“The Future Ain’t What It Used To Be”…

The European Union, as currently designed, is at a most critical turning point. When  the EU was launched in 1999, Milton Friedman observed, perhaps presciently, that the Euro would not survive the first major European economic recession. The concept of a single Euro currency advanced a dream of an integrated Europe. It was built on a ‘hope and a prayer’ pledge that member countries would undertake deep structural economic reforms. The excessively loosened budget policies of Greece, Spain, Portugal, Italy, and Ireland created excessive price and wage inflation within their countries. Burgeoning budget deficits have placed their public debt at unsustainable levels, and begs the question as to whether those governments can honor their bloated debt obligations.

Now the news that credit rating agency, Standard and Poor’s, has issued a warning to cut the credit ratings of many members. This may energize the EU to work harder at solving their crisis. The odd couple, Sarkozy and Merkel, has pledged to force through a change to the EU treaty at the December 9^th summit. Being discussed, will be loosening collateral criteria so that the banks have access to cheaper ECB (European Central Bank) cash (a ¼% rate cut is being predicted), and extending loan terms to encourage financial institutions to borrow, and lend to businesses and households. This will be the EU’s fifth attempt at a comprehensive solution in 19 months. I appear to dwell on a similar threat to our own credit downgrade that the U.S. Congress chose to ignore this past August. Our esteemed gathering of solipsistic, bloviating policymakers ignored the warning, and the effect of this failure led to markets around the world experiencing the most volatility since the 2008 financial crisis. U.S. markets were down 635 points (5.6%) in one day. Fortunately, our yields dropped as anxious investors fled to the safety of government bonds. Will a similar threat of a credit downgrade galvanize EU policymakers to agree on a bold plan? Here, a downgrade could automatically require funds to sell bonds of affected states, making their costs rise even further. Not good. Only when yields drop, as they have here, does it give troubled Italy, Portugal, France, and Greece more room to survive until reforms are in place. Reforms that must include austerity, especially in those countries where seemingly everyone wants to work for the government, and not pay taxes.  A Clarion call. A make or break moment for the global economy. Geithner is dispatched to Frankfurt. His mission, to meet with key European policymakers and press for decisive action to arrest this crisis. They have the distinct advantage of a precedent. They have witnessed what occurred here when our fearless leaders ‘blew it off’, and went on recess. Maybe, just maybe, there will be some adults in the room at this summit.

The velocity of money. Money is bred for speed. It is itinerant. It fidgets with nervous energy. Risk on / Risk off. The promise of a plan with teeth has led to a recent ramp up in the market. Is this another case of ‘buy the rumor, sell the news’?  Thus far, the menacing debt crisis racking Europe defies the puny ineffectual solutions being cooked up. Austerity must be accompanied by monetary easing, and allow the banks to recapitalize. They may get there, yet I am hoping our economic fortunes can decouple, and not derail this nascent US recovery now underway. Just this morning, December 8^th, the press announces that the economy has generated a 100,000 or more jobs for five months in a row. This is the first time since April 2006. Manufacturers are boosting output, retailers report a strong start to the holiday season, and consumers are said to be more confident. I hope these rumors are true. I love the idea of people running around at Christmas, buying things they, and their lucky recipients, desperately do not need. The U.S., however, is vulnerable to ‘shocks’ from around the world. A European recession would cut U.S. exports, and thus, cut overseas profits of our multi-national ‘big guys’. Growth will be slow, very slow, however, we are moving along in the right direction.

As Herman Cain predictably falls from grace, Newt ‘the Newtster’ Gingrich suits up, and enters the game. Newt has a successful lineage of influence peddling in Washington on the resume. Christian conservatives, so desperate for an alternative to Romney, have now landed on Newt. Newt Gingrich as a viable standard bearer of family values! You can’t make this up. These are not normal circumstances. The conservative faction, in their frantic attempt to derail Romney, care little that the moderate Romney just might resonate with many disenfranchised independents, and currently is their best choice for a chance to win in 2012. The conservative right is so disingenuously opinionated as to how one should /must act. Ideologues are not leaders, they are followers. Plain and simple.

The rap on Mitt, he is too rich, too polished, too Mormon, and has been on three sides of every issue. In 1994, while running for the Senate seat in Massachusetts, Romney pretended to be a bit more liberal announcing he was personally opposed to abortion but ‘I do not impose my beliefs on other people’. I hear you; however, you cannot be pro-choice in today’s Republican Party. Now he must revert to his original Mormon rectitude.  His appeal is as a businessman, a turnaround artist, a consultant who takes control of a company, flushes out inefficiencies, and takes sleepy companies and makes them sleek. A prudent recipe for fat governments worldwide. His debate performance shows a fluent command of facts in a field of candidates whose mistakes are melodramatic, and their fates soar and plunge. Maybe if Newt caves, he and Cain can form a third political party, the ’horn-dog’ ticket. Whatever happened to Centrism? Who else but the government will train three people to do the job of one, spend to pay for three vacations, holidays, medical benefits, sick days, ‘I just don’t feel like working today’ days, and then pay for three ‘start early’ retirements. Or better yet, two retirements if you learn to game the system. And we have to trust this entity to manage our fiscal policy? What the hell, it’s only other people’s money they are playing with. There is no imperative to accomplish anything. The government work ethic is shameful. Where else can you get paid, and rewarded for not accomplishing what you are being asked to do.

Yet I digress, back to real estate.  I overhear some people opine that one would be crazy to buy real estate now. One less thing to think about. The problem with clumping real estate altogether as an asset class, is that some places are just damn nice places to live. Not everything deserves to go down in concert. The correction we have witnessed has evidenced that some areas hold up better than others. Location, Location, Location, always. Uncertainty creates opportunity to negotiate. Place your trust with someone who has a seasoned approach to understanding market value.

It’s time to fall in love with Rhode Island’s coastal communities. I’m feeling Yogi Berra today. Let’s begin and end with the big man. ‘If you don’t know where you are going, you might not get there’. ‘Rhody’…more than you wished for.

My best holiday wishes.

Til then,
Ray Mott

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