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Happy Holidays!

Brian Pretti spoke to the Investment Marketing Forum this past week at the Orinda Country Club. His presentation was titled “The Tale of Two Economies” and I thought the following notes are worth sharing:

  • This is a balance sheet recession, which is significantly than an oversupply recession. This recession will take years to recover once we are pointed in a corrective direction.
  • Unemployment Insurance has been extended another 13 months for a total of approximately 160 months! Unemployment insurance is beginning to look a lot like welfare.
  • Brian reiterated what I have written previously, that is that until we have real jobs ( jobs that provide benefits and financial stability) there is no way we will exit this recessionary period. Brian called this “organic” growth which leads to income growth which leads to “Square Footage” as he relayed his point towards real estate.
  • KEY JOBS will be at the small business level. Small business is responsible for the majority of GDP growth- yet legislatures are focused on BIG business. Further, the United States needs 250,000 jobs per MONTH just to keep up with population growth-
  • Our debt laden markets are crowding out the private sector. As US employment growth continues on a decline, US Credit Market Debt as a % of GDP continues to rise.
  • European bailout is only in its’ infancy. “The Japanese Government has been borrowing, spending and printing money for TWO DECADES” (Brian Pretti, slide 21). That has yielded two decades of ZERO GDP growth. We are following the same course of action… or should I say inaction.
  • Market Values today are less than replacement costs… I have witnessed this via my pursuit of multifamily properties in other states. California is so wildly overpriced I will not pursue investment opportunities in California under the current market conditions.
  • Pension Funds obligations are wildly under funded and unemployment rates are severely understated. Brian estimated the Unemployment U6 number (U6 is U5 + Part time workers who want to work full time, but cannot due to economic reasons) to be approximately 18%. Learn more about unemployment via Wikipedia: http://en.wikipedia.org/wiki/Unemployment
  • Quantitative Easing concluded and the stock market dropped 16%. The reasons for this reaction is something Dave Carney (IMF Board of Directors) and I discussed over a year ago: NO ECONOMIC CONFIDENCE. The reason for lack of economic confidence is the lack of real jobs. Jobs that provide pay, benefits and confidence to allow consumers to go out and spend.
  • The lack of velocity of money (real estate transactions) is due in part to bad debt not being reconciled. This debt needs to be restructured and the cost of doing so will be steep…not to mention the decision to do so will be completely unpopular. Do you know of any elected official willing to be the disciplinarian? Brian stated that Politicians will NOT let Socialism die without the fight of a lifetime- Politicians always vote for Inflation.
  • Brian predicts that we will see both deflation and inflation simultaneously.
  • Pension funds require roughly an 8% return to keep afloat, as such commercial real estate may be the answer. As we all know pension funds are well invested in commercial real estate- what other investment vehicle can produce an 8%+ return? Could this be a reason why the bottom hasn’t fallen out? Brian stated that “Income is the scarce resource- as investors, we should acknowledge and invest for deflation”, so our pro forma numbers should reflect a softening economy vs. a hardening economy!

    Thank you to all my past clients, industry partners and colleagues for another successful and interesting year. Please email or call with your comments. I am always interested in an intelligent discussion around the state of our economy and how we may position ourselves for the future. All the best to you and yours this Holiday Season.

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    Continued Success and Happy Holidays, Pete