If you were to believe anything Obama says about the sequester, the world is about to end and the US government can barely pay its bills, even now before the sequester. Many in the media are happy to further this nursery rhyme with talking heads touting what a disaster this will be. Reality check. The actual reduction by October 1, is a mere $44 billion, not $85 billion which is the amount over a longer time. A little over 1% of the projected budget. It is not even a cut in spending, only in what they call the base line, or what the rest of us would call the proforma budget. Now compare this to the new $60 billion of new spending for so called Sandy relief when only about $30 billion, or so, was really for Sandy and the rest was classic pork wasted spending. Then there was $12 bill for windmills in the fiscal cliff resolution, plus new tax breaks for Hollywood. Or maybe we should talk about $580 million to Solyndra. So let me get this straight, the world will end because they can’t find a way to reduce proforma spending by around 1%???. If the calamity Obama and LaHood bellow about were real, then the country should get a new CEO and management team, and just declare Chapter 11 now, and fix the problem. That is what private sector companies would do. Staging a bunch of cops and firemen who are actually paid from local, not federal funds, and trying to claim sequester will force them to be fired, is pure misrepresentation and histrionics. Claiming babies will be out of day care or old people will go hungry is pure phony scare tactics. He claimed at the debates that sequester was not his idea, so if he is willing to blatantly lie about that, what is wrong with a little political theater. Just imagine, if we can’t cut the projected INCREASE in the budget by 1%, a measly $44 billion, how will we ever do Simpson Bowles or any other deficit reduction. On top of this, Obama just got an added $680 billion of new tax revenue to cover all his spending needs. And now he is demanding another several hundred billion, but claims all these tax increases have no detrimental impact on the economy. I need to return my economics degree to Wharton since they obviously did not teach me how things really work when you raise taxes. Obama, Nancy and Harry and their minions now try to tell us we have a revenue problem, not a spending problem, and if we just increase spending we will create more jobs. Bottom line, we are really in serious trouble with leaders like this. Either they really believe this absurd line, in which case they are just stupid, or they are perfectly willing to lie to the voters who have no idea what is really going on.
Then we have the little Patty Murray who made it impossible for the so called debt commission to agree on any reductions, and who is now the head of the Senate budget committee, and putting forth a budget that focuses on raising taxes and nothing at all to deal with the real issue of entitlement reform. Patty has a degree in phys ed from some random school, and spent a good part of her early days teaching pre school and a course in parenting. And this is who is the leader in the Senate in charge of the budget????? You would not hire her to be an accounting clerk based on her education and experience.
So where does all this leave us in CRE. There will be continued political dysfunction in Washington at least thru the 2014 elections. There will be no grand bargain, or anything even close. There will not be tax reform, or corporate tax reform, and carried interest is at high risk of being taxed. Home mortgage deductions are on the table. Now HUD is about to release a new set of regs which say if they find “statistical disparity” in a new housing development, they can sue you for discrimination. In short, you can’t sell homes to whoever shows up and wants to buy one. You must make sure you have the right number of each color, ethnic group, sexual preference and handicapped buyers, or some statistician in Washington will find you have a disparity violation and sue you. Quotas we used to call this. This regulation should do wonders for affordable housing developers who are subject to this regulation. So the white guy who wants to buy a unit now has to be told to go away because we have too many white guys and not enough transvestites.
If you think the economy is now going to grow faster and prosper with all of this, I have a bridge to sell you going over to Brooklyn. We are in for at least two more years of total dysfunction, misleading garbage and political theater, and no good resolution of the serious fiscal crisis the country faces. We will, at best, stumble along at minimal employment growth, minimal consumer spending increases, higher taxes, and bigger deficits for two or more years, and the Fed will be forced to continue to subsidize the economy, building up a even bigger potential for big problems when the unwind of the massive bond position begins. How the Fed thinks it is going to sell what will be nearly $4 trillion of bonds into a rising rate market and not have huge losses is hard to understand. When the Fed has losses it is profits not going to Treasury. More deficit.
Keep your head on and don’t go out the leverage limb. Don’t plan on sustained and better economic growth. There is nothing to drive that to happen, and the risk of black swans and bad things is very high. Be happy with solid cash on cash returns for a few years. .
For an irreverent take on the macroeconomic environment, check out GlobeSt.com's Chief Economist authored by Dr. Sam Chandan.