the Erdogen Islamists fight for control with the secularists and at the same time battle the PKK. Israel is experiencing a ramp up of terror threats and rocket attacks thanks to the pending gift of $150 billion to Iran when sanctions are lifted. Every terror group facing Israel is now competing for a piece of the Obama cash hand out. Assad is barley handing on and there is no way to know how long that goes on until his regime collapses and there is even worse chaos. The flood of migrants into Europe is now at overwhelming levels and has the potential to create political disruption in Europe as the right wing gathers support to end the mass immigration. ISIS continues to create havoc with things now at stalemate because the US will not take the actions needed to defeat them. Libya has become a terror bastion threatening Europe. Putin has ramped up his probing of the Baltics looking to create another Crimea. China continues to softly invade the South China Sea and North Korea can do something really stupid at any time. In summary, there are so many potential points of unexpected explosion, that there is a high probability there will be a situation develop that will create instability for the world, and possibly worse.

As I have mentioned before, the real issue in China, which almost everyone is failing to grasp, is not slower growth, or the stock market nor the devaluation. It is the anti corruption program which is dramatically impacting everything in China and is now impacting the movement of capital to the US for investment. This crack down is the priority of Xi and is creating a destabilization which has a long time to play out. In the end it is the right and needed thing to do, but by arresting very senior regime members and on down to local bureaucrats, the whole system of doing business in China is being turned on its head. The result is a lot of things are not happening because a lot of people in the system do not know the new rules of how to function without graft, so they do nothing. Fear of arrest for corruption permeates everything now. Many people who amassed millions, are afraid to have it show and are afraid to try to move it offshore for now where it would show up and maybe be confiscated. China is going through massive cultural change in how it operates and this means there may be a material reduction in the flow of investment capital into US real estate as the money is kept hidden for the time being.

That gets us back to the US. It is the one island of relative stability and solidity. The banking system is in better shape than it has been in decades, consumer balance sheets are in better shape than in decades, and there is a massive amount of liquid assets in the system. All of this is good, however, the potential for major black swan events around the world, or a mass casualty terror incident here, strongly suggests we be cautious going forward. Prices for real estate assets are already too high thanks to the Fed. There is a growing sense among older, sophisticated investors that maybe we are in the top of the ninth now. We are at a point where losing a deal on price now may be the best deal. We are in year 7 of the recovery. In the US economic recoveries only last 7 to never more than 10 years.

It is a time to underwrite carefully, stress test your projections because you can be certain there will be a downturn or worse over the next five years, do not over reach and don't buy the Kool Aid. We are getting into very risky times and it is not a time to be way out on the limb just to do a deal.

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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.