The Wall Street Journal reported today that the giant $300 billion California Public Employees Retirement System (Calpers) will increase its real estate allocation from $26 billion to $33 billion. It is not news that commercial real estate prices have surged and are now well above the frothy peak or early 2007. Just as in the late 1980s and and in 2005-2007 it appears that Calpers is weighing in at the top of the market.
Recall that Calpers bought the California land play Catellus and the UK property company Randsworth Trust at the peak of the late 1980s real estate boom. Those investments, to say the least, soured. In 2007 Calpers bought into the giant and highly leveraged Stuyvesant Town apartment project in Manhattan as de-rent control play. Like Randsworth Trust that investment was a wipe-out.
To be sure one can say that Calpers has learned from their previous episodes. This time it will be concentrating on lower risk "core" assets that have become extraordinarily pricey in the global search for yield. Therefore the risk here is very straight forward, cap rates could rise. Basically to take a major position in commercial real estate today the investor has to believe that cap rates will remain low for a decade. To me this could be the riskiest bet of all. After all more money has been lost in the search for yield than in practically any other investment endeavor.
As a result real estate investors should be forewarned. It looks like, yet again, Calpers will be making another top.
Wednesday, October 8, 2014
Monday, September 29, 2014
You can’t be a Kantian in a Hobbesian World
Herr Doktor Professor Kissinger proves that a 19th Century man can offer much needed foreign policy advice for the 21st Century. Although it would be ideal to bring reason and rationality to bear to solve the world’s problems, we unfortunately live in a world that is an inherently dangerous place. The goal of U.S. foreign policy is to “achieve equilibrium while restraining the dogs of war” while being mindful that “our universal principles don’t necessarily hold in other parts of the world.”
“World Order” is a logical follow-up to Kissinger’s “A World Restored,” his history of The Congress of Vienna and its aftermath and “Diplomacy,” his treatise on the history and craft of international relations of Europe since the middle ages. As always he is a fan of the Westphalian System created in 1648 which gave birth to the modern state. The four principles of the Treaty (ies) of Westphalia are 1) noninterference in the domestic affairs of other states, 2) inviolability of borders, 3) that states are sovereign and 4) encouragement of international law. All these four principles were to be enforced by a balance of power among the various states. When the balance of power was disturbed, war was the result. Further, because Westphalia was value neutral, it did not speak to legitimacy. You have to take the good with the bad.
His heroes are the grandmasters of the Westphalian system. Among them are Cardinal Richelieu, Metternich, Castlereagh, Talleyrand and Palmerston. He also admires Kautilya of ancient India and Theodore Roosevelt. Each and every one of them are foreign policy realists. His greatest disdain is for Woodrow Wilson who placed values, many of them noble, over the need to preserve the peace.
Unfortunately radical Islam, for example, does not play by Westphalian rules. This is especially true because there are so many non-state actors associated with it. Indeed one of the most vexing foreign policy questions we face is whether Iran is a state or an Islamic movement.
“World Order” is up to date in that he discusses the rise of ISIS in Iraq and Syria. Kissinger also devotes an entire chapter to the role of the internet. Here this 91 year old man was tutored by Google’s Eric Schmidt. Would we all be actively learning at that age? He discusses the implications of cyber warfare and the hyper speed of communication that can outrun more deliberate pace of diplomacy. This makes life more difficult and dangerous because when the chips are down states people have to act on limited information.
You don’t have to agree with all of it and his personal history is far from perfect but, Kissinger has written a book that should be required reading for President Obama, Secretary Kerry and all of the candidates for president in 2016. We can’t afford the foreign policy disasters of the past dozen years.
The Amazon URL is: http://www.amazon.com/review/R7QR481EYT92K
Saturday, September 13, 2014
T.G. Otte, a Professor of Diplomatic History at the University of East Anglia, has written an exhaustive and difficult to read study of the diplomatic maneuvers undertaken by the major powers on the eve of World War I. He covers the period from the assassination of the Archduke Ferdinand on June 28, 1914 to Britain’s entry into the war the following August 4th on a day-by-day basis. The problem for the lay reader is that there are way too many characters and you have to continually update your score card to understand what is going on.
Otte is not interested in the broad historical forces that caused World War I, but rather he focuses in on the flesh and blood human beings who by their actions precipitated the war. His theme is similar to Margaret Macmillan’s “The War that Ended Peace…..” which discusses how the major powers increasingly narrowed their options making war more or less inevitable. Instead of taking 24 years to narrow options, the diplomats in his story take less than six weeks as peaceful option after peaceful option is foreclosed upon.
Otte has a set of clear villains. They are the Austria-Hungary leadership, mainly Foreign Minister Berchtold, who are so narrowly focused on Serbia; they fail to understand the European consequences of their actions. They are the “Sleepwalkers” Christopher Clark writes about. Next are the Germans, Kaiser Wilhelm, Chancellor Hollweg and Foreign Minister Jagow, who issue the “blank check” to Austria on July 5th thereby surrendering their foreign policy to that narrowly focused dying empire.
Other diplomats singled out for blame include Maurice Paleologue, the French Ambassador to Russia, who conveys far more hawkish sentiments than that of his government to his Russian counter-party Foreign Minister Sazanov. Had Paleologue been more discreet and Sazanov less aggressive, the Russian mobilization of July 29th might have been delayed giving more time for diplomacy.
Britain’s Sir Edward Grey comes off the best as he frantically tried to come up with diplomatic solutions to the crisis. This is a different take because many historians blame Grey for not forcefully signaling Germany that Britain would enter the war on the side of France thereby acting a major deterrent. Here Grey is the neutral mediator. I am not sure what to believe. One last point when Otte discusses the role of Eyre Crow an Assistant Under-Secretary in the foreign office rather than being an above the fray civil servant, he fails to disclose that he was the long time anti-German hawk in British foreign policy circles.
For the Amazon URL see: http://www.amazon.com/review/R26M9257ZKBDTR
Friday, September 12, 2014
Growth Ramping to a 3% Economy from a 2% Economy
After declining by 2.1% in first quarter and growing at 4.2% in the second quarter we forecast that real GDP growth will now run at about a 3% over the next few years. Specifically we are forecast growth of 3.2% in the current quarter and 2.9% in the fourth quarter. On annual basis GDP growth will rebound from 2014’s 2.1% to 3.1% and 3.4% in 2015 and 2016, respectively. Payroll job growth should average 230,000/month and by the end of 2016 the unemployment rate will drop to 5.3%.
Instead of Contracting Defense Spending will be on the Rise
In a major change from prior forecasts, we now anticipate that defense spending will increase rather than decline. The rise of ISIL in Syria and Iraq along with the presence of Russian troops in Ukraine will cause a rethinking of the U.S.’s defense posture. We have modeled in an additional $24 billion in defense spending by 2016. For those with a long memory we would note that the Reagan defense build-up started under President Carter in 1979 after the Iranian Revolution and the Soviet invasion of Afghanistan.
Inflation on the Rise
As we discussed in prior forecast we believe that inflation as measured by the headline and core consumer price indices at 2% or higher over the next two years. The main drivers of the inflation will come from rising residential rents and increasing healthcare costs. Thus the core CPI will be rising by about a ½% higher than the overall index.
Fed to Raise Rates in March 2015
In response to declining unemployment and rising inflation we forecast that the Fed will increase interest rates at its March 2015 meeting. Thereafter we expect a gradual increase in the Federal Funds rate to about 3% by the end of 2016.
Growth Leaders to be Housing, Nonresidential Construction and Investment in Equipment and Software
Despite the housing recovery being slower than we anticipated we forecast that housing starts will rise from this year’s estimated 1.025 million units to 1.32 million and 1.47 million units in 2015 and 2016 respectively. Because of continuing investment in energy production and a revival in commercial construction, non-residential construction will start to increase rapidly in mid-2015. In 2016 investment in nonresidential construction is forecast to expand at a robust 8.2%. Continued strength in equipment and software spending will continue to buoy the economy.
Monday, September 1, 2014
“We don’t have a strategy yet.”
President Obama, Press Conference, August 28, 2014
From Bagdad on the Tigris to Kiev on the Dnieper U.S. foreign policy is in disarray. At his press conference President Obama noted that he was awaiting a strategy from the Pentagon to deal with ISIL. Wrong!! It is the civilian leadership who makes strategy. Therefore it is up to the Pentagon to come up the appropriate military response to achieve the political ends dictated by the strategy. Simply put the President has it backwards.
Secretary of Defense Chuck Hagel, hardly a hawk, referred to ISIL “as sophisticated and well- funded as any group that we have seen…beyond anything we have seen.” If that is anywhere close to being the case then a clear and present danger exists to the national security of the United States. Up to now the President has authorized air strikes in Iraq, but not in the ISIL heartland of Syria. I fear that will not be nearly enough and that both air strikes in Syria and ground combat troops will be necessary as well. ISIL is too well entrenched to be handled by air power alone.
Yes the American people are war weary. But it is up to the President to make the case. Great leaders don’t follow polls they change them and the sooner the President lays the groundwork for action the sooner it will happen. He has to remember he is President first and party leader second.
He has to spend the time to do the hard work of coalition building that will be necessary to dislodge and ultimately neuter ISIL. President Bush ’41 was successful at it, but it took real work internationally to create it and he also had to overcome real opposition in Congress. In order to this the President will have to spend less time on the golf course and schmoozing political contributors and more time with foreign leaders and members of Congress.
Meantime Russia has all but formally invaded Ukraine and is now talking about a creating and independent state in the eastern part of the country. Such an open act of aggression must not go unpunished. It is now time for very real and very hard sanctions on Russia that would end all technology transfers and their access to the western banking system. Further NATO should send advanced weaponry to the Ukraine so that the can defend their homeland against the onslaught of Russian tanks and artillery. Hopefully there will be the will at the upcoming NATO meeting in Wales.
The White House has become a theme park of strategic indecision. The President has to snap out of it quickly because we do not have the luxury of waiting more than two years for a new president. The locomotive of history waits for no one. Just as reminder 75 years ago today, after several years of watching Britain and France vacillate, the German army crossed into Poland starting World War II.
Friday, August 22, 2014
My Amazon Review of Rick Perlstein's, "The Invisible Bridge: The Fall of Nixon and the Rise of Reagan"
Rick Perlstein has written a long book, perhaps too long. “The Invisible Bridge…” is really three books: a biography of Ronald Reagan, a political history with an emphasis on the continued rise of the Republican Right and a social history of the mid-1970s. This book follows his two prior books, “Before the Storm…” and “Nixonland…” on the emergence of the Republican Right. Perlstein is a man of the Left, but he tries to understand the motivations behind the success of the Right. In some respects he succeeds, but in others he doesn’t fully emphasize that the period he discusses was one of retreat abroad and recession at home. With the latter along with virulent inflation ends the Keynesian consensus that ruled economics in the postwar period up to that time. Thus the way was open for a politician who offered hope to a nation where it seemed there was only despair. That politician was Ronald Reagan.
Pearlstein enabled me to relive the period that I remember all too well. It seemed that the wheels were falling off the train of history. For example the 1973-76 period encompassed the following:
* Defeat in Vietnam
* CIA scandals
* The rise of OPEC which triples gasoline prices
* Assassination attempts on Jerry Ford
* Patty Hearst and the Symbionese Liberation Army
* The widespread distribution of porn
* The bankruptcy of New York City
* The growth of weird self-improvement groups like est.
Into this milieu comes the former actor and former governor of California who offers what appears to be simplistic solutions to the liberal elite, but to a yearning public he offers hope and a return to the greatness of America that as Perlstein notes resonates with the 1976 Bi-Centennial. Always under-rated by the pundits Ronald Reagan was far smarter and cannier a politician than his critics realized. And boy did he know how to give a speech.
Perlstein spends a great deal of time on the 1976 Republican convention where Reagan almost rests the nomination from Jerry Ford. Much of this ground was covered by Craig Shirley’s very pro-Reagan, “Reagan’s Revolution.” In fact Shirley has sued Pearlstein for infringing on his material. Shirley’s book is a good read and I recommend it.
What Perlstein gets wrong is his treatment of Reagan’s failed attempt to pass Proposition 1 his tax and spending limitation initiative in 1973. He highlights what he perceives to be its radical nature. In my opinion had Proposition 1 passed the far more “radical” Proposition 13 of 1978 might never have seen the light of day. Pearlstein also get wrong the notion that California coastal development was banned in 1973; not true. What actually happened was new permitting regime under Proposition 20.
Although he opens his book the the return of the Vietnam POWs, he doesn't really deal with the moral crisis associated with the treatment of the returning veterans. To the Right they were drug crazed losers and to the Left they were war criminals. The resentment that this engenders adds fodder to the growth of the Right later in the decade.
One last point Perlstein should remember Eric Ambler’s maxim in “A Coffin for Demitrios,” “In a dying (although I would use “threatened”) civilization political prestige is the reward goes not to the shrewdest diagnostician, but to the man with the best bedside manner.” Most dour liberals fail to understand this while an optimistic liberal like Bill Clinton knows this in his guts.
All told for readers who have the time for this very long book, it very well worth the read.
The Amazon review appears at the following url:
The Amazon review appears at the following url:
Wednesday, August 6, 2014
On May 7 I blogged that we were reliving the 1930s with the Great Recession being the analog to the Great Depression and the appeasement of Vladimir Putin in the Ukraine being an analog to the appeasement of Hitler. Unfortunately we also are reliving the virulent anti-Semitism the 1930s as well.
There is no question that if Hamas had the power there wouldn't be a Jew alive in Israel today. If you are skeptical all you have to do is to read Hamas’ charter and listen to the statements of their leadership. The Gaza War was not about a two state solution for Palestine, but rather it was an attempt to kill as many Jews as possible and to make martyrs out of innocent Palestinian children. The killers of those children do not reside in Tel Aviv, but rather they sit comfortably in Hamas headquarters in Gaza and places far away from the battlefield.
Of course to much of the European Left and to some extent the American Left along with a few on the far Right, the right of Israel to defend itself from rocket attack and an invasion from underground tunnels metastasized itself into a most virulent anti-Semitism. There is a straight line from the Hamas killers to the street demonstrators in Paris to the anti-Israel marches in the United States. For those who argue that the marchers and demonstrators were concerned about human rights rather than bashing Israel in particular and Jews in general, all I have to say is where are the protests against the carnage in Syria, ISIS terror in Iraq and Libya? I guess for them it is OK for Arabs to kill other Arabs.