The World Order Is Changing Raising Risk

I have just returned from three weeks in Russia, Azaerbaijan and Turkey. It was very illuminating and what one hears from Russians tells us a lot about the world events and what we can expect. It affects you in that the entire Syria scenario and the new relationship between Syria and Iran with the nuke deal will impact the whole world, and not in a good way. My black swans are thrilled. There are long range, and possibly short range impacts we will see.

When you go to Russia and really talk to people there you learn that the Russians have lived through over 400 years of Czars, emperors, and ruthless dictators. Under Stalin they lived in fear every day and millions died. In WWII tens of millions died. Under Gorbachov the country literally collapsed and stopped functioning. People were not paid, they had no food, the infrastructure fell apart and survival was difficult. Gorbachov is considered the worst thing other than Stalin to ever have happened and all the plaudits in the west for him are based on totally false notions. The Russian hate him for destroying the nation. When Putin rose to power in 1999, he first took on the Chechen war and defeated a feared group of people. Russians believe Chechens are the best trained and fearless fighters in the world who are taught to kill from childhood. When Putin beat them he did with classic Russian brutality by just killing as many as he could. He then put people back to work, he paved the roads, cleaned and repaired buildings and made the country function again. He restored pride in the people and put food on the table and money in their pockets. Now he has an 86% approval. Ask Russians about the recession and should Putin be replaced and they tell you there is nobody else to run Russia. They fault him for not diversifying the economy, but then they repeat there is nobody else who can run the country. So he has a mandate to do anything he wants and because he protects the oligarchs and gets 10% of everything in return, he has the money and power.

He has watched Obama and Hillary fail in Syria and Iraq, he has seen Iran roll Obama in the nuke deal, and he saw how he conned Obama in the red line agreement. When you travel in all those countries you hear how the failure to bomb Syria over the red line was a giant mistake and demonstrated to even ordinary people in all these countries that Obama was weak and the US is in decline. Putin saw all that and realized he can do as he wishes and ignore Obama and Europe who let him get away with Ukraine and shooting down a civilian airliner.

So now Putin has seen the opportunity to take control of the Mideast, to partner with Iran to control the area, to retain his naval base in Syria on the med, and to destroy ISIS which poses a real threat to Russia where millions of Muslims live and are restive. He has no compunction to kill civilians and will step up his bombing and possibly send in troops.

We are witnessing a major change in the world balance of power now, with Russia and Putin in control. He will show everyone that he is the real power to be reckoned with and the US is weak and unwilling to act.

For all of us this means a much more dangerous world order and the risk of real black swan events occurring. People in that part of the world no longer think of the US as the real power and they see us as a country in decline. This will have serious consequences in ways we do not yet know. For investors the risk premium just rose. Uncertainty has risen. The impacts on an already slowing world economy are not good. Weakness in geopolitics leads inevitably to really bad outcomes and Obama has demonstrated major weakness and a total lack of understanding of history or power politics on the world stage. Consider all of this when looking at deals and trying to forecast five years out. Risk is 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.