Sequester Is Not The Issue
Where the Washington circus of clowns goes from here is completely unclear, but it does appear that Obama may have overplayed his hand and the bluff did not work. Republicans did not fold because it became clear that Armageddon has not descended upon the earth, and life will go on. It also became known that it was Obama who actually proposed what he now calls a stupid idea, and Woodward made it clear that it is Obama who is retrading the deal. Now that it has come out that the White House has been intimidating the press, and not only Woodward, the White House credibility is even weaker. Almost everyone knows that there is surely plenty of places to cut spending with no impact at all, other than releasing illegal aliens into the streets of Arizona, and making everyone wait on longer lines at the airport. It is also clear that the White House will force agencies to find the most painful way to implement sequester, to make certain the public suffers to the maximum possible limit. This White House will do anything and say anything to win its political point, but it may have reached a point that is could become counter-productive for them. It is so typical that Chuck Schumer excortiated the Republicans for not wanting to pass the entire $60 billion of Sandy pork package with at least $25 billion of non Sandy waste, and now he is demanding more taxes and saying there is no place to cut spending other than TSA, day care and defense. This week the General Accounting Office identified $115 billion of improper or over payments to contractors and others in the past year. The list of waste is endless. If they really wanted to cut spending and not raise taxes, it is easy, and far more than $85 billion.
The point for CRE is the uncertainty of where from here, the attack on carried interest taxation, potential space reductions, and other cuts to make everyone’s life miserable. If you have a lease which is dependant on annual or periodic appropriation, you might have more risk than you expected. You might have delays in collecting rent. Lease renewals may not occur or may be negotiated harder or later. Just getting paid on routine maintenance or similar contracts may slow down. In defense, most new contracts are on hold for who knows how long. It is unlikely most GSA leases or contracts will get signed until all of this is resolved. In short, the next several weeks, or maybe months is completely uncertain if you are dealing with a federal agency.
That uncertainty is spreading to many non real estate areas. It is not so much sequester, which even Obama now admits is not going to impact many things for at least a month, it is the total uncertainty and lack of inertia by all government agencies. As a result, the impact on GDP this quarter, and on hiring, will likely be more negative than it should be. Very likely GDP will come in lower than many forecasts of just a few weeks ago. How much lower is impossible to predict.
The good news is most deal guys and most corporations, have gotten so fed up with the nonsense in Washington, that they have decided to just go forward, even if cautiously. I think much of the business community and CRE world, has nonsense fatigue. There is only so long that we can pay attention to the children running amuck in the Washington sandbox. There is little interest remaining to hear what new fear mongering Obama is spewing. We all know it is all political and reality is far different.
The much bigger concern needs to be what is the Fed doing, what is happening in Italy and the rest of Europe, will France continue on its Socialist path to economic problems, what is real unemployment and is there any prospect that employment and consumer spending will improve over the next 24 months. Will Israel attack Iran in the next few months. Will the whole middle east explode into new civil wars and disruption of oil markets. Will Cuomo, and Obama get out of the way of fracking and allow the US to produce much more low cost fuel and to have energy independence to drive factory growth in this country. What will happen in the currency wars now taking place. When will interest rates begin to materially rise creating a rise in cap rates and lower returns to CRE. Will Obamacare crush profits at low wage companies like hotels and restaurants meaning less ability to pay higher rents for retail or to develop new hotels due to lower returns to investors from a combination of higher rates and higher costs.
These are the real issues, not ridiculous and phony political blather out of the White House about sequester. We need to be focused on the long term macro issues and plan and invest accordingly.
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