Commercial note buyer — A Lack of Certainty

Uncertainty rules the land – in the U.S., in Asia, and most especially, throughout Europe.  Anyone who has followed government bumbling over the last few years knows national policymakers will continue to make the wrong economic decisions, but we don’t know which wrong policies they will implement.  The Fed, which just this week extended “Operation Twist” to keep long-term interest rates low, has spent trillions of dollars to stimulate the economy, including sizable loans to their Wall Street buddies.  What has this gotten us?  Has unemployment come down to normal post-recession levels or has income and wealth increased for most citizens or has consumer confidence grown or ………?  The answer to all would be a big fat “NO”.  Unemployment (both real and as calculated by the government) is still high, as only 69,000 jobs were created in May, and GDP grew a measly 1.9% annualized in the first quarter.  Between 2007 and 2010, median income fell 7.7% and net worth dropped about 39% for middle income families.  Average net worth is now back to 1992 levels and median wages are lower than a decade ago when adjusted for inflation.  One of the few groups doing well is Wall Street CEO’s, whose pay grew 20% in 2011.

Overseas, business activity in the Euro-zone has declined for five straight months and Chinese manufacturing activity has contracted.  It will only get worse with policies like those advocated by Francois Hollande, the new president of France.  He and his legislative cronies want to reduce the retirement age, raise the marginal tax rate on the rich from 41% to 75%, hire more government workers, and spend more money to promote growth.  If there was a prize for the most moronic economic policy of the year, that one would win by a landslide.

Back on our side of the pond, the fiscal cliff hitting this coming January will raise taxes by $500 billion and decrease federal spending by $130 billion, according to MarketWatch.  The uncertainty over how Congress will forestall this and how Europe will navigate through its crisis will continue to hamper business investment and hiring during the coming months.  So, don’t expect any improvement to the unemployment picture in the near future.

Despite the glum economic news, there is a little good cheer in real estate.  Building permits rose in May and home values are increasing in some areas with good schools that are close to employment centers.  The New York Times reported that prices rose 25% in the Phoenix area from April 2011 to April 2012, though prices still remain far below their peak.  I am hearing many stories about bidding wars erupting for houses due to a lack of available inventory.  Of course, over 10 million Americans are still in a negative equity situation with their homes, and many home buyers are investors, including a growing share from other countries.  The prognosis for real estate is still poor, in my opinion, at least until unemployment drops, median pay increases, and banks dispose of their shadow inventory.

We are now learning about more consequences of a country going broke.  European officials are openly discussing a rollout of capital controls, which would limit the amount of money that an individual could withdraw at an ATM or transfer outside the country.  “Sovereign Man” reports that one Italian bank, with the approval of Italy’s bank regulator, froze all accounts starting on May 31.  That meant no ATM withdrawals, no bill payments, … nothing.  Greece is pulling money out of citizens’ bank accounts if they even suspect someone of being a tax cheat.  That is one reason why $125 million is fleeing the Greek banking system every day.  Capital controls are a nasty form of theft by governments.

Could capital controls be imposed in the U.S.?  Absolutely.  Realistically, that is not on the horizon in the near-term, but it bears keeping an eye on the situation.  As the economy deteriorates and uncertainly rules , government will make ever crazier decisions.

Alan Noblitt is a California-based residential and commercial note buyer.  As a commercial note buyer, he will look at real estate notes on properties as varied as office buildings, retail storefronts, restaurants, and many others.

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