A Holiday Thought

If I Had My Life To Live Over

I'd dare to make more mistakes next time.
I'd relax. I would limber up.
I would be sillier than I have been this trip.
I would take fewer things seriously.
I would take more chances.
I would take more trips.
I would climb more mountains and swim more rivers.
I would eat more ice cream and less beans.

I would perhaps have more actual troubles but I'd
have fewer imaginary ones.

You see, I'm one of those people who live sensibly
and sanely hour after hour, day after day.

Oh, I've had my moments and if I had it to do over
again, I'd have more of them. In fact,
I'd try to have nothing else. Just moments.

One after another, instead of living so many
years ahead of each day.

I've been one of those people who never go anywhere
without a thermometer, a hot water bottle, a raincoat
and a parachute.

If I had my life to live over, I would start barefoot
earlier in the spring and stay that way later in the fall.

If I had it to do again, I would travel lighter next time.
I would go to more dances.
I would ride more merry-go-rounds.
I would pick more daisies.

By Nadine Stair (age 85)

 

---

"Together We Can Do It Again"
November 7, 2011
by Tom Barrack
Click here for printable version

A common misconception amongst growing constituencies is that the paradigm has shifted and the world is imploding as a result of a new breed of toxicity in the global system. It is not. There is one truism – the American Dream is always stronger and longer lasting than our perception of reality. We will definitely climb out of this current parade of horribles and perhaps the magic elixir is listening to a melodically simple voice of "the dream" rather than the fragmented cries of "the nightmare."

My tortured brain waves ran rampant over my third 4am espresso, as I attempted to bring literary clarity to our confusing economic mess in the world today. As I recalibrated thought after thought and rewrote paragraph after paragraph, my memory came to the rescue as I recounted a clear and bold Explanation by a clear and bold Explainor, of a time and situation much like the one we confront today. As a young man I was blown away by the clarity and simplicity of the first presidential speech I had ever heard in person. Several decades and economic wars later I am even more stunned by the timeless astuteness of the message and the brilliance of the messenger.

Please, please, please take the time to watch this video of President Reagan's economic address to the nation circa October 13, 1982. It will amaze you!!!

 

---

From Pearl to Necklace
November 1, 2011
Click here for printable version

Many of you have asked me to share my personal point of view and impressions from my travels, especially through the Middle East. The following is a travel log, rather than a financial thesis on Nerbrand Z or Black Scholes.

The Arabian Gulf
As we swept across the wind sculptured deserts of Qatar, I became enraptured by the intoxicating scent of a thousand civilizations. Etched in the ever-changing sands of timeless simplicity were the footprints of Byzantine complexity, Carthaginian structure, Anglican rigidity, and Abbasid suzerainty. Flowing deep beneath the still waters of the Arabian Sea were Samanid poetry, Persian art, Ottoman ferocity, and sunken trunks of Chinese spices. Our eyes were captivated by the striking red pearl beds of the stoic shore eternally bloodied by Berber herds, Mamluk soldiers, the swords of Saladin's warriors, and the carcasses of Mongol horses. Our ears sensed the spiritual sound of "Allahu Akbar" from the modern mosques, never muted by Fatimid revolutionaries, Portuguese war ships, and the clashing of vanished daggers of the battling Bani Utbah tribe. The Mashrabiyas lattices of rolling sand dunes recalled a terrifying peek at the atrocities of endless Roman legions.

As the wings of our modern aircraft caravan bent and bowed towards the greatest urban experiment in Arab rejuvenation, I was captivated by the faint and humbling melody of ancient Arabian Adani music. Onboard, Jack Johnson's calming soft music was dampened by the distant chants of an ancestral cultural warfare between Ottoman's Islam and Persian Zoroastrian expansion repeated in relentless cadence. Outside, the chants seemed to fade into a hopeful song sprung from the soft strings of the Ud as a new tune breezed across the Arabian Gulf. The strengthening and calming voice of tiny Qatar, growing louder as it grows in power, merchant prowess, and diplomatic relevance throughout the world.

The Arabian Gulf history is rich and complex and, contrary to popular belief, exhibits a historical tolerance and understanding of foreigners. Trade, in one form or another, is a foundation stone of the culture. Regime change however, has also been a consistent element. Tribes argue with other tribes, sons argue with fathers, and brothers with brothers. In the early 1800s the British exercised their power in the Persian Gulf as a result of their continuing commercial and economic interests in India. East India Company ships, carrying cargo between the British colony of India to Great Britain and beyond, were continually raided by pirates from tiny gulf tribes. Eventually, the British imposed a Trucial peace upon the neighboring sheiks of the region. The Gulf Arabs learned that power was in the control of waterways while their nomadic brethren inland concentrated on grazing and agriculture.

The Gulf region was one of the highest quality pearl producing areas in the world. Throughout time, pearls have always been treasured by the wealthy. In fact, although dangerous and often life threatening to harvest, pearls were the trade of choice in that region. Portuguese, Indians, and Iranians have been commercing in Gulf pearls for over 2,000 years. The Pearl trade faded out in the 50s and was replaced with oil and gas.

During the 20th century the Gulf flags were primarily dictated by the powerful hands of the West, as spoils were divided from the First and Second World Wars. The United Arab Emirates, Oman, Qatar, Bahrain, Saudi Arabia, Kuwait, Jordan, Syria and Iraq had all been individual fiefdoms governed by individual tribes, which primarily existed on agriculture, grazing, piracy and trade. There was no political or social union, only religions bonding based on Sunni, Shia or Wahhabi Islamic beliefs. The Portuguese, Turks, British, French and Americans divided up the region for various commercial purposes supporting the regime of the then friendly tribe. The West simply adopted a play out of the playbooks of the Persians, Portuguese, and Ottomans who had dominated previously.

The Western powers would provide protection, administration and support the independence of the tribe, provided they received the proper compliance with their political dictate. If a local chief became too disruptive they would arrange for another family member to replace him. Around 1949, most of the oil in the free world started flowing through the 3-mile Straight of Hormuz. The West's interest in keeping the free flow of plentiful oil was foremost, just as the British interests had been in the preceding century in keeping the waterways clear of pirates. For an in depth discussion of the amazing intervention and the eventual division of these geographic fiefdoms Paris 1919 by Margaret MacMillan is a must read.

Qatar
I had the pleasure of travelling to Qatar recently with the Miramax team in support of their participation in the Doha Film Festival. The Festival was superb and magical – and revolutionary as its stewardship is in the hands of a woman, the amazingly capable and progressive Sheikha Mayassa, daughter of the Emir.

Qatar, Abu Dhabi and Dubai are perhaps the most vibrant examples of a new breed of Arabian open leadership. They have managed to navigate the complex matrix of blending the damnation of riches with the elegance of a valued ancient culture of simplicity. Dubai has differentiated itself as the Singapore of the Gulf through flawless planning and unparalleled urban execution. Abu Dhabi made its mark through early diplomacy and oil exploration as well as instituting the oldest and one of the finest sovereign wealth funds in the region. Now Qatar is setting itself apart in a very modern way. Qatar's courage shines in every country in which its TV station, Al Jazeera, broadcasts its progressive and uncensored views. Additionally, Qatar is not only a leader in oil – having the world's largest per capita production and proven reserves of both oil and natural gas – it has become the best of class in diplomacy, business investment, and international sport (hosting the World Cup of Soccer in 2022.)

Qatar plays a unique diplomatic role in the Middle East as peace broker and regional conflict resolution moderator by balancing an appeal to Arab populist causes while extending a hand to Israel. Using its UN Security Council seat (2005-07) to play an expanded role in the region and world, Qatari actions never followed traditional alliance structures. Instead, as a new entrant but skilled diplomat, it mediated and intervened in regional affairs (e.g., Lebanon, Sudan, and Libya) where state interests were blurred and success unclear. Its niche diplomatic success rests primarily on the fact that the Emir and Prime Minister have placed Qatar in a unique position by cultivating close ties to many diverse states that are often at odds with one another. For instance, Qatar hosts an American military base and maintains a close friendship with the US, while keeping neighborly relations with Iran. Qatar convenes meetings with Hamas officials, while pushing for the Middle East to develop co-operative economic ties with Israel and maintain open Israeli lines of diplomacy. Qatar has prevailed in its diplomatic initiatives as mediator because it is globally perceived as honest, trustworthy, and financially agnostic. As a result, Qatar has become much more than just another oil-rich emirate in the Arabian Peninsula.

The historical intersection of cultures and civilizations is in every aspect of Qatari life, from the traditional sipping of tea transported in dhows from the Indian shore, to the incessant drinking of coffee carried on camels from Kaffa in Ethiopia. It is a country of contrasts. On one hand there is the whir of the Ferrari engines speeding down freshly minted highways, lined with the most modern skyscrapers that house the global business elite. On the other hand, just slightly out of Doha, one can hear the hoof beats of the domesticated camel laden with African gold, Chinese spices, and Indian tea, as their nomadic handlers reside in tents in the harsh open desert.

Today's modern routes used for transporting oil were paved by the ancient spice roads used for transporting nutmeg, sandalwood, frankincense, and myrrh. Having long ago perfected the art of caravanning high-value, lightweight items along routes that connected the East to the West, the mastery of foreign cultures and quenching the insatiable thirst for precious items has been the basic fabric in the Gulf Arab quilt. And there is no one better at this than the Qataris. Their reputation as "Merchant Princes of the Gulf" continues under the current leadership of their visionary and beloved Emir along with his financially brilliant and diplomatic cousin the Prime Minister and their unparalleled investment teams at the Qatar Investment Authority and Qatar Holdings. Qatar has not only achieved international prowess in the production of natural resources but through its Sovereign Wealth Fund has been recognized as the best of class at redeploying the riches gained from the extraction of oil and gas for the benefit of its people for centuries to come.

Islam was based on a foundation of equality without the concept of classes or hierarchy. All men are created equal. As modernization took place across many parts of the Arabian kingdom the division between the "haves" and "have-nots" widened in many countries. Tribes and flags became split over geological and religious lines. Wealth was maintained and distributed according to familial hierarchies. As modern communication dawned – ushering in cinema, television, and the internet to the region, the "have-nots" became very aware of the differences between themselves and the "haves." The traditions that had normally been unquestioned in the Arab world became the issue of the day. Travelling a little further ahead in a similar social experiment – we in the West are currently experiencing "Occupy Wall Street" – which addresses our own issues of the day.

In many regions, these challenges were worsened by the economic and administrative mismanagement of dictatorial regimes. Qatar has navigated these issues admirably. Today, the issues the Arab world is confronting are universally experienced. We in the West have had the same struggles in organizing our society for over 500 years and continue to struggle with – the role of women in society; religion vs. secularism; liberty vs. order; modernity vs. tradition; wealth in the hands of a few vs. betterment for all; more governmental control vs. less. We have fought our own bloody battles, a revolutionary war as well as a brutal civil war. Our similarities far outweigh our differences.

Qatar is not a new entrant to international diplomacy having already mastered lessons learned from both East and West. In 1820 Qatar was a dependency of Bahrain. In 1867, Mohammed bin Thani led an important peace settlement between the Bahrainis, British, and Qataris. This was the beginning of true Qatari independence and their influence and support of democratic regimes has never waned.

Knowledge through formal education is a recent phenomenon in the Arabic culture and Qataris have attacked it with energy and commitment. Qatar's future lies with its young professionals – in every aspect of investment; oil, gas, airlines, entertainment, science, sport, banking, industry, and politics. They are extremely well educated and have rightly taken their place in the front row of international acclaim. This education, however, is not their most precious commodity. It is their "instinct" and their ability to "read people" that has set them apart. The region's brilliance in dealing with people is of ancient descent. A Qatari can look into your eyes and see the nature of your soul.

The West sees the youth across the Middle East demonstrating in the streets and cheering for a scent of democracy. In Qatar, the youth are the architects, engineers, and constructors of that bouquet, heralding in the new Arabian era. They are intoxicated by their ability to transform and embolden their small and enlightened society. They are doing…not simply cheering. It is on the streets of Doha that one can see and smell the vibrant sirocco of change governed by the calming and nurturing hand of enlightened wisdom. Qatar has always been known as "The Pearl of The Gulf" and now is, in conjunction with the other bright shining jewels in the Gulf such as Abu Dhabi, Dubai, Kuwait, and Bahrain, becoming a "necklace" of hope and progress in a new world order.

"The sailing dhows and chants of the pearl divers have disappeared on the horizon. But what remains in the spirit of the people of Qatar, of Bahrain, Kuwait and the UAE, is the memory of this arduous and painful past, but also the magnificence of the acts of courage of the ancestors, for which going to work was an act of faith, and often ultimate sacrifice, even as they would come back to the light with the pearls." – Sheikha Mayassa

It is that same courage that instills the people of the Gulf to leap forward into the future.

---

Harness your Amygdala
September 28, 2011
Click here for printable version

We all love the thrill of the roaring Ferrari engine of our emotions far more than the dull purr of the Prius of our reason. In relationships, business life, family affairs, sports competitions, reason is boring, slow, cognitive and controlled, while emotions are bold, energizing, and impulsively in the moment. Emotions are triggered by the amygdala in the brain. We especially succumb to the power and velocity of our emotions when our survival is at risk. When the amygdala senses that the body may be threatened by elements in the outside environment it responds by firing an instinctive response of emotion. The amygdala is like our internal Navy Seal team dedicated to our self-preservation.

The brain is the ultimate adapter. As more information is absorbed from varied sources, such as sight, sound, touch, and scent, it redirects the body's functions to adapt to the new environment. Fear is one of the strongest emotions. It actually elicits a chemical change in our body. As we are flooded with adrenalin, our heart rate rises, our oxygen is redistributed and our defensive line takes the field. Properly gauging when to go with your emotions and be fearful and when to check fear at the gate and rely on your reason is the never-ending quest for an investor.

Do you listen to the noise or do you listen to your gut? One of the biggest issues today is that the "noise" has become global, instantaneous and all encompassing. We now have 24/7 information overload and our micro decisions have been infiltrated by macro issues and mind boggling complexity. We believe a butterfly flapping its wings in a rain forest in Brazil can be the cause of a tsunami in Thailand.

Information, and others' interpretation of it, is prolific and instantaneous in cyber space. Twitter, Facebook, and Google have rendered information a commodity. When someone cries fire in a theatre in Culver City, the fire engines are dispatched by the Vigili del Fuoco in Milano. Information, and the fear generated by it, reaches us in our homes, businesses, and fishing holes in massive amounts – and in real time. Much of our time is spent agonizing over many things over which we have no control. This affords us less time to focus and attend to those things that we can control. To make matters worse, information is homogeneous, instantaneous and digestible. To weed out what is important from what is not is an impossibility. The radius of people, places, and things has become exponentially greater than it was 50 years ago or even a decade ago. Our rational experiential process has nothing to draw upon and we adopt the fear in the air. Fear shared by a group becomes self-validating and the flight or fight debate is usually won by flight.

We are all trying to run a race on a very muddy track:

• The Arab Spring may turn into Winter
• European Banks are threatened and appear at the brink
• The European Union itself may be at issue
• China is wrestling its own gigantic panda
• The USA is on its "rocky road" to a double dip
• Flags and Tribes and Wars seem to be prolific
• Housing, Unemployment, HealthCare, Education, Infrastructure, Social Security, Defense, Taxes, Budget Deficits, Money Printing are all looming issues in the USA
• The average man all over the world is becoming disgusted with politicians, whether democratic of dictatorial
• Growth in developed countries seem to be stalled
• Emerging markets are looking more coupled than decoupled
• There is more distance between "haves" and "have-nots" in most regions of the world
• The only answer for everyone seems to be "kick the can further down the road"

To me, the key to survival is to train our brain to fire emotions for the near future on only those events that are life threatening to us in our backyards. The bottom line is that we are all spending an inordinate amount of time worrying about those things that we cannot control, giving us less time to concentrate on those things that we can control.

What is causing the turmoil?

Macro: (A decade of unbridled exuberance and excess.) The world gorged itself on a debt-fueled asset boom, aided by a vendor-financed consumption binge, with seller financing provided by emerging countries with low cost labor who then inflated their economies as a result of our consumption and then used their surpluses to buy our debt, allowing us to buy more of their products.

Real Estate Commercial Bank Debt: The repeal of the Garn-St. Germain Act allowed banks and investment banks to conduct the same activity. Banks found that the most profitable business was to "originate and syndicate" loans. They no longer had to maintain the liability on their own balance sheet and could obtain incredible leverage and corresponding extraordinary profits on their own equity by selling these loans in pools to third parties. Thus the proliferation of securitization bred a new stable of global debt buyers who had a voracious appetite for "rated paper" wrapped in CDOs, CLOs, CMOs, CMBS, etc. As the debt buyers became more acquisitive the banks' underwriting standards dropped, assumptions and pro formas became more bold and values soared. When the music stopped there was little or no growth to support increased income levels and so the only debt relief came in the form of Zero interest rates and relaxed mark to market provisions for the banks. This coupled with the Feds' prolific printing of money fueled asset price increases and evaded many commercial loan defaults on bank loans by artificiality supporting values. As credit spreads tighten and bank regulators increase capital requirements, asset prices may fall and defaults will accelerate which will further exacerbate the deleveraging process. (The residential real estate market experienced a similar set of circumstances.) This will afford those buyers with cash and expertise to avail themselves of a repricing opportunity on a re-equitized basis.

For sure "preservation" is the goal in these tumultuous markets. However, there is a winner even on a muddy track and we need to take one stride at a time. It is difficult because there is little clarity and even less leadership or consistency. So let's return to reason and rationale of what we have experienced in the past. We have been to this rodeo before in many places in the world over the past 30 years and the following are the lessons that we have learned from our "cognitive" experiential bank:

• Operating businesses need to maintain cash heavy balance sheets and continue to delever. Organic Growth of the top line will be challenging in an era of reduced consumption and slow growth. Consolidations and mergers will be the growth tool of choice.
• Investors who exercise the most difficult and complex investing technique: "WAIT" will be rewarded. This is a moment to create liquidity and prepare silos of investible capital and await the inevitable "Tap Out" in an asset class in which you have expertise. If there is not a "Tap Out" you will not likely have missed a sustained run up.
• Drive forward with your base business and concentrate on fundamentals. Do not listen to the noise outside of your field and spend 110 percent of your worry and concern on those things that you can control. Do not fret about things that you cannot control.
• Risk is part of life – managing it is an art form. "Preservation and Survival" is the prerequisite to future bold action. Today the premium is on survival. When in doubt, wait for the next pitch.

What does this mean for Colony?

• Distressed Debt in both the USA and Europe will continue as the base business. Banks on both continents will accelerate the sale of assets as they respond to increased regulatory pressure and increased capital requirements.
• Value-added real estate will become more investable as institutions divest assets and banks start to face the music as credit spreads tighten.
• There will continue to be mispricings in Media, Banking and Entertainment and we will take advantage of the confusion in those markets.
• Our global network provides an amplitude of arbitrage to our hedge fund joint venture of O'Connor-Colony and we will continue to harvest the real estate public markets.

We need to quell fear, focus on only what we can control, not listen to the noise, and replace fear with cheers. The markets are delevering and redefining themselves and within that volatility will be a plethora of opportunities for those that stay conditioned and ready to respond. We will listen to our amygdala and adapt quickly, while harnessing those chemically induced emotions with the reason and rationale we have developed over three decades

---

Europe's Banks Ramp Up Teams For Real Estate Work Outs
September 23, 2011

A positive outlook – Banks have been expanding and restructuring their property management teams to work more closely and flexibly with property companies....[link]

---

Roubini: Greece Should Default, Leave The Euro And Reinstate The Drachma
September 20, 2011

Another great article on the state of Greece – A Greek default looks increasingly likely. That seems to be the theme of the day as markets and commentators insist that the debt situation over in Europe is unsustainable ....[link]

---

I'll Take Rocky Road
September 13, 2011
Click here for printable version

The debate over a double dip is the wrong issue...we are in one. The debate over whether Greece will default is wrong as well, they most likely will. The correct issue is what defensive and offensive actions should we, as investors, be preparing in anticipation of a potential Lehman II (Deux, Duas, Due, Ouo, Dos).

Deleveraging will be the mantra of the foreseeable future. It will be chanted from the bell towers of both private banking and sovereigns. Many lenders and debt participants are relinquishing the hope of growth as a panacea to asset value erosion and are tapping out to the acceptance of debt restructurings and equity conversions in both the public and private sectors. Debt and deficits cannot be a can kicked further down the road without real restructurings and more capital. For sure, a decrease in debt servicing requirements for sovereigns, as well as corporate and individual investors, is a prerequisite to servicing loans of all types. We have already used our silver bullets in the USA banking sector, in the form of zero interest rates, TARP, TALF, and relaxation of mark-to-market capital requirements, and have little ammunition remaining other than value annotation. With little or no growth, the V component of LTV can best be addressed by conversion to equity, more capital, asset sales below loan terminal value, or all of the above.

The bigger question is what tools will the European Union have available to them (similar to our TARP) to address their banking crisis and when will they step from denial to reality?

The bottom line is that we are likely to see asset price correction in equity and credit supported assets, which will be driven by deep debt restructuring requirements. If not, defaults across all sectors will give rise to an even more dramatic free fall in the credit markets. Either should be a painful global experience, and at the same time, a unique opportunity to invest at the moment of an "unforeseen intervening event." The fallout and corresponding opportunities may be experienced far beyond the European borders.

---

Chaos Makes A Swift Comeback
September 12, 2011

Interesting article in Seeking Alpha – Europe getting ready for Lehman Part Deux – Could be next great investable opportunity as banks clear...[link]

---

IMUA
September 08, 2011
Click here for printable version

TO: All my kids
RE: The President's Speech Tonight

The President needs only to resort to his Hawaiian roots and chant the mantra of ancient paddlers of voyaging canoes, "Imua"... "Imua" is a Hawaiian terms that means, "We go," and they may not have known exactly where they were going or when they would arrive but the individual paddlers had blind faith in their captain. The ancient Polynesian double-hulled canoes had crews of astrologers, herbalists, naturalists, paddlers and warriors. Each individual's expertise contributed to building and launching the vessel. And when danger arose and found them trapped in a storm in one of the most dangerous bays in the world, right in the center of the impact zone in the middle of 35-foot waves, there is only one way to get to shore. They listened to the focused chant of "Imua" from their captain. The crew's job, regardless of who they were, was to paddle, in sequence, and with seamless symmetry. It was not to question the navigational tactics of the captain. "He will get us there if we do the job."

We need a captain to say paddle and paddle hard... don't look back ...don't pick your head up... don't argue about who is stronger, who will be the boss when we get to shore. Paddle hard and we will slug it out later. We will get to shore one paddle at a time. Victory will be in the hands of the crew who hurts the most for the longest.

What the American public needs now is Obama's natural gifts, charisma and leadership, and a plan. He needs to do what he can do the best... communicate. We need the straight scoop, not partisan quips from anyone. We are in trouble but we are still the best country in the world. We will get through it. We all need to work harder and sacrifice more and we need to do it as a team until we get out of the impact zone. Once safely to shore then we can pound each other politically. Obama needs to look us in the eye and say that we are all going to have to lower our standard of living for a while and make up for our excesses. There is no magic elixir. Use this moment as motivation to reignite the "American Dream" coupled with "American Effort."

FDR's fireside chats on the radio explained to the American people in simple words very complicated issues. It brought them closer to the President and gave a feeling of confidence. That is the difference. The world is far too complicated for any of us to understand. Our political leaders are much better informed than we are. Instead of debating, they need to climb into one canoe and paddle together while listening to one voice chanting "Imua."

The President cannot even fire the White House chef without consultation. Everyone is playing party politics rather than figuring out how to get to shore safely. The recent debate between Congress and the President over raising the debt ceiling was an international embarrassment. The issue, which rocked the world, was not the lowering of America's credit rating, it was the despicable manner in which the most respected politicians in the world conducted themselves. The whole world is in search of itself and America needs to retain its elegant position and stature above idiotic party politics. America needs a plan and it needs the truth. What can the average guy do in a shared plan to get us out of this stagnation and lost decade?

All things are relative and the world is in flux; the Arab world is deposing dictators and searching for new models. The Eurozone is harshly realizing that a common currency and monetary union with individual fiscal policy doesn't work. Huge entitlement populations borrowing to support a "less producing" population exploded. China has been booming with undervalued currencies, savings used to buy foreign debt rather than local consumption. Freedom and transparency will start to rear their head.

America is not doing as badly as people think. It is the most transparent, reliable nation in the world. Our standard and quality of life is still the best. Corporation's balance sheets have been recapitalized and personal households are starting to save. We had become addicted to "housing" profits and the rehab back to learning to live on what we make, not what we borrow, will take some time. Nonetheless the individual, given a level playing field, can work harder and live more frugally. We just need to join together. No partisan politics. Put Americans to work and let them figure out the rest. We are best in times of crisis, we bond; we listen for the "Imua" chant.

Of course this means higher taxes and lower entitlements and yes it will mean continuing to print money. So what!!!!! Let the entrepreneurial spirit lead the way to reemployment. Real tax incentives and relaxed regulatory environment to hire our own.

So far, Obama's jobs initiatives have relied on stimulus spending of public funds – money that is largely borrowed. The debt ceiling debate and S&P downgrade shocked the nation into facing the fact that we must reduce the trajectory of borrowing and spending. The virtue of private-sector job creation is that it is largely self-funding and that it provides a return on investment, which in turn generates new tax revenue. The administration is in the best position to create incentives for corporations to repatriate off shore capital at lower tax rates, tax investment credits for start-ups, and deregulate burdensome bureaucratic stoppage to other entrepreneurial initiatives.

My greatest fear is that we are creating social silos of "haves" and "have-nots." We are losing our national pride and have become divisive, angry and confused. Luxury goods and discount stores claim success and everything in the middle dies. The average guy loses his credit while fighting for a home and culprits of the 2007 demise seem to be doing better than ever. Health care has turned into a race to the emergency room and our public standard of education is dismal and getting worse. Social discord as the baby boomers retire to chaos appears on the horizon. We need heroes. Who are our heroes today in business, politics, education, science and what is the American dream? These are the issues that the President can best present for us in his own voice and with bold and unwavering candor. Where is the shore and how do we get there? Until then, my advice to all of us is paddle like crazy, and don't worry about the direction. "IMUA."

---

It's All About Cycles
June 08, 2011
Click here for printable version

The most important aspect of real estate investing is knowing where you are in the cycle –


The Road

• Case - Shiller housing price index shows National Index fell 4.2% in the first quarter alone, and is down 5.1% compared to its year ago level. GET READY FOR FURTHER DECLINES
• Housing prices have now fallen by more than they did during the Great Depression
• Until housing gets better, nothing will really get better
• America's consumer confidence rests in its belief in home equity value and appreciation
• Negative home equity equals negative sentiments in general

• New jobs are the key to a recovery and they are not on the horizon
• Treasury yields fell to 2011 lows
• Middle East politics, economics and attitudes in chaos
• Eurozone in economic chaos and banking and state balance sheets under severe pressure
• China sitting on a bubble and over steering
• Japan digging out and will be slow to go
• Commodities groping with new margin requirements to control speculation
• May – consumer confidence fell once again
• No inflation except everything you and I buy, such as fuel, food and commodities, is twice as expensive
• Congress is worrying the world as “Weinergate” trumps the budget deficit
• Bernanke and the Fed saying “we are out” QE2 is over at the end of June and will not be extended  – In reality, they are in and will continue to print although we may go directly to QE4
• We worry about inequality in the Middle East but at home “class warfare” is on the horizon
• GSEs are perpetrators of the DEBT addiction
• Bank NPLs and REOs still at an all time high – the “dumping” will start this summer
• Interest rates at zero
• Deficit soaring – we are the largest debtor nation in history
• Normal working people all struggling and defaults and delinquencies in housing are increasing
• Too much money chasing too few goods and assets
• Costs up, UNEMPLOYMENT HIGH, and productivity down (STAGFLATION)
• Iran and Saudi Arabia squaring off over OPEC (OIL PRICES ALREADY CRIPPLING THE DEVELOPED WORLD)
• Germany tired of kicking the “Euro can” further down the road
• It feels as though we are in a race to the bottom again
• Growth factors significantly lower than expected
• Higher gas prices are certainly weighing on discretionary spending
• Confidence took a hit and HOUSING and auto sales slowed
• Construction looks very much weaker in Q3

Where Is Colony Now and What We Are Seeing

• We are cautious and risk averse waiting for the next unforeseen intervening event
• Risk premiums on most real estate equity investments are too low and complexity too high
• Debt is still a better risk adjusted return in the sector – Debt is the new equity
• Banks will begin to dispose of still historic levels of NPLs and REOs this summer – there is not enough capital to digest and recycle it all so prices will normalize
• There is a rush of smart sellers to sell assets into an overly euphoric market place overly concerned with current yield and hopeful pro formas
• We survived the crisis and in fact are thriving
• Invested $3.5 billion of equity in the last twelve months
• 39% appreciation during 2010 despite only 9 months average time since acquisition
• Projected IRR >20%, and equity multiple 2.1x, largely on an unleveraged basis
• Debt investments feature a >10% interest yield on a blended basis while indicating substantial additional gain through capital appreciation
• Most equity gains by funds in real estate since March 2009 have been accomplished through debt and balance sheet trimming and restructurings.
• Fundamentals across most asset classes in most geographic regions are “iffy”
• We have lost many of our competitors
• This is a moment to cautiously invest in real assets that can be bought attractively, mostly through distressed debt acquisitions and re-engineering of real estate operating company balance sheets
• This market may yet have another bump in the road in front of it
• Interest rates are at a historic low which has created an addiction to any “yield”
• Risk premiums have once again vanished and are back to a 2007 level
• Popular belief is we have bottomed in the real estate cycle in US and Europe – or have we?
• There has been little or no construction for the last 5 years
• Real estate downside is better on a risk-adjusted basis than other asset classes
• We have learned the lessons of 2007 and 2008 – or have we?
• There will be yet another shakeout and we will be liquid and ready to move at the next unforeseen intervening event

The Past, Present and Future of Real Estate as an Asset Class:

• Today investors want safety, quality and liquidity in real estate
• 2008-2010: a repositioning period – capital scarce
• 2011: capital as a commodity and proprietary deals are a scarcity – auctions are back
• Institutional entry requests to get into open-end core real estate funds have sky rocketed – from 1.8 billion at the end of 1Q09 to 10 billion at the end of 1Q11 – it is a rush to perceived safety and quality with some liquidity
• The squeeze will cause tremendous consolidation
• Capital now moving up the risk curve
• Core, Core plus, Value-Added, Opportunistic, Distressed Debt, Mezzanine Debt, and Hedge Funds will all consolidate – Scale matters!
• Real Estate will return to “ordinary” returns with competitive advantages to the “lowest cost of capital” and scale and expertise will matter
• Majority of real return will be demanded in yield
• REITs have out performed the S&P by double for the past two years and will now likely normalize
• Sector specific vs. “theme drift” will become an issue
• Real Estate has been the drunk driver in every decade on the Economic Highway, leverage is the “tequila,” the market is falling off the wagon once again
• Zero interest rate, non recourse, tax deductible interest, debt is a very cheap speculative option
• There are few, if any, barriers to entry in the USA real estate business

• Extraordinary real estate returns have historically been derived through “trading," not holding
• Europe will be a fertile field of opportunity for 2011 and 2012 as Bank Capital Regulations become more severe and cross-border lending dissipates due to overregulation
• Debt Recycling will begin although legal systems more challenging than the USA for a "debt buyer"
• Europe is more of a “capital preservation” model
• Lower highs and higher lows with less leverage and far less competitive building and expansion

• What drives real estate is truly supply and demand (of capital)
• Extraordinary real estate returns are driven by buying or selling at points of volatility along the cycle – sell into excitement and buy from disappointment
• This requires the discipline to wait for “an unforeseen intervening event”

• Ordinary returns and yield are driven by obtaining positive spreads through asset management...this is a “feet on the street” business
• Don't expect to make more money for taking risk, just know you have to take risk to make more money
• Availability of debt through new originations and securitizations is significant
• Underwriting standards weakening
• Non-recourse
• Securitization is back
• Covenant lite is back
• Upward only adjustment of rents and downward adjustment of costs is back

Comparison of Total Returns

NCREIF / NAREIT Total Return Breakdown


Conclusion
It feels to us like a different strain of the “Stagflation” of the 1970s. Stagflation is an economic situation where the growth rate slows down, unemployment levels remain steadily high and inflation also stays high. We should all take a look back at the OPEC oil embargo of 1973, government spending of the 1970s, and the effect of a fall of consumer confidence that ensued. Maybe, we will not incur a “double dip” but caution should be foremost and complexity and risk should be correctly priced and calibrated.

---

Must read piece by George Friedman directly on topic
March 23, 2011

Libya, the West and the Narrative of Democracy

By George Friedman
Stratfor Global Intelligence

Forces from the United States and some European countries have intervened in Libya. Under U.N. authorization, they have imposed a no-fly zone in Libya, meaning they will shoot down any Libyan aircraft that attempts to fly within Libya. In addition, they have conducted attacks against aircraft on the ground, airfields, air defenses and the command, control and communication systems of the Libyan government, and French and U.S. aircraft have struck against Libyan armor and ground forces. There also are reports of European and Egyptian special operations forces deploying in eastern Libya, where the opposition to the government is centered, particularly around the city of Benghazi. In effect, the intervention of this alliance has been against the government of Moammar Gadhafi, and by extension, in favor of his opponents in the east.
 
The alliance’s full intention is not clear, nor is it clear that the allies are of one mind. The U.N. Security Council resolution clearly authorizes the imposition of a no-fly zone. By extension, this logically authorizes strikes against airfields and related targets. Very broadly, it also defines the mission of the intervention as protecting civilian lives. As such, it does not specifically prohibit the presence of ground forces, though it does clearly state that no “foreign occupation force” shall be permitted on Libyan soil. It can be assumed they intended that forces could intervene in Libya but could not remain in Libya after the intervention. What this means in practice is less than clear.
 
There is no question that the intervention is designed to protect Gadhafi’s enemies from his forces. Gadhafi had threatened to attack “without mercy” and had mounted a sustained eastward assault that the rebels proved incapable of slowing. Before the intervention, the vanguard of his forces was on the doorstep of Benghazi. The protection of the eastern rebels from Gadhafi’s vengeance coupled with attacks on facilities under Gadhafi’s control logically leads to the conclusion that the alliance wants regime change, that it wants to replace the Gadhafi government with one led by the rebels.
 
But that would be too much like the invasion of Iraq against Saddam Hussein, and the United Nations and the alliance haven’t gone that far in their rhetoric, regardless of the logic of their actions. Rather, the goal of the intervention is explicitly to stop Gadhafi’s threat to slaughter his enemies, support his enemies but leave the responsibility for the outcome in the hands of the eastern coalition. In other words — and this requires a lot of words to explain — they want to intervene to protect Gadhafi’s enemies, they are prepared to support those enemies (though it is not clear how far they are willing to go in providing that support), but they will not be responsible for the outcome of the civil war.
 
The Regional Context
 
To understand this logic, it is essential to begin by considering recent events in North Africa and the Arab world and the manner in which Western governments interpreted them. Beginning with Tunisia, spreading to Egypt and then to the Arabian Peninsula, the last two months have seen widespread unrest in the Arab world. Three assumptions have been made about this unrest. The first was that it represented broad-based popular opposition to existing governments, rather than representing the discontent of fragmented minorities — in other words, that they were popular revolutions. Second, it assumed that these revolutions had as a common goal the creation of a democratic society. Third, it assumed that the kind of democratic society they wanted was similar to European-American democracy, in other words, a constitutional system supporting Western democratic values.
 
Each of the countries experiencing unrest was very different. For example, in Egypt, while the cameras focused on demonstrators, they spent little time filming the vast majority of the country that did not rise up. Unlike 1979 in Iran, the shopkeepers and workers did not protest en masse. Whether they supported the demonstrators in Tahrir Square is a matter of conjecture. They might have, but the demonstrators were a tiny fraction of Egyptian society, and while they clearly wanted a democracy, it is less than clear that they wanted a liberal democracy. Recall that the Iranian Revolution created an Islamic Republic more democratic than its critics would like to admit, but radically illiberal and oppressive. In Egypt, it is clear that Mubarak was generally loathed but not clear that the regime in general was being rejected. It is not clear from the outcome what will happen now. Egypt may stay as it is, it may become an illiberal democracy or it may become a liberal democracy.
 
Consider also Bahrain. Clearly, the majority of the population is Shiite, and resentment toward the Sunni government is apparent. It should be assumed that the protesters want to dramatically increase Shiite power, and elections should do the trick. Whether they want to create a liberal democracy fully aligned with the U.N. doctrines on human rights is somewhat more problematic.
 
Egypt is a complicated country, and any simple statement about what is going on is going to be wrong. Bahrain is somewhat less complex, but the same holds there. The idea that opposition to the government means support for liberal democracy is a tremendous stretch in all cases — and the idea that what the demonstrators say they want on camera is what they actually want is problematic. Even more problematic in many cases is the idea that the demonstrators in the streets simply represent a universal popular will.
 
Nevertheless, a narrative on what has happened in the Arab world has emerged and has become the framework for thinking about the region. The narrative says that the region is being swept by democratic revolutions (in the Western sense) rising up against oppressive regimes. The West must support these uprisings gently. That means that they must not sponsor them but at the same time act to prevent the repressive regimes from crushing them.
 
This is a complex maneuver. The West supporting the rebels will turn it into another phase of Western imperialism, under this theory. But the failure to support the rising will be a betrayal of fundamental moral principles. Leaving aside whether the narrative is accurate, reconciling these two principles is not easy — but it particularly appeals to Europeans with their ideological preference for “soft power.”
 
The West has been walking a tightrope of these contradictory principles; Libya became the place where they fell off. According to the narrative, what happened in Libya was another in a series of democratic uprisings, but in this case suppressed with a brutality outside the bounds of what could be tolerated. Bahrain apparently was inside the bounds, and Egypt was a success, but Libya was a case in which the world could not stand aside while Gadhafi destroyed a democratic uprising. Now, the fact that the world had stood aside for more than 40 years while Gadhafi brutalized his own and other people was not the issue. In the narrative being told, Libya was no longer an isolated tyranny but part of a widespread rising — and the one in which the West’s moral integrity was being tested in the extreme. Now was different from before.
 
Of course, as with other countries, there was a massive divergence between the narrative and what actually happened. Certainly, that there was unrest in Tunisia and Egypt caused opponents of Gadhafi to think about opportunities, and the apparent ease of the Tunisian and Egyptian uprisings gave them some degree of confidence. But it would be an enormous mistake to see what has happened in Libya as a mass, liberal democratic uprising. The narrative has to be strained to work in most countries, but in Libya, it breaks down completely.
 
The Libyan Uprising
 
As we have pointed out, the Libyan uprising consisted of a cluster of tribes and personalities, some within the Libyan government, some within the army and many others longtime opponents of the regime, all of whom saw an opportunity at this particular moment. Though many in western portions of Libya, notably in the cities of Zawiya and Misurata, identify themselves with the opposition, they do not represent the heart of the historic opposition to Tripoli found in the east. It is this region, known in the pre-independence era as Cyrenaica, that is the core of the opposition movement. United perhaps only by their opposition to Gadhafi, these people hold no common ideology and certainly do not all advocate Western-style democracy. Rather, they saw an opportunity to take greater power, and they tried to seize it.
 
According to the narrative, Gadhafi should quickly have been overwhelmed — but he wasn’t. He actually had substantial support among some tribes and within the army. All of these supporters had a great deal to lose if he was overthrown. Therefore, they proved far stronger collectively than the opposition, even if they were taken aback by the initial opposition successes. To everyone’s surprise, Gadhafi not only didn’t flee, he counterattacked and repulsed his enemies.
 
This should not have surprised the world as much as it did. Gadhafi did not run Libya for the past 42 years because he was a fool, nor because he didn’t have support. He was very careful to reward his friends and hurt and weaken his enemies, and his supporters were substantial and motivated. One of the parts of the narrative is that the tyrant is surviving only by force and that the democratic rising readily routs him. The fact is that the tyrant had a lot of support in this case, the opposition wasn’t particularly democratic, much less organized or cohesive, and it was Gadhafi who routed them.
 
As Gadhafi closed in on Benghazi, the narrative shifted from the triumph of the democratic masses to the need to protect them from Gadhafi — hence the urgent calls for airstrikes. But this was tempered by reluctance to act decisively by landing troops, engaging the Libyan army and handing power to the rebels: Imperialism had to be avoided by doing the least possible to protect the rebels while arming them to defeat Gadhafi. Armed and trained by the West, provided with command of the air by the foreign air forces — this was the arbitrary line over which the new government keeps from being a Western puppet. It still seems a bit over the line, but that’s how the story goes.
 
In fact, the West is now supporting a very diverse and sometimes mutually hostile group of tribes and individuals, bound together by hostility to Gadhafi and not much else. It is possible that over time they could coalesce into a fighting force, but it is far more difficult imagining them defeating Gadhafi’s forces anytime soon, much less governing Libya together. There are simply too many issues among them. It is, in part, these divisions that allowed Gadhafi to stay in power as long as he did. The West’s ability to impose order on them without governing them, particularly in a short amount of time, is difficult to imagine. They remind me of Hamid Karzai in Afghanistan, anointed by the Americans, distrusted by much of the country and supported by a fractious coalition.
 
Other Factors
 
There are other factors involved, of course. Italy has an interest in Libyan oil, and the United Kingdom was looking for access to the same. But just as Gadhafi was happy to sell the oil, so would any successor regime be; this war was not necessary to guarantee access to oil. NATO politics also played a role. The Germans refused to go with this operation, and that drove the French closer to the Americans and British. There is the Arab League, which supported a no-fly zone (though it did an about-face when it found out that a no-fly zone included bombing things) and offered the opportunity to work with the Arab world.
 
But it would be a mistake to assume that these passing interests took precedence over the ideological narrative, the genuine belief that it was possible to thread the needle between humanitarianism and imperialism — that it was possible to intervene in Libya on humanitarian grounds without thereby interfering in the internal affairs of the country. The belief that one can take recourse to war to save the lives of the innocent without, in the course of that war, taking even more lives of innocents, also was in play.
 
The comparison to Iraq is obvious. Both countries had a monstrous dictator. Both were subjected to no-fly zones. The no-fly zones don’t deter the dictator. In due course, this evolves into a massive intervention in which the government is overthrown and the opposition goes into an internal civil war while simultaneously attacking the invaders. Of course, alternatively, this might play out like the Kosovo war, where a few months of bombing saw the government surrender the province. But in that case, only a province was in play. In this case, although focused ostensibly on the east, Gadhafi in effect is being asked to give up everything, and the same with his supporters — a harder business.
 
In my view, waging war to pursue the national interest is on rare occasion necessary. Waging war for ideological reasons requires a clear understanding of the ideology and an even clearer understanding of the reality on the ground. In this intervention, the ideology is not crystal clear, torn as it is between the concept of self-determination and the obligation to intervene to protect the favored faction. The reality on the ground is even less clear. The reality of democratic uprisings in the Arab world is much more complicated than the narrative makes it out to be, and the application of the narrative to Libya simply breaks down. There is unrest, but unrest comes in many sizes, democratic being only one.
 
Whenever you intervene in a country, whatever your intentions, you are intervening on someone’s side. In this case, the United States, France and Britain are intervening in favor of a poorly defined group of mutually hostile and suspicious tribes and factions that have failed to coalesce, at least so far, into a meaningful military force. The intervention may well succeed. The question is whether the outcome will create a morally superior nation. It is said that there can’t be anything worse than Gadhafi. But Gadhafi did not rule for 42 years because he was simply a dictator using force against innocents, but rather because he speaks to a real and powerful dimension of Libya.

---

Lessons Learned
March 22, 2011

As we prepare for our Spring Investors Conference, I am harvesting my own thoughts of “Lessons Learned” through the challenge of an ever-changing business global landscape over thirty years of investing.  As I gulp a third Tylenol to relieve my brain pain from the anguish and thrills of my own intellectual adventure, I cannot help but also focus on “Lessons Learned” from our country’s past interventions or failure to intervene in the Middle East and Africa.  Each country is distinct and the region is a mélange of varying political systems from Democracy to Dictatorship as represented in the Arab League and the African Union themselves.  As a consequence, our foreign policy as well as our business strategies and missions are aimed with a laser rather than a shotgun.  In an effort to better understand our foreign policy and it’s affect upon trade and commerce it is helpful to look at history… Lebanon, Iran, Iraq, Palestine, Israel, Syria, Jordan, Turkey, Afghanistan, Egypt, Tunisia, Yemen, Bahrain, Rwanda, Sudan and Congo.  Regime change in many of these countries may or may not be a desired global objective but equally important is: “What replaces it?”; “What happens in a vacuum of leadership?”; “How do local populations relate to a slow or no change to their lives?”; “What entities in a transition are responsible for logistics of food, water, hospital, petrol and infrastructure needs of an anxious local population?”; “Who is the leader of the replacement?”.  

There is an old Arab traders’ proverb that reflects on this: “Mittel ma henah mittel ma jeenah... bala shee” which means: “The way we went is the same way we came back... with nothing”.  Consequently, I am reminded that the mission, the opponents, the choice of opposition replacements, the leadership, the affect on neighbors, the cost, the commitment and the EXIT are all threshold entry issues for a businessman seeking an eventual exit.  Don’t panic... I am not about to render a critical political comment but rather find confusion an interesting commercial opportunity and a challenging social dilemma.  

I have concluded that Lesson #1 of Lessons Learned is: “Always reflect on Lessons Learned”!

Please find below for your amusement some interesting articles...

Stratfor | Libya's Opposition Leadership Comes into Focus

Libya has descended to a situation tantamount to civil war, with forces loyal to Libyan leader Moammar Gadhafi in the west pitted against rebels from the east. One of the biggest problems faced by Western governments has been identifying exactly who the rebels are. Many of them, including former Libyan Justice Minister Mustafa Abdel-Jalil and former Interior Minister Gen. Abdel Fattah Younis, defected early on from the Gadhafi regime and represent part of the leadership of the National Transitional Council, which lobbied Western governments for support soon after its formation. Challenges posed by geography and lack of military capabilities remain, however, meaning that even with the aid of foreign airstrikes against Gadhafi’s forces, the rebel council will struggle to achieve its stated goal of militarily toppling Gadhafi and unifying the country under its leadership.

Analysis
Identifying the Opposition

One of the biggest problems Western governments have faced throughout the Libyan crisis has been identifying who exactly the “eastern rebels” are. Until the uprising began in February, there was thought to be no legitimate opposition to speak of in the country, and thus no contacts between the United States, the United Kingdom, France or others. Many of those who now speak for the rebel movement are headquartered in Benghazi. There have been several defections, however, from the regime of Libyan leader Moammar Gadhafi to the eastern rebel leadership, and it is men like these with whom the West is now trying to engage as the possible next generation of leadership in Libya, should its unstated goal of regime change.

The structure through which the Libyan opposition is represented is the National Transitional Council. The first man to announce its creation was former Libyan Justice Minister Mustafa Abdel-Jalil, who defected from the government Feb. 21 and declared the establishment of a “transitional government” Feb. 26. At the time, Abdel-Jalil claimed that it would give way to national elections within three months, though this was clearly never a realistic goal.

One day after Abdel-Jalil’s announcement, a Benghazi-based lawyer named Abdel-Hafidh Ghoga held a news conference to refute his claims. Ghoga pronounced himself to be the spokesman of the new council and denied that it resembled a transitional government, adding that even if it did, Abdel-Jalil would not be in charge. Ghoga derided the former justice minister as being more influential in the eastern Libyan city of Al Bayda than in Benghazi, which is the heart of the rebel movement.

The personality clash between Abdel-Jalil and Ghoga continued on for most of the next week, as each man portended to be running a council that spoke for the eastern rebel movement in its entirety. It was significant only insofar as it provided just a glimpse of the sort of internal rivalries that exist in eastern Libya, known historically as Cyrenaica. Though Cyrenaica has a distinct identity from the western Libyan region historically referred to as Tripolitania, that does not mean that it is completely unified. This will be a problem moving ahead for the coalition carrying out the bombing campaign of Libya, as tribal and personal rivalries in the east will compound with a simple lack of familiarity with who the rebels really are.

The National Transitional Council officially came into being March 6, and — for the moment, at least — has settled the personal and regional rivalry between Abdel-Jalil and Ghoga, with the former named the council’s head and the latter its spokesman. Despite the drama that preceded the formal establishment of the council, all members of the opposition have always been unified on a series of goals: They want to mount an armed offensive against the government-controlled areas in the west; they want to overthrow Gadhafi; they seek to unify the country with Tripoli as its capital; and they do not want foreign boots on Libyan soil. The unity of the rebels, in short, is based upon a common desire to oust the longtime Libyan leader.

The transitional council asserts that it derives its legitimacy from the series of city councils that have been running the affairs of the east since the February uprising that turned all of eastern Libya into rebel-held territory. This council is, in essence, a conglomeration of localized units of makeshift self-governance. And while it may be centered in the east, the rebel council has also gone out of its way to assert that all Libyans who are opposed to Gadhafi’s rule are a part of the movement. This is not a secessionist struggle. A military stalemate with Gadhafi that would lead to the establishment of two Libyas would not represent an outright success for the rebels, even though it would be preferential to outright defeat. Though it has only released the names of nine of its reported 31 members for security reasons, the National Transitional Council has claimed that it has members in several cities that lie beyond the rebel-held territory in the east (including Misurata, Zentan, Zawiya, Zouara, Nalut, Jabal Gharbi, Ghat and Kufra), it has promised membership to all Libyans who want to join, and it asserted that the council is the sole representative of the whole of Libya.

The council’s foremost priorities for the past several weeks have been garnering foreign support for airstrikes on Gadhafi’s forces and the establishment of a no-fly zone. Absent that, the rebels have long argued, none of their other military objectives stood a chance of being realized.

It was the lobbying for Western support in the establishment of a no-fly zone that led the transitional council’s “executive team,” also known as the crisis committee, to go on a tour of European capitals in mid-March designed to shore up support from various governments and international institutions. Mahmoud Jebril, an ally of Abdel-Jalil, and de facto Foreign Minister Ali al-Essawi, the former Libyan ambassador to India who quit in February when the uprising began, comprise the executive team. The result of this trip was the first recognition of the transitional council as the legitimate representative of the Libyan people, which was provided by France on March 10. France, as we were to see in the following days, was to become the most vociferous advocate of the international community coming to the aid of the rebel council through the use of airstrikes.

Challenges

Before the decision was made to implement a no-fly zone, the Libyan opposition forces collapsed in the face of Gadhafi’s onslaught, and they have shown little sign of coalescing into a meaningful military force. While the loyalist eastward thrust was against a disorganized rebel force, Gadhafi’s forces have demonstrated that they retain considerable strength and loyalty to the regime. That means that even with coalition airstrikes taking out armor and artillery, there will still be forces loyal to Gadhafi inside any urban center the rebels might encounter in a westward advance, meaning that the rebels would be forced to fight a dedicated force dug into built up areas while operating on extended lines, a difficult tactical and operational challenge for even a coherent and proficient military force. So even though the coalition airstrikes have since shifted the military balance, the fundamental challenges for the rebels to organize and orchestrate a coherent military offensive remain unchanged.

It is important to note that little of the territory that fell into rebel control in the early days of the insurrection was actually occupied through conquest. Many military and security forces in the east either deserted or defected to the opposition, which brought not only men and arms, but also the territory those troops ostensibly controlled. Most fighting that occurred once the situation transitioned into what is effectively a civil war, particularly in the main population centers along the coastal stretch between Benghazi and Sirte, consisted of relatively small, lightly armed formations conducting raids, rather than either side decisively defeating a major formation and pacifying a town.

Just as the executive team represents the National Transitional Council’s foreign affairs unit, the council also has a military division. This was originally headed by Omar El-Hariri, but the overall command of the Libyan rebels has since reportedly been passed to former Interior Minister Gen. Abdel Fattah Younis. Younis’ name arose early on as the man with whom the British government was engaging as it tried to get a grip on the situation unfolding in rebel-held territory. He was not included in the original transitional council membership, however, despite several indications that he did in fact retain widespread support among eastern rebels. This, like the clash between Abdel-Jalil and Ghoga, was another indication of the rivalries that exist in eastern Libya, which paint a picture of disunity among the rebels.

Younis, however, now appears to have been officially incorporated into the command structure and is presiding over a National Transitional Council “army” that, like the council itself, is the sum of its parts. Every population center in eastern Libya has since the uprising began created respective militias, all of which are now, theoretically, to report to Benghazi. Indeed, the most notable of these local militias, created Feb. 28, has been known at times as the Benghazi Military Council, which is linked to the Benghazi city council, the members of which form much of the political core of the new national council. There are other known militias in eastern Libya, however, operating training camps in places like Ajdabiya, Al Bayda and Tobruk, and undoubtedly several other locations as well.

Younis has perhaps the most challenging job of all in eastern Libya: organizing a coherent fighting force that can mount an invasion of the west — something that will be difficult even after an extensive foreign bombing campaign. More defections by the military and security forces in the west, like the earlier defections in Zawiya and Misurata, would perhaps benefit the transitional council even more than the bombing campaign under way. There is no sign of imminent defections from the west, however, which will only reinforce the military and geographic challenges with which the rebel council is faced.

Libyan society is by definition tribal and therefore prone to fractiousness. The Gadhafi era has done nothing to counter this historical legacy, as the Jamahiriya political system promoted local governance more than a truly national system of administration. Ironically, it was this legacy of Gadhafi’s regime that helped the individual eastern cities to rapidly establish local committees that took over administration of their respective areas, but it will create difficulties should they try to truly come together. Rhetoric is far different from tangible displays of unity.

Geography will also continue to be a challenge for the National Transitional Council. The Libyan opposition still does not have the basic military proficiencies or know-how to project and sustain an armored assault on Tripoli; if it tried, it would run a serious risk of being neutralized on arrival by prepared defenses. Even Gadhafi’s hometown of Sirte — almost certainly a necessary intermediate position to control on any drive to Tripoli — looks to be a logistical stretch for the opposition. An inflow of weapons may help but would not be the complete solution. Just as the primary factor in eastern Libya’s breaking free of the government’s control lies in a series of military defections, the occurrence of the same scenario in significant numbers in the west is what would give the National Transitional Council its best chance of overthrowing Gadhafi.

Stratfor | Russia Finds Opportunity in the Libyan Crisis

Summary

Russian Prime Minister Vladimir Putin said March 21 that the U.N. Security Council resolution allowing foreign military intervention in Libya is “defective and flawed” and criticized the West, particularly the United States, for being overly aggressive. The military intervention in Libya has given Russia an opportunity to return to a confrontational stance against the United States as Moscow and Washington discuss missile defense and other contentious issues.

Analysis

Russian Prime Minister Vladimir Putin on March 21 criticized the U.N. Security Council resolution on Libya for allowing foreign military intervention in a sovereign state. Putin called the resolution “defective and flawed,” adding that “it allows everything and is reminiscent of a medieval call for a crusade.” Putin noted that Russia, which abstained on the U.N. resolution vote and is not involved in the operation, wanted to avoid direct intervention and admonished the West, especially the United States, for acting too aggressively.

Putin’s comments indicate the strength of Russia’s geopolitical position in the midst of several ongoing crises. The Western-led intervention in Libya is an opportunity for Putin to return to a familiar confrontational position on the United States in order to advance Russia’s interests even further at a difficult time for Washington.

As several crises continue unfolding across the world — the nuclear accident in Japanhttp://www.stratfor.com/theme/japanese-disaster-full-coverage, growing unrest in the Persian Gulf http://www.stratfor.com/theme/middle-east-unrest-full-coverage  and now the military invention in Libya http://www.stratfor.com/theme/protests-libya-full-coverage  

— no country has benefited geopolitically from these developments more than Russia http://www.stratfor.com/geopolitical_diary/20110315-russia-rises-amid-geopolitical-events . Growing instability has caused oil prices to rise, boosting Russia’s income. Japan’s dependence on nuclear power for energy has caused Tokyo to turn to Russia for more natural gas supplies, and concerns over the safety of nuclear power have led the Europeans, Russia’s primary energy market http://www.stratfor.com/analysis/20110316-nuclear-power-europe-after-fukushima-special-report , to reconsider many future (and existing) nuclear plants. The chaos in Libya, even before the Western-led military intervention began, took much of Libya’s oil and natural gas exports offline http://www.stratfor.com/graphic_of_the_day/20110317-foreign-interests-intervention-libya , and Russia has been more than happy to make up the difference to Italy and other European countries. Perhaps most important, it appears that the window of opportunity that led to Russia’s geopolitical re-emergence in the first place — U.S. distraction in the Middle East — will be growing for the foreseeable future.

The conflict in Libya has not only opened up a third theater for U.S. military involvement, it has also given Putin the chance to characterize the United States as overly aggressive and willing to invade anywhere, while Russia prefers a more cautious approach. Russia’s position is strong enough that it feels it can easily switch between cooperation with and opposition to the United States. Russia has been more cooperative under the “reset” in ties between Washington and Moscow, but Putin is reverting to the tactics he used when Russia was geopolitically weaker, from the mid-2000s through early 2009, when he constantly and publicly railed against the United States.

Besides using the opportunity to criticize the United States, Putin has two other reasons for his confrontational push. First, U.S. Defense Secretary Robert Gates is in St. Petersburg meeting with Russian President Dmitri Medvedev and Russian Defense Minister Anatoly Serdyukov. Missile defense http://www.stratfor.com/analysis/20110207-influence-us-domestic-politics-bmd-negotiations  is the key topic, and Washington is offering a small concession on this controversial issue in setting up an exchange center for sharing data. However, this is not enough for the Russians, who want actual participation in missile defense. Putin’s speech criticizing the U.S. involvement in Libya symbolically was made at a ballistic missile factory on the same day Gates was in the country. Putin noted that the Libyan intervention “once again confirms the rightness of those measures which we undertake to strengthen Russia’s defense capacity” and that Russia would increase its ballistic missile capabilities.

The second issue is that Putin personally is not happy with the United States after U.S. Vice President Joe Biden's recent visit to Russia http://www.stratfor.com/analysis/20110309-us-russian-relations-biden-visits-moscow . When Biden was in Moscow, he met with Russian opposition leaders — something that displeased the Kremlin, particularly since Biden mocked a famous quote from former U.S. President George W. Bush about Putin during these opposition meetings, saying he “looked into Putin’s eyes and saw no soul.”

Given that U.S. commitments are increasing while Russia’s ability to maneuver is growing, Moscow is using the current opportunity to make its displeasure with Washington known.

Stratfor | The Libyan War of 2011

The Libyan war has now begun. It pits a coalition of European powers plus the United States, a handful of Arab states and rebels in Libya against the Libyan government. The long-term goal, unspoken but well understood, is regime change — displacing the government of Libyan leader Moammar Gadhafi and replacing it with a new regime built around the rebels.

The mission is clearer than the strategy, and that strategy can’t be figured out from the first moves. The strategy might be the imposition of a no-fly zone, the imposition of a no-fly zone and attacks against Libya’s command-and-control centers, or these two plus direct ground attacks on Gadhafi’s forces. These could also be combined with an invasion and occupation of Libya.

The question, therefore, is not the mission but the strategy to be pursued. How far is the coalition, or at least some of its members, prepared to go to effect regime change and manage the consequences following regime change? How many resources are they prepared to provide and how long are they prepared to fight? It should be remembered that in Iraq and Afghanistan the occupation became the heart of the war, and regime change was merely the opening act. It is possible that the coalition partners haven’t decided on the strategy yet, or may not be in agreement. Let’s therefore consider the first phases of the war, regardless of how far they are prepared to go in pursuit of the mission.

Like previous wars since 1991, this war began with a very public buildup in which the coalition partners negotiated the basic framework, sought international support and authorization from multinational organizations, and mobilized forces. This was done quite publicly because the cost of secrecy (time and possible failure) was not worth what was to be gained: surprise. Surprise matters when the enemy can mobilize resistance. Gadhafi was trapped and has limited military capabilities, so secrecy was unnecessary.

While all this was going on and before final decisions were made, special operations forces were inserted in Libya on two missions. First, to make contact with insurgent forces to prepare them for coming events, create channels of communications and logistics, and create a post-war political framework. The second purpose was to identify targets for attack and conduct reconnaissance of those targets that provided as up-to-date information as possible. This, combined with air and space reconnaissance, served as the foundations of the war. We know British Special Air Service operators were in Libya and suspect other countries’ special operations forces and intelligence services were also operating there.

War commences with two sets of attacks. The first attacks are decapitation attacks designed to destroy or isolate the national command structure. These may also include strikes designed to kill leaders such as Gadhafi and his sons or other senior leaders. These attacks depend on specific intelligence on facilities, including communications, planning and so on along with detailed information on the location of the leadership. Attacks on buildings are carried out from the air but not particularly with cruise missiles because they are especially accurate if the targets are slow, and buildings aren’t going anywhere. At the same time, aircraft are orbiting out of range of air defenses awaiting information on more mobile targets and if such is forthcoming, they come into range and fire appropriate munitions at the target. The type of aircraft used depends on the robustness of the air defenses, the time available prior to attack and the munitions needed. They can range from conventional fighters or stealth strategic aircraft like the U.S. B-2 bomber (if the United States authorized its use). Special operations forces might be on the ground painting the target for laser-guided munitions, which are highly accurate but require illumination.

At the same time these attacks are under way, attacks on airfields, fuel storage depots and the like are being targeted to ground the Libyan air force. Air or cruise missile attacks are also being carried out on radars of large and immobile surface-to-air (SAM) missile sites. Simultaneously, “wild weasel” aircraft — aircraft configured for the suppression of enemy air defenses — will be on patrol for more mobile SAM systems to locate and destroy. This becomes a critical part of the conflict. Being mobile, detecting these weapons systems on the ground is complex. They engage when they want to, depending on visual perception of opportunities. Therefore the total elimination of anti-missile systems is in part up to the Libyans. Between mobile systems and man-portable air-defense missiles, the threat to allied aircraft can persist for quite a while even if Gadhafi’s forces might have difficulty shooting anything down.

This is the part that the United States in particular and the West in general is extremely good at. But it is the beginning of the war. Gadhafi’s primary capabilities are conventional armor and particularly artillery. Destroying his air force and isolating his forces will not by itself win the war. The war is on the ground. The question is the motivation of his troops: If they perceive that surrender is unacceptable or personally catastrophic, they may continue to fight. At that point the coalition must decide if it intends to engage and destroy Gadhafi’s ground forces from the air. This can be done, but it is never a foregone conclusion that it will work. Moreover, this is the phase at which civilian casualties begin to mount. It is a paradox of warfare instigated to end human suffering that the means of achieving this can sometimes impose substantial human suffering themselves. This is not merely a theoretical statement. It is at this point that supporters of the war who want to end suffering may turn on the political leaders for not ending suffering without cost. It should be remembered that Saddam Hussein was loathed universally, but those who loathed him were frequently not willing to impose the price of overthrowing him. The Europeans in particular are sensitive to this issue.

The question then becomes the extent to which this remains an air operation, as Kosovo was, or becomes a ground operation. Kosovo is the ideal, but Gadhafi is not Slobodan Milosevic and he may not feel he has anywhere to go if he surrenders. For him the fight may be existential, whereas for Milosevic it was not. He and his followers may resist. This is the great unknown. The choice here is to maintain air operations for an extended period of time without clear results, or invade. This raises the question of whose troops would invade. Egypt appears ready but there is long animosity between the two countries, and its actions might not be viewed as liberation. The Europeans could do so. It is difficult to imagine Obama adopting a third war in the Muslim world as his own. This is where the coalition is really tested.

If there is an invasion, it is likely to succeed. The question then becomes whether Gadhafi’s forces move into opposition and insurgency. This again depends on morale but also on behavior. The Americans forced an insurgency in Iraq by putting the Baathists into an untenable position. In Afghanistan the Taliban gave up formal power without having been decisively defeated. They regrouped, reformed and returned. It is not known to us what Gadhafi can do or not do. It is clear that it is the major unknown.

The problem in Iraq was not the special operations forces. It was not in the decapitation strikes or suppression of enemy air defenses. It was not in the defeat of the Iraqi army on the ground. It was in the occupation, when the enemy reformed and imposed an insurgency on the United States that it found extraordinarily difficult to deal with.

Therefore the successes of the coming day will tell us nothing. Even if Gadhafi surrenders or is killed, even if no invasion is necessary save a small occupation force to aid the insurgents, the possibility of an insurgency is there. We will not know if there will be an insurgency until after it begins. Therefore, the only thing that would be surprising about this phase of the operation is if it failed.

The decision has been made that the mission is regime change in Libya. The strategic sequence is the routine buildup to war since 1991, this time with a heavier European component. The early days will go extremely well but will not define whether or not the war is successful. The test will come if a war designed to stop human suffering begins to inflict human suffering. That is when the difficult political decisions have to be made and when we will find out whether the strategy, the mission and the political will fully match up.

http://www.economist.com/blogs/newsbook/2011/03/no-fly_zone_libya

http://www.economist.com/blogs/newsbook/2011/03/archive  (from the archive of 1986)

---

The Spice Road Continues
March 21, 2011

Just as the Spice Road was the first real conduit of globalization, as it connected vast lands into a trade network that spread goods, beliefs, and technologies far from their areas of origin, so today are some bright young Arab leaders leaving their imprint on the sands of time.

H.H. Hamad bin Khalid Al Thani, The Emir of Qatar
H.E. Hamad bin Jassim Bin Jabr Al Thani, The Prime Minister of Qatar.

Qatar has managed to find an important and necessary diplomatic niche between the West and the Arab nationalist mainstream, which it backs up with its considerable financial resources generated from a brilliantly structured liquefied natural gas production/distribution industry.  It is benefited from first class diplomatic and business leadership. Additionally, Qatar has become one of the smartest, most reliable, and most transparent Sovereign Wealth Fund investors in the world.

Qatar’s leadership and courage in the current Libyan crisis is unique and inspirational. You will find reference articles below.

World Tribune
http://www.worldtribune.com/worldtribune/WTARC/2011/me_gulf0314_03_21.asp

Examiner
http://www.examiner.com/foreign-policy-in-national/how-qatar-was-able-to-join-the-libyan-coalition-against-qaddafi

http://www.examiner.com/political-buzz-in-wilmington

About.com
http://middleeast.about.com/od/qatar/a/Qatar-world-cup-2022.htm

H.R.H Prince Al-Waleed bin Talal bin Abdul Aziz al-Saud, a member of the Saudi Arabian Royal Family.

H.R.H. Prince Al-Waleed bin Talal bin Abdul Aziz al-Saud recently eloquently voiced the soft winds of change across the ancient Arabian deserts in the below New York Times Editorial. No one could do it more artfully or sensitively than one of the most prominent global investors in the world, who also happens to be a member of the Saudi Arabian Royal Family.  It is not critical that one agree or disagree with his point of view, what is important is to acknowledge the courage and wisdom from a prince of entitlement who is leading an intellectual caravan as a prince of enlightenment.

New York Times
http://www.nytimes.com/2011/02/25/opinion/25alsaud.html?_r=1&ref=middleeast

---

The Spice Road Gets Spicier
March 21, 2011

I have received a deluge of requests to provide my insights on recent events in the Middle East. As we are all beginning to understand, there is no Middle East, but rather a patchwork quilt of individual countries sharing geographic borders (that are primarily the architecture of the West after past conflicts), a rich but crisis-ridden history, religious enthusiasm (interpreted by a multitude of sects in transition) and the damnation and blessings of the oil and gas “haves “ and “have nots”.  A culture that has transitioned over thousands of years from frantic port cities of the Phoenicians and Carthaginians to the wealthy and enlightened modern oases of Doha, Abu Dhabi, Jeddah and Dubai, who’s growing influence can now be felt throughout the remainder of the business and political world.  Through the 3-mile Straights of Hormoz in the Arab Gulf flow more than half of the world’s oil and gas resources and it remains as an umbilical cord of unbound proportion to the ever more consuming world.  As an immigrant son of the Levant and a fortunate and blessed beneficiary of the American dream, my point of view is driven by a disciplined cadence of emotions in support of the care and prosperity of a beautiful and ancient civilization in the fertile crescent and Maghreb, and the growth and prosperity of its young and capable leaders in symmetry, if not similarity, with western civilizations.  Since 200BC The Silk Road has been paved with chaos, crisis, confused expectations, religious conflict, and untold benefits for those who can become the mortar to those loosely laid stones and lay the long-line relationships that are necessary for its care and feeding.

As a global citizen my opinions are much broader than my knowledge.  As a result, I will not render my own personal point of view but rather would like to share with you various viewpoints from foremost journalistic sourcesthat may supply some context to the confusing content.

Wall Street Journal:
http://online.wsj.com/article_email/SB10001424052748704433904576212631120959252-lMyQjAxMTAxMDIwMTEyNDEyWj.html

Time Magazine:
http://www.time.com/time/world/article/0,8599,2060551,00.html

Stratfor Global Intelligence:
http://www.stratfor.com/analysis/20110319-libyan-war-2011

http://app.response.stratfor.com/e/es.aspx?s=1483&e=248358&elq=cbcf4c46eaaa4 a719de84a466619236d

The Economist:
http://www.economist.com/blogs/newsbook/2011/03/no-fly_zone_libya

NPR:
http://www.npr.org/2011/03/21/134730661/foreign-policy-libya-is-too-big-to-fail

Financial Times:
http://www.ft.com/cms/s/0/0c3ad8aa-5329-11e0-86e6-00144feab49a.html#axzz1HFYnyJTY

http://www.ft.com/cms/s/0/202f4b50-5312-11e0-86e6-00144feab49a.html#axzz1HG5 witZ0

Roubini Global Economics:
http://www.roubini.com/roubinimonitor/260650/the_economic_consequences_of_the_arab_revolt

France24:
http://www.france24.com/en/20110318-libya-response-france-takes-high-stakes-step-spotlight-sarkozy-gaddafi-un

Seeking Alpha:
http://seekingalpha.com/article/259298-shaken-10-economic-disasters-threatening-global-financial-markets

The Raw Story:
http://www.rawstory.com/rs/2011/03/20/george-will-warns-of-mission-creep-in-libya/

---

Happy New Year!!
December 30, 2010

I find the following poem by Nadine Stair (at age 85) summarizes a worthy New Year's resolution for us all!! All the best for 2011 and thank you for your friendship and support in 2010.

If I Had My Life to Live Over

I'd dare to make more mistakes next time.
   I'd relax. I would limber up.
I would be sillier than I have been this trip.
   I would take fewer things seriously.
      I would take more chances.

I would climb more mountains and swim more rivers.
    I would eat more ice cream and less beans.
    I would perhaps have more actual troubles
        but I'd have fewer imaginary ones.

You see, I'm one of those people who live
    sensibly and sanely hour after hour,
        day after day.

Oh, I've had my moments,
    and if I had it to do over again,
        I'd have more of them.
    In fact, I'd try to have nothing else.
        Just moments, one after another,
    instead of living so many years ahead of each day.

I've been one of those people who never go anywhere
    without a thermometer, a hot water bottle, a raincoat
        and a parachute.
If I had to do it again, I would travel lighter than I have.

If I had my life to live over,  
    I would start barefoot earlier in the spring
        and stay that way later in the fall.
    I would go to more dances.
    I would ride more merry-go-rounds.
    I would pick more daisies.

---

Happy Thanksgiving
November 23, 2010

---

Let's Renew the Reality
September 3, 2010
by Tom Barrack

On this Labor Day, at the end of a summer of market doldrums and economic chaos, let us all band together to recapture the spirit that made America great.  Let’s create new heroes, let’s leave everyone in our path better than when we found them, and let’s rely less on government and more on our own efforts and results.  The word entitlement needs to be permanently removed from our vocabulary.

The economy will rock and roll and we will all maneuver through it. Real estate will be worse or better. Currencies will be volatile and out of parity but it will still be a zero sum game. Some businesses will do better and others will do worse. Some of us will be re-employed and some of us will be unemployed.  The cycle of life will not change – only the manner in which we handle and adapt to the cycle will change.

Through it all we must be diligent, or we will lose something more valuable than a piece of property or a good job. We will lose the foundation and heart of the American Dream – the ability for people of all colors and races to spend themselves in productive labor to better the conditions of life for themselves and their families. America is an oasis in which reality can actually EXCEED dreams.  The basic requirement from all of us is to dream hard and work even harder.

I wish you all a fantastic last weekend of summer and hope that the Autumn Equinox brings a harvest of untold benefit.  As you BBQ, hike, horseback ride, eat, play tennis and chat at beaches, houses, ranches, and parks please don't despair – let's start the repair.  One man's vision will remain a nice dream... a group's vision becomes reality.  Let's renew the reality!

---

Tiger on the Terrace or Kitty in the Kitchen
August 17, 2010
by Tom Barrack
Click here for printable version

Today is the ten-year anniversary of Laird Hamilton's mammoth and infamous forty-foot, tow-in wave at ferocious Teahupoo in Tahiti.

As most of you know, Laird was the guest speaker at our Investors Conference in 2008 (click here to view video) and he and his amazing wife Gabby have become great personal friends of mine. Laird is probably the best all-around waterman on earth and also one of the best all-around gentlemen on earth. I am increasingly impressed by his philosophy and commitment to evaluating and conquering "risk envelopes" as well as his gentle and compassionate nature with all who cross his wide path. Even more impressive is watching him exercise those steel strands of integrity in every aspect of his life outside of the water with the everyday "invisible" people and tiny unnoticeable things. Surfing big waves is exactly like investing and he and I share many beliefs about the nature of men, competition, humility, shelf-life, friends, compassion, the conduct of life, and when to "man up." We are also both a little uncontrollable and very unconventional.

For the last twenty years, Hawaii has been a volatile real estate market. We have always been successful buying assets there in the bottom of cycles and selling them in the up cycle (i.e. Hilton Waikoloa Hotel, Orchid at Mauna Lani, The W Hotel in Oahu, etc.) I had a few meetings lined up in Oahu to take the temperature of the island's state of play and decided that since I was already in Hawaii it would be the perfect time to celebrate Laird's Teahupoo anniversary with him in the waters off Kauai. We sawed the cast off my arm and set sail for Laird's "Surfer Toy Box" at Hanalei Bay.

What I want to share with you is not the fun, fear and humility I gained being in the water with Laird, but rather a few of the thoughts, attitudes, and practices which we shared on this trip that may be of value to you in your daily lives.

1. Most people operate in an environment of such low risk that both action and inaction have very few consequences. So although we may be attracted to the tiger on the terrace, we prefer to live with the kitty in the kitchen. The tiger on the terrace is operating in a high-risk environment so the consequences of his actions are significant. He is keeping everything stirred up and everyone around him on their toes. He is tireless, always in perpetual motion, relentless, obsessed and fills every room with energy the moment he enters. He has a twinkle in both eyes and all in his path are standing on their toes. While he is on the terrace no one is whining, complaining or sick. They are all running for their lives. That is entertaining for most people to watch, but not to live. The tiger is all things to excess and nothing to moderation. As a consequence, the masses choose to trade the tiger for a kitty in the kitchen and lower risk tolerance. The daily risk appetite of the tiger is just too exhausting even though the thrill quotient is significantly higher. Most people want mediocrity, security, safety and repetition. The kitchens are then filled with whining, sickness, complaints and boredom. That is why there are few tigers left in the world and millions of kitties. Leaders are tigers!


2. The attributes of a great man, adventurer, investor or surfer are reflected in how they treat everything around them – not just in their defined skill or art!!! Their friends, their kids, their mate, their subordinates - respect, thoughtfulness, honesty. You can tell how someone is with the big things by watching what and how many little things they can master. You can tell how they will be with you by looking at how gentle and kind they were with the others that came before you. The person you want next to you when you are in a life or death situation is the one who has practiced integrity, selfless strength and pushing through comfort barriers for a lifetime with everyone with whom they came in contact in preparing for that moment. No man left behind!


3. Some become arrogant and cocky by merely catching a lucky wave, not necessarily being the best. As a result luck may be the biggest impediment to the "shelf life" of a career. If the objective is to be good or do well over a long period of time, being lured into a false sense of security by one lucky ride may be the most detrimental possible event. Anyone can get lucky when the conditions are perfect and the wind is holding up the wave. You will see what you are made of when conditions turn ugly and bleak and the wave is eating all within your reach. Who do you want to be in the water with then?


4. If you are a fisherman teach your children to fish - don't give them fish. (Easier said than done.) Today, much of our society is struck by the "Disease of Ease." Everyone wants more for doing less and the wave is one of entitlement rather than hard work and not confusing efforts with results. You can only gain true self-confidence and self-esteem by making it happen for yourself – by testing, jousting, parrying, thrusting, failing, pushing and doing. People that take it easy, find it easy, are given easy, and are seeking easy, find their fuel tank to be empty when they reach to hit the afterburner.


5. It is lonely being a leader and you hear more jeers than cheers. Doing what others will not do and going where others will not go is not popular. Others are threatened by unconventional conduct. There are observers and there are participants. Participants view defeat as a tool in building towards success while observers view defeat as an unacceptable result. For observers there is always an excuse as to why they are not in the water today. Observers are empowered by banding together in criticism on the shore as the leader paddles off the face of a wave alone and unadorned in the far off line up.


6. The practice of Hawaiian Zen says that it is impossible to add more tea to an already full cup. It is impossible to change attitudes of the mind when the mind is closed. Closed minds say, "I already know. Don't tell me and don't show me I already have it." This is an acquired and simple arrogance that becomes a huge limitation. Great performers have an unlimited cup of "openness" which is manifested as humility. Their cups are open and accepting of all points of views around them. When humility meets boldness, it is magic.


7. If you are always worried about the last wipe out or if you are second guessing yourself, musing that the next wave is bigger than the one you are on, you will not succeed on the wave you are riding. All that exists is where you are at the moment. Be in that moment! Your instincts will tell you what to do; your mind at times will become your worst enemy. If you have not had a disastrous wipe out, you are not pushing hard enough. Don't lick the wounds from the past wave but rather find the opportunity in the next wave. Be better prepared and better equipped... don't be more conservative or cautious.


8. If you keep your body, mind and soul in shape, age brings a unique competitive advantage: laser focus!! It's the ability to not listen to the noise. Most people around us are not happy for our success. They live life by common denominator. As a consequence, when you are young you are influenced by older people who may want to use you or people your own age who want to abuse you. In youth you are searching so the noise reverberating in your doubting mind becomes unbearable and the scope is as broad as a floodlight. With age, the focus becomes honed and you understand that the noise, even from associates, is designed to neutralize you, not elevate you!!! You know what is important and what is not and discount most of the meddlesome influence of those who are jealous or envious. Allow that gut instinct to flow – there is the answer.


9. The strongest, toughest most reliable people are also the kindest, most compassionate and most gentle. The ability to assert incredible amounts of physical, mental or emotional strength on behalf of a group or family by necessity makes one far more sensitive to those who cannot, and far more tolerant of those who are hurtful. For the most part, the most compassionate individuals are also the individuals who, when they finally hit that "impact zone," you need to get out of their way. They have a long line between taking a punch and "enough is enough," but when enough is enough, there is no doubt who or what they are.


10. In a survival situation there is one thing that's certain: The rigid and immovable person chasing an expectation derived from a rule book is a disciple of death. The soft, supple and delicate individuals reacting to their instincts with no expectations or rule book are the enhancers and savers of lives.


11. Make a habit of leaving everyone a little bit better than when you found them.


12. Trust is earned by hours and hours of shared reliability on each other in various situations, and is lost in a single second of bad judgment by a friend who chooses to let you swim for it at a critical moment – "He is strong. He will make it." You just can never look at them the same way again.


13. Reputations are built on commitment and the broad-based perception of others in the water that you are committed... when you go, you GO. When paddling down the face of a 30-foot wave there is no room for indecision. I will... I won't... I should... I can't.... Character is built on the back of "Go" or "No" – not "whoa." We may not make the wave but no one will be confused about integrity and testosterone levels.


14. Common sense is the uncommon characteristic. You don't need to learn it... You have it – use it!


15. Imua!!!!! Hawaiian paddlers navigate hundreds of miles under the stars not knowing for sure where they are going. What they know is that wherever they are going they will get their faster if each paddle enters the water at the same time, with the same force, in harmonic synchronicity. It is not about the strongest paddler, it is about the canoe that is the most in unison together. You can often times hear the chant "Imua" from the steersman which means, "We go! We may not know exactly where, but we will go as hard as we can go, together, committed, with power ... without knowing the destination – we just go."  IMUA!!!!!

---

Today's T is for Talent
August 11, 2010
by Tom Barrack
Click here for printable version

Our current objective is to not lament over the agony of business practices of the past, nor to despair over business cycles of the present – it is rather to anticipate and capitalize on the business of the future. In the last post we started to look at the effect that technology (the first T in the equation) has on the legacy world of bricks and mortar. Our purpose is to ferret out the quantum leaps that we may avail ourselves of in the future, so the quantum leap-ors can grasp them. We will discuss technology in more depth in future posts, but for now we will take a look at a second T – the equally important talent factor. The true differentiation in real estate returns in the near- and mid-term will be engineered by those professionals who are best equipped for the tasks at hand. What are those attributes? What are the tools? How do they practice? What are the ingredients that make the truly great GREAT? Will the greats of 2000 be the greats of 2012? Does experience help or hinder? Does historic knowledge help or hinder? How much does discipline, intellect, communication, drive, passion, creativity, dedication and trustworthiness come into play? Who can adapt?

We will assume for the sake of discussion that all the talent in the selected pool is at the top of his or her respective game. They all have JDs, MBAs, CPAs, architectural or engineering degrees from the best schools. They are accomplished at finance, law, acquisitions, or asset management. They possess all the academic and experiential tools to be considered in the top ten percent of their performing peer group. The true question then becomes, how do you recognize and promote great talent in an already talented pool?

My most difficult job is recruiting great talent and making them leaders. The rest is simple. Pick the right people – they will make it happen. Pick the right theme and the wrong people – it will fail. Fall upon the right opportunity without the talent to reorganize complex components – you will be defeated. Find great historic talent that cannot adapt to changed circumstances – you will go down in flames.

There are libraries filled with books about talent. Is it God-given or developed over time? How do you discover it, maintain it, maximize it? In our business I think talent is much easier to define. It is a blend of passion, practice, perseverance, focus, discipline, reputation, risk-tolerance, ability to push though comfort barriers, and a commitment that results in abject trust and confidence.

The first element that I look for in a prospective hire is commitment – it is the glue. Drive, passion, tolerance for pain, and the inability to be defeated by setbacks, all set the stage. How do they commit to all things around them, not just their commitment to the job at hand? What is their relationship with their friends? What is their relationship with their significant other? What is their relationship with their parents? What is their relationship with their subordinates? Who are their mentors? What kind of past baggage have they left unattended? Are they quitters? Have they tried to justify their failure to reach the top by blaming others for their misfortune? What time do they wake up in the morning?

I have learned to judge talent by their friends and history. A glossy wrapper that has bounced from friend to friend, business to business, idea to idea, geography to geography – has probably done so for a reason. Excuses are often times proffered, as the reason a particular person was not a winner. What I have learned over three decades of competitive business is that there is always a winner, even on a muddy track.

Why is getting up early important? It signifies passion and enthusiasm as well as discipline. In order to stand out from the crowd you must get up earlier, stay later, want "it" more and surround yourself with positive individuals that will enhance you, not slow you down. Under-commit, over-deliver. Great talent believes in all things in excess and nothing in moderation. This is impossible by self-criticism alone. It requires mentoring, coaching, and willingness to accept others' criticism. It is the ability to acknowledge one's misgivings that create the power to overcome them and eventually eliminate them. The scarcest resource for talent is time. We are in a constant frenzy to maximize each moment.

The second element that I look for is humility. Humility is simple. It is found in those with the highest self-esteem. They are the hitters, the winners. Hubris is bred in the bowels of insecurity and discontent. Those who are confident can listen and absorb everything around them without trying to drown out the clues with their own boastful voice or false bravado. In fact, talented people raise and lift all those around them by in one way or another leaving things better than when they were found.

The best talent all share one common theme in every endeavor – visceral integrity. They do what they say! There is an internal voice that drives them to accomplish the little things. Answering phone calls – not screening them, showing up, writing thank you notes, being punctual, listening, the list goes on and on. Integrity is built by stringing hundreds of these tiny invisible habits together in a seamless necklace. Once we get to integrity then the confidence to drive through comfort barriers becomes another key ingredient. Talented people have no truck with the status quo. Once they have accomplished or mastered a level they must push themselves beyond the momentary victory - they must push themselves to the next level in which they will one again confront the unrelenting fear of failure. Talent welcomes risk and learns how to manage the ledge. This does not come from boastful glad-handing or reckless abandon. It comes from having prepared for years and years to handle the situation at the edge. The fear has already been experienced in all of the practice runs leading up to the point where one is dangling one's toes over the ledge, so there is no fear when one actually gets there.

I also have found that I am not so interested in analyzing the talent in the "winners circle". Conduct is predictable in the victory zone. What is far more interesting is looking at the defeats and their aftermath. Do they blame someone else? Do they shift to another sport? Do they find another stadium? It is these moments, when they are getting their butts kicked, that you find out what they are really made of. Correspondingly, seeing how they react to watching someone else having their butt kicked is another tremendous insight into their capacity to get to the top. No compassion – no capacity...it is that simple.

Winner or loser you have choices to make. If you have lost, then the ability to put a defeat behind you and move to the next match is essential. Hawaiian surfers have a saying that everybody eventually takes their lickings in the green room. If you don't, you're not pushing hard enough. However, drowning in the doldrums of a loss is unacceptable. Move to the next wave and paddle over the next ledge. If you are the victor, do not rest on your laurels and coast on accolades. There is always someone more talented and it is only a matter of time before you become the kickee and not the kicker. Be gracious in victory.

Great talent doesn't require tools or crutches. They are the warriors to fear the most. As the famous parable in The Art Of War, "It is not the warrior with the sword to fear, for you know he has the desire to fight in close, so you may take him with an arrow. Likewise it is not the warrior with the bow to fear, for he has a fear of fighting close, so you may take him with your knife. The warrior to fear is the one standing naked in the middle of the battlefield." At the end of the day victories are driven by the person, not the tools at hand.

Talent comes from discipline, drive and a complete insensitivity to failure. It is the ability to absorb and learn from failures rather than an unquenchable thirst for victory that allows one to expand one's talent. Talent can only be measured on the playing field, not in a vacuum. Today the plays are changing dramatically, the field is tilting in different directions and at times feels as though it is moving through cyberspace. Adaptability and versatility expand the universe in which talent is utilized and measured.

Bottom-line – bricks and mortar, technology, the economy, financial markets, international trade, are all horses upon which the international economy will bet. I prefer to bet on the jockey and let him pick his own horse.

---

Move it or Lose it!!
August 9, 2010
by Tom Barrack
Click here for printable version

Wars have been waged, countries have been torched, and millions have died over differing points of view. In the aftermath both victor and loser usually agree that a better result would have been to come to a mutually tolerable agreement before things got out of hand... in other words adapt. This is no easy feat, as it requires each party to surrender, to some degree, and try to find some meaningful middle ground. This is very difficult for people who have been trained over a lifetime to focus on a particular point of view – and I am at the top of that list! The key to the real estate business today is to maintain the desired qualities in our tool-kit – loyalty, dedication, focus, strength, and endurance – while at the same time, modify our single-minded, straight-forward thinking and expand our methodology to meet our ever-shifting horizons. We must be willing to adapt to a vastly changed reality – a different and shifting point of view.

The reason no one can provide an accurate forecast of the economy is that the definition of "economy" has changed so substantially that it has become meaningless. Technology, government intervention, currencies, inflation, interest rates and the nature of trade have all dramatically changed from physical-space-driven to cyber-space-driven. CPI does not include energy and food (which are the most inflationary) and GDP does not measure cyber growth. The effect that this will all have on the future of workers within developed countries and the nature and character of the international real estate business will be monumental. Many of us will not be able to maneuver the aircraft carriers that have taken decades to construct and we will be run over by the cyber-Mangustas with jet engines and no baggage.

The past decades have been driven by financiers, MBAs, investment bankers, brokers, lawyers, accountants and bankers. The US economy has not been driven by consumption; it has been driven by cheap debt as fuel for consumption and abundance. Similarly, the real estate business has not been driven by growth and expansion, it has been driven by cheap and plentiful debt and a cadre of new buyers of recently rated debt. Technology has changed the face of the world and established and entitled economies are taking a back seat to emerging markets such as China, India, Russia and Brazil. The efficiency of cyberspace is disintermediating most businesses, brokers and middlemen of every flavor. Apple and Microsoft are two of the largest and fastest growing market cap companies in the world. Stocks, bonds, banks, books, records, movies, automobiles – all are running on increasingly technology-based business models. Thus reducing their real estate and employee needs. The technological affect of replacing people and places with computers and cyberspace is real and the real estate business is the last to adapt. Physical, financial and functional obsolescence will dominate every level of the real estate business for the next decade and technology will change the face of how business is transacted. PDAs will be the office of the future and abundance will submit to function and efficiency.

With this ongoing overhaul of the business landscape, the future belongs to a different kind of animal. Knowledge and information will become totally efficient and cheap and the ability of individuals to create an arbitrage in brokering transactions will fade slowly into the sunset. Those still toting a tool kit designed for a Model T Ford will be stalled on the new highway. Creators, inventors, storytellers, and dreamers will make up the new power class.

Linear thinking and rationality will wane, in my opinion, and free thinkers, master storytellers, and those who focus on beauty, emotion, design, content and newness, will rise to the top. Human incentives in developed and developing worlds are changing. Life has taught us that many people that have achieved financial prosperity are not fulfilled by it. Young, brilliant minds in the developed world are focusing on a broader context than just material wealth. Entitlement and more abundance will simply add weight to an already listing ship. Developing countries, on the other hand, are bitten by the capitalist bug and are not imprisoned by entitlement or hubris. We will continue to empower them through our licensing and outsourcing as a competitive tool in aligning our developed production economy.

Art, design, creativity, and entertainment must be combined with an MBA or law degree in order to create premiums. Costs and efficiencies will revert to the mean as outsourcing and global sourcing becomes more dominant. It is a known fact that today it is as difficult to gain entrance to a first class art school as it is to a first class business school. In an abundant marketplace of choices, touch, feel, beauty and emotion become more critical, assuming cost is neutralized. Routine legal work is now found on line. Wills, estate planning, divorces, lawsuits...MBAs can now be hired for one fortieth of the hourly cost in India and possess direct global access to New York. Real estate brokers are in a foot race to extinction with new cyber-formats and soon all forms of real estate will be traded as stocks and bonds with the same disitermediating affect on the business, which is that all information will be attainable in real time. With the onset of Google Earth, online title companies, real estate data engines such as CoStar, and the ability to hire lawyers and record deeds online, we will soon be able to close a real estate transaction from our PDAs while having lunch at Gray's Papaya.

MBAs, lawyers, investment bankers – real estate intermediaries of all types – simply need to add a few clubs to their bag to make sure there is still a playable course in their future. I will expand more on these topics over the weeks to come but rather than parry and thrust with financial restructurings and futile predictions of where we are in the cycle, I would like to focus on what will be the "quantum leaps" and who will be best equipped to be the "leap-ors."

---

Come to Win
July 22, 2010

How can sports prepare you for success in life?

"The greatest lesson I’ve learned in sports that helps me run my
business is there's no "I" in team."...

Hear more of my thoughts in Chapter One of "Come to Win" by Venus Williams.

---

Tiring and Boring???
July 21, 2010
by Tom Barrack
Click here for printable version

It seems last week I caused a bit of a stir in an article on my thoughts about the current state of the US real estate market. I indicated that as a global financial investor I am feeling as though I enter the octagon every day, training with the top Ultimate Fighters in the world. Tap outs and submissions do not come quickly or without learning the art of "taking a punch." This is applicable to every aspect of life.

Business is anything but boring and the challenges on every continent are manifold while the visibility, transparency and predictability of all asset classes in all regions is a blur.  I indicated that the US real estate market in particular was tiring and boring and the greatest tool kit today was to be well versed in hand-to-hand combat. Some reporters and pundits believed I had committed a mortal sin by not waxing poetic about the invigorating, refreshing and unlimited upside attributes of real estate speculation at this cyclical inflection point. Let me shed a bit of lucidity on my point of view, which was intended to properly align expectations with reality - something we do not do often enough in the global investment world.

Real estate investing is a complex, cyclical business made up of trillions of dollars of disparate non-homogeneous assets.  The industry today does not lend itself to speculativetrading based upon cheap and plentiful debt and euphoric future rental growth projections.  Let's start with the basic and very general premise that US commercial real estate fundamentals are still poor and recovering slowly, if at all. This is of course a generalization; however, with soaring deficits, weak GDP growth, massive unemployment and continuing corporate contraction of G&A, it could be no other way.

There are intermittent signs of hospitality occupancy rates leveling, regional mall sales resuming and an occasional sale of an asset at nosebleed levels. However, according to Moody's All Property Real Estate Index, US values are still off 40% from their peak in late 2007 (see chart below). The nominal CAGR for real estate values since the beginning of the decade is just over 1%.

For the most part, the fundamental law of supply and demand is alive and well, which largely explains why real estate rents and revenues in current dollar terms have been flat since 1994 (see chart below).

Additionally, zero interest rates and the regulatory relaxation of mark to market requirements for banks has all but abated the flow of troubled commercial debt to be recycled through the system. Rather than a tsunami, it has been a knee-high wave.

To make matters worse, capex has been scarce in many projects since 2007 and the amount of deferred capex in most property types is significant. Thus cash flow for leasing commissions, tenant improvements, key money and deferred maintenance is nowhere to be found in a still opaque and weak new real estate lending environment.

The disposition of distressed commercial mortgages has not happened at a scalable level as a result of relaxed mark-to-market regulations; untested special servicers and CMBS waterfalls; tranche warfare amongst holders of various classes of debt; zero interest rates; "pray and delay" and "extend and pretend" strategies. Consequently, the anticipated recycling profits from a massive macro correction in debt has been slow to come and many funds have been frustrated by the lack of product at what they believe to be attractive discount pricing. As a result, there are very few market clearing transactions for non-strategic, long-term buyers.

Many owners realize their equity value is gone but in many cases, due to historically low floating interest rates, can still make debt service if the term of the loan is extended. Everyone is playing for option value and it is a slow moving train, which becomes a bit "Japanese-esque," and the tea leaves tell me that this stage will be here for a while.

Commercial banks feel no pressure to mark the loans to market value because the regulatory requirements have provided a relaxation of LTV mark-to-market tests if sufficient debt service is still available. Consequently, a loan originated in 2007 on a $100 property at 70% LTV and 1.0x DSC with a 5.5% interest rate can still be "OK" at an LTV of 150% because artificially low interest rates are driving up coverage ratios to acceptable levels (see chart below); thus the dawning of "extend and pretend" and "delay and pray."

Real estate equity is moving slowly because a substantial disparity between most buyers and sellers still exists. Buyers have been anticipating price corrections as a result of the market downturn and continued deterioration in fundamentals while sellers who are not under bank or mortgage pressure are simply holding their ground. In most cases they have little incentive to sell, and due to their own debt issues, more likely than not, have lots of reasons to hold.

With the cost of their liabilities near zero, banks have been earning money in recent quarters and reserves are building. A more vibrant flow of private treaty real estate loans is beginning to materialize and we expect, as loans get closer to term limits in 2011 and 2012, there will be significantly more loan sales coming to market.

In an environment where the government continues to print money and create massive accumulating deficits, inflation will surely return at some point. However, the deleveraging cycle in real estate must first run its course. A resurgence of demand for product will coincide with better pricing power, which will once again drive values. After we experience deflationary correction across our economy we will then be in the wake of significant inflation. The only non-printable currency is hard assets and over time hard assets will carry the day.

In summary, solid risk-adjusted returns will be made by true real estate professionals with the tools and the teams to plow and hoe. By being in the marketplace, we will sense when that next repricing opportunity exists and will avail ourselves of it. The business is not about inventing the next iPad or launching the largest leverage buyout. It is about showing up, doing a good job, harvesting reasonable returns for our investors (which will look strong in hindsight against other asset classes), and waiting for the repricing moment.

The fast money, high velocity, handsomely leveraged, quickly appreciating days of real estate investment are not in the near-term tea leaves. Real estate has returned to the hands of real estate professionals, not financial arbitrageurs, and most real estate opportunities in the US involve hand-to-hand combat on restructurings or intensive value-added implementation. In either of those two circumstances, the process is slow and low. It is an era of what real estate is supposed to be - singles and doubles. Home runs will be few and far between, while the World Series is still a bit in the future and only after a very long season of individual games, made up of individual innings, made up of individual at-bats.

If my rendition of the above has been a bit tiring and boring, then I have effectively conveyed my message. Thankfully, the business has finally returned to the real real estate business.

Bottom line, there's nothing new. As in all aspects of life, expectations based on anything other than reality will always lead to disappointment. Reasonable expectations are the key to peace of mind.

---

"TERROIR" (a sense of place)
June 25, 2010
by Tom Barrack
Click here for printable version

My recent visit to our offices and companies in the Eurozone has yielded few profound analytics. However, in the midst of reveling in the last bastion of social interaction and irreplaceable art of living, a few instincts surfaced that seemed to be shared by many of my European counterparts. The Europeans have experienced centuries of crises and ever-changing political regimes. As a result their crisis management technique is enviable. They attain lower highs and suffer higher lows. Harnessing the emotions of the French, Italian, German and Swiss businessmen has helped to shape my global point of view. Below are some consensus thoughts:

• The US has engaged in converting troubled private bank debt into over-valued sovereign debt. Europeans, on the other hand, have engaged in converting over-valued sovereign debt into troubled private bank debt. The US debt-to-GDP ratio is relatively low, while personal debt is relatively high. Conversely, the European debt-to-GDP ratio is relatively high while they retain relatively low personal debt. In either instance, this is simply financial and fiscal alchemy of socializing losses for the masses and privatizing gains for the few. The US advantage in this game of sovereign musical chairs is that it has retained the ability to "print money". Unfortunately, Italy can no longer print the lira; France can no longer print the franc, and Spain can no longer print the peseta.
• Europe cannot grow if the Germans will not spend. The fact is the Germans are not spending – they are saving. Productivity and competitiveness of European manufactured goods pales in comparison to Asian unit economics and efficiencies. All European political regimes are struggling with an aging and less productive population demanding more entitlements and desiring to work less.
• Banks, for the most part, are attempting to increase capital in anticipation of Basel III and are not really interested in lending to the small and midsize companies that are the European backbone. "Extend and pretend" and "pray and delay" tactics are as endemic in the European community as they are in the US.
• The Euro is the German Central Banks muse that has turned into an imponderable witch. There has never been an instance in history in which a common currency functioned in a cross-border multinational setting without common fiscal and political agendas.
• Currencies everywhere in the world are under tremendous pressure and the only currency, which cannot turn on the printing press, is gold. Hard assets and commodities will be the capital preservation proxy.
• The US and European populations are fed up with politicians and are in desperate need of some adult supervision.
• Capitalism is soaring in Asia, the Middle East and Africa and populism is deteriorating the competitive advantage of the emerged world.
• Visibility is non-existent, volatility is daunting and predictability useless.
• The financial world is in frenzy for yield as a result of zero percent interest rates and a total abandonment of "risk premiums." Another bubble looms!
• Macro government and financial events combined with knee-jerk governmental interventions will continue to frustrate usually smart macro bets and cause three-Tylenol headaches to hedge funds.
• This is a good time to be patient and stick to what you know.
• Real businesses with regulatory or industrial monopolies or irreplaceable infrastructure will avail themselves of the shift from developed to developing.
• Relationships and trust will return as key attributes of investment acumen and the colors and flavors of investors will become more broadly differentiated.

---

Dads
June 11, 2010
by Tom Barrack
Click here for printable version

On the eve of a momentary victory lap for Dads when we should be focused on the lessons and enduring memories garnered from either receiving or passing the baton of fatherly wisdom, we instead find ourselves distracted by the ominous clouds of volatility in the world and what it means to our prospects of wealth creation or perhaps even survival. Global apocalyptic events, blended with economic uncertainty and dissatisfaction with the political status quo, are surpassed by disappointment in the efficacy and quality of leadership. We continue to find that beneath the beautiful foam of the political and financial cappuccinos there is no espresso, simply air.

We all know that the last chapter to this book will be ugly. It is impossible to continue to print money, increase national, state and municipal debt, further entitle the entitled through broadened populist programs, and more fervently tax the already taxed while producing and consuming less. Federal Stimulus is disguised debt, and the taxpayer is the ultimate subsidizer for zero interest rates. It is simply more debt on debt!

We are all searching for strength, courage and some edge to the myriad of quandaries that present themselves to us each day. Complexity, confusion and chaos have captured our minds and unfulfilled expectations have deadened our souls. We are all hopeful yet unsure, optimistic yet cautious, and singularly focused on "what will be" and not "what is." We share an unquenchable thirst for faster, better information. We herald the arrival of any new iGadget, yet the plight of disaster, famine and disease gets bumped to the back of the real agenda. No one will "own it"...it is all someone else's dilemma. We live in a world where information is simply a commodity and compassion is a relic from Jurassic Park. Compassion with appropriate action on any front is as rare as a vinyl record. What are the tools that we need today? What is the magic elixir? How can we better manage our helm? Who should set the sails?

There was only one place for me to go as I myself drown in this pool of global mediocrity: My go-to man, my Pop!!

I am going to wax a bit philosophical, however, I promise you I have not been on sabbatical to a medical marijuana farm. It simply seems to me that Father's Day is a time to reflect upon things that are important and not all the noise that seems to blur the moment. We need leadership, not more disinformation, and my Dad was my first place to look.

A Snapshot of Dad
My Dad is about to turn 95 and is simply one of the strongest, brightest and most honorable men I have ever known. He started work at the age of 12 as the oldest son of a Lebanese immigrant family blessed by the gift of America. He bought his first grocery store in his late teens and supported his parents, siblings and 18-year-old wife single handedly. He is a bull of a man with no lace edges or frills. He is a man's man and has an amazing charismatic reach. His word is his bond and he has no truck with whining or complaining or bitching. He is about integrity, commitment and trust.

When I was a kid my Dad worked at his store on National Boulevard seven days a week, 5:00 a.m. to midnight, coming home only for dinner and then going right back to work. It was at this palace of street education that I learned my most valuable lessons from him. It wasn't what he said as much as what he did. I never heard him complain. His view of life was that every moment is a gift, and to handle anything that was thrown at him with integrity and commitment. As a young man, if I came home dejected after a game or a poor grade and attempted to blame it on someone else he would simply say, "Welcome to life. Now own it, feel it and get rid of it. There will be good days and bad days. That determination is yours and yours only. You are responsible for it all!"

He never bothered fussing about the little things but when he laid down the law it was in stone and I buckled under immediately. I still do! In the midst of the daily struggle and striving to give his family the blessing of an education and opportunities that he never had, he maintained incredible peace of mind and self-confidence that I still today find awesome.

Fathers Are Guided by Mothers
Whenever I think of my father I automatically think of my mother. Her life was her husband and her kids. She was the product of ancient Lebanese culture and believed that "a man's life is life and a woman's life is her man". There was no concept of mediocrity or normalcy with my Mom. There was only one speed and that was flat to the floor driven by a belief that those who are given much, much must be given. While most kids were raised with a notion of nothing to excess and everything in moderation, my Mom's motto was everything to excess and nothing in moderation. Her belief is that if you stuck to a "menu" it was a sure fire guarantee for mediocrity and that happiness and peace of mind were found in extending yourself and extending yourself and then extending yourself one more time. It was all about becoming a "man for others" while blazing your own path and not following the worn but safer path of others.

My Mom did not have a formal education. She was raised with ten brothers and sisters in a one-bedroom farmhouse by immigrant parents, all clinging to each other and to the hope of the American Dream. The foundation she laid out for us was simple, consistent and relentless and had been adapted from the Phoenician scent of a hundred decades of civilization: Discipline, manners, compassion, generosity, kindness, selflessness, enthusiasm and humility. Calculus, physics and chemistry came easy to me, it was my Mom's hard-core curriculum that has been a lifelong challenge. She taught me "what a man is" but I learned "how to be a man" by watching my Dad. I want to share with you a few of those lessons I learned as a box boy that I still find today to be the most important tools whether on Main Street or Wall Street.

Dad's Tool Kit
1) The Art of Conversation

One of my Dad's favorite expressions was that "to be a great conversationalist you need to learn how to shut your mouth and listen". His point was that everyone has a deep and burning desire to tell their own story. They would like to do so unhampered, uninterrupted and with the full and devoted attention of their conversational partner. Unfortunately, most of us feel that a conversation is a few sets of "ego tennis" and that each story or fact demands a volley of an even better story or fact. Even more frustrating the symmetry of simple soliloquy is most times interrupted by a comment, criticism or query. His insistence was to let others perfect their skills as an "orator" and you perfect your skills as a "listener." He used to say, "Let them talk and you say nothing and they will walk away thinking how brilliant you are." It made no sense to me then but makes so much sense now!

The highest compliment we can pay to each other is to actually "be in the moment" during a conversation. The generosity of total attention and unobstructed focus is a lost art. We very seldom experience it with anyone in day-to-day conversation. The premium today is instead placed on multi-tasking. In the midst of any social or business conversation we are simultaneously on Blackberries, iPhones, or Googling a fact so that we can be faster, quicker and more multitasked. The "art of conversation" is in the intensive care ward and the highest form of rudeness is to be on a blackberry while someone is speaking to us.

The ability to make your conversational partner feel that they are the only star in your universe at that moment is more powerful that 10,000 gigabytes of information. The competitive advantage today is not more multi-tasking or faster information, but more focus and patient listening.

My Dad was a fanatic on shaking hands. It was all about looking deep into the other person's eyes, staying focused with them and grasping a firm and solid handshake. He always believed that a handshake is the preview of your character. If you are distracted, insincere or wimpy it will be hard to change that first impression regardless what you do later.

Secondly, when you then say goodbye you assert the same handshake but remember your new introductees first name. As a kid, I thought this was ridiculous. How could I remember each customer's first name?? Why? No one would really care!!! He would answer that our oranges were a few cents more expensive but the smile and courtesy were free!! He was right! That was the distinguishing difference and still is. The simple act of being in the moment and remembering a new introductees name is unique and irreplaceable. The simple act of letting someone know that you were actually paying attention to "only" them.

2) Agenda-less Elegance

Dad knew little details about all his customers: Their kids, their kids' schools, their sicknesses, their birthdays. If someone was in trouble he gave them credit until they could pay. If a supplier was in trouble he would advance money for them until they re-tooled. He was kind and considerate to everyone from the deliverymen to the waitress at the deli. He gave them all the greatest gift that he could give them: His uninterrupted time and attention. As a result, people became devoted to him. He would say you build a business in strenuous inches and you can loose it in miles. It is casting long lines with no expectation of immediate reward.

Relationships really do matter and building a lifeline of "long line" relationships is one of the most important keys to success. He drilled into me that these relationships however, work primarily when you don't need them, when you are nurturing a relationship without even thinking of a payoff or reward in return.

This agenda-less extension of yourself to others is the mortar to building a powerhouse of long-line relationships, which will harvest themselves across the pangs of a lifetime. The keyword, however, is "agenda-less."

3) Upsets

Dad's view was simple! All upsets arise from two basic things: 1) unfulfilled expectations and 2) miscommunicated communications. Eliminate these two circumstances and you will eliminate most of the gnawing numbing feeling of upset and aggravation, which paralyzes most of the planet.

Unfulfilled expectations are best eliminated by simply choosing it to be as it is. By accepting where we are at the moment and not hoping that this moment will become something other than it is curative. We all find ourselves unable to find satisfaction in the now because we are captured by the anxiety of the future and the anguish of the past. Dad's lesson was simple: Get over it -- It is what it is, stop crying about what didn't happen and stop worrying about what it will be. One foot after the other, inhale and breathe the moment that you are in and pay attention to the atmosphere around you.

Miscommunicated communications, he said, was the easiest to remedy. "You give simple straight answers to questions with no bending." Yes or No - not maybe!!! Lay it out the way that it is with no coating and no smoothing. It is better to deal with someone's discontent upfront and early than to defer - it will only fester over time and create confusion.  Bottom line: Be straight, be concise and don't hide the ball.

He maintained flat lined expectations. Life had its ups and downs and when you were up he would say, "Know one thing- you will soon be going down". Likewise when you were down things would quickly turn up. His store was in an area of Los Angeles that was subject to nighttime break-in robberies. This was a common occurrence to have an alarm go off in the middle of the night and I would often times go with him to meet the police as they arrived in the middle of the night. I was always amazed to see his immovable confidence without regard to what the damage or loss had been. We lived paycheck to paycheck and in those days there were no insured losses. He never blinked.

Every night he and my Uncle would go to the back room, count the money trays, crack open a pint of Early Times whiskey and pour two drinks into Dixie cups. They would discuss what went well that day and what didn't, but either way they enjoyed the Dixie cup of whiskey and a slice of cheddar cheese. He never registered disappointment, panic or dismay. If it was a bad day he would simply say "I will fix it tomorrow" or "We did something wrong but we will get better."

He is all about not lingering in the past and hoping for the future. Momentum begets momentum and speed is the only remedy to gravity. If we are stuck worrying about the past and hoping about the future, the downward force of gravity will simply overweigh and crush us. As long as we are moving – somewhere, anywhere – we can beat the force of gravity and the key to this is "choosing it to be as it is." Getting rid of the "I wish and I want and I could have or I should have" is a colonic for the soul and a steroid for self-esteem and self-confidence.

4) Show Up!

Dad and I share a love for cowboy heroes. There is something magnetic about a person who has no fluff, who doesn't waiver, who stands straight and tall in the middle of controversy, who just lays it out the way that it is. A leader!!!! There are good guys and bad guys! Where have they gone? Overtime we have all been lured into the shadow of "paralysis by analysis" in every aspect of our life. As a result, we spend more time reading about the science of making a touchdown than we do running pass patterns. The simple fact is that if you spend your days and nights running pass patterns your body will automatically find the goal line. You won't need to analyze it you will simply do it. If, however, you run computer programs on how the perfect pass pattern should be run but never set on the field as prepared and ferocious competitor you remain a spectator. You need to get beat up, knocked silly, undercut at the knees, clotheslined at the neck, and drop the ball by looking at the goal line instead of the ball...and then you will be ready to score.

5) Don't look at the scoreboard!

The key to success is focusing on the game not the score. When I was in high school our football games were on Friday nights. My Dad of course worked on Friday nights so by the time I was a junior, he had never been to one of my games. Finally, he engineered some time off and came to our CIF finals game. I was so excited and so nervous. He would finally be in the stands. It was the fourth quarter and I was playing tight end. Two minutes left in the game and we were down one touch down. Mike Bergdahl our QB called a simple flair in pattern for me and my stomach dropped to my feet. This was the moment...Dad in the stands, we are on the 30-yard line, I could catch the tying pass! I ran the pattern perfectly and Mike laid the ball at my fingertips. Rather than looking and catching the ball and taking the beating but having a second down on the 10 – I looked quickly to the goal line to see where I would have to run. The rest is a nightmare I have had for 40 years. The ball hit my fingers and started to slowly roll out of my grasp. As I returned my eyes to the ball it was too late, bounce, bounce, bounce...incomplete pass. My whole life passed in front of me. My one moment of glory with my Dad in the stands and I blew it. Later, when I crawled out of the locker room my Dad was there to meet me. All he said was "concentrate on catching the ball first...then worry about where you will run." I never forgot it.

6) Pushing through Comfort Barriers

We all become quite complacent when we nestle under our security blanket of knowing where we are and what we are doing. The fear of failure weighs heavy in our minds and the drumbeat of "risk" drives most of us to the "status quo." However, satisfaction and peace of mind are found when we push through our own comfort barriers and obliterate the fear of failure. I have found most of the quantum leaps in my career are from my failures rather than my successes. At the time I certainly did not feel that way, but each failure or disappointment led me to a new place that shattered the shackles of comfort and mediocrity and pushed me to be better. What kept me going is that from a young age my Dad never criticized or ridiculed me for failure. The fact that I could drop the ball was ok; the fact that I would lay down and not get up was not ok. His philosophy was take your licks and keep on kicking.

7) Take the Consequences Like a Man

When I was nine years old we lived right next to the Ballona Creek, a flood drainage easement that flowed to Playa Del Rey beach. My Mom was freaked out about this flood basin and forbade me to go near it. The problem was, it was the most direct route to a "toes over" surf spot and I was just crazy about surfing. One day my friend Tommy Sltaky said a storm was coming and the waves would be great and he twisted my arm to go with him. Of course, knowing Mom would never let me do it, I told her I was going to baseball practice. We grabbed the boards from Tommy's house, went to the creek, turned them fin up and floated 3 miles to the sea. Little did I realize that the creek would soon be flooded due to a torrential rain. Afterward, I went back to Tommy's house, changed clothes, picked up my baseball glove and went home. When I walked in the door my Mom knew something was up. When she asked where I had been, of course I lied. She went ballistic. "Wait until your father comes home," a phrase that can still make me quake. When Dad came home for dinner with the second half of his day still ahead of him, not needing this for sure, he said "you have one shot at telling me the truth...give it to me straight and the aftermath will be much better." I knew not to mess with him and so I immediately spilled my guts. When I had finished he said "come with me to the bedroom." He loomed over me, slowly removed the belt and told me to bend over. When he was done as I stood there (I couldn't sit) blistered and humiliated and I asked, "you told me the aftermath would be better - why did you spank me?" He said," Consequences are simply consequences. The spanking was the consequence, the aftermath will be better, let's go get an ice cream cone."

Bottom line: Give the bad news first, take it like a man and move on with life. Honesty and integrity will limit the aftermath but the consequences to stupidity always remain the same.

8) Take care of your team and your family and the universe will take care of you.

My Dad's favorite saying was that until you have lied restless on a Thursday night not knowing how to make payroll on Friday morning you have learned nothing of business. He always put his own interests last and his employees and customers interest first. Keeping a smile on his employees face was the insurance policy for keeping a smile on his customers face and that was his primary focus. Stewardship, leadership, selflessness and mentorship translated into good business. Take care of others and the universe will take care of you!!!

Conclusion
My personal view is that the economic situation in the world is going to get much worse before it gets better. Eventually, inflation will return and real estate will become dear. When will this chaos conclude? I have no idea. Nor do we have any control over their determinants. However, what I am sure of is that concentrating on the basics of what we all learned from our dads – integrity, commitment, long line relationships, gratitude and basic kindness and manners – is a sanctuary from tumultuousness. Additionally, we can actually control these things! Now is a moment to concentrate on relationships not information. There is only disinformation and disinformation stimulates fear and trepidation. We will not be disappointed if we reset our expectations to adjust with reality. This is a time for us to work harder for less and return to earning a living from what we do, not what we invest in. Kindness and courtesy generates generosity of heart, which in turn becomes the magical elixir for the spirit.

Dad's formula for never being disappointed was simple "Have no expectations of others' conduct as a condition to your own and you will never be disappointed." Simply do the right thing!!

Happy Father's Day!!!

---

Chairman's Corner Thoughts
May 20, 2010
by Tom Barrack

The European reordering and the natural impact on global growth projections will cause a retrenchment and reconsideration of "risk premiums" everywhere, including the USA. All currencies will feel the "resetting" pressure and real assets will gain prominence as a capital preservation bookmark. Credit spreads, earnings projections, and Wall Street multiples will continue to be erratic as markets search for integration or fiscal alignment of the European Community. Real estate values everywhere will continue to be stimulated by "residual value" rather than current cash flow, as a proxy to "hold" without the fear of "folding". NOIs will take longer to re-emerge but capital flows and the continued unavailability of acquisition debt will keep cap rates dear.  Banks and Special Servicers will start bringing bad loans to market and "risk premiums" on debt will re-emerge and put an end to the amateur flood of liquidity into these markets. As a consequence, more community and small regional banks will likely be ceased and the Japan-esque "extend and pretend" and "pray and delay" tactics will come under real pressure.

Increased financial regulation will likely lead to more confusion and less than projected earnings on Wall Street. This comes at a moment of historically high unemployment, withdrawal of government stimulus, further retrenchment of real lending, the Tea Party mastering their Tea Service, populist disenchantment with Wall Street, and a further confusion in the USA and the Eurozone. For sure volatility is treacherous and the ebb and flow will continue to dominate – however, the moment for hard assets is surely coming.

---

Don't Panic!!!
May 06, 2010
by Tom Barrack

• This is simply a baby "unforeseen intervening event" which we have been foreseeing!!!!
• We all know the generosity of fiscal deficits and monetary policy has ultimate consequences. The Euro and Greece simply had less flexibility and fewer options than the USA but the consequences to each are unavoidable.
• Spain and Portugal will be next.
• Debt truly is the new equity.
• The exuberance for IPOs and mergers and acquisitions was founded on emotions not facts.
• The fear in the market will also carry to debt.
• The "bad assets" in banks will also have their day of reckoning.
• Liquidity will still reign as king...maybe in a different kingdom.
• When "risk premiums" vanish, so should you -- VOLATILE TIMES WILL CONTINUE.
• We learned in 1997 and 2007 that the USA is not decoupled from the rest of the world. We are all in discordant cadence!
• A programmatic mistake or emotional side step - fear is deep-rooted in the market.

Protect yourself on the downside...The upside is yet to come...

---

Random Thoughts from a Secret Spot
April 18, 2010
by Tom Barrack
Click here for printable version

The sun was sitting high and hot over the Baja peninsula, as the cracked odometer on our beat up Jeep left us musing as to how many miles we had been dusting our way through the roadless, desolate Mexican desert. There were no souvenirs of man's presence as far as the eye could see. The air was still and heavy and the silence was only interrupted by the chanting of locust nestled within their sagebrush fortresses. My sons and I had been driving through the Badlands for four hours and could only now see the enticing blue of the Pacific Ocean far in the horizon.

I had promised them a three-day surfing trip to "Secret Spot" (SS) Baja and we were finally about to reap the quarry of our chase, the ultimate surf spot, which could only be accessed by those who were willing to take the "road not traveled." There were no paved roads, no signs, no tire tracks, no maps, no gas stations, no villages, no people, and definitely no GPS. The only way to get to SS was by knowing how to get there. The only way to know how to get there was to have been there before.

This was the ultimate adventure. The lure of perfect endless waves at double overhead height in the welcoming waters of the Mexican Pacific was only surpassed by the certainty that we would be the only people there. There would be no surf-crazed crowds, no being cut off, no being kicked out, no being sweared at, no one to interfere with the beautiful balance of nature's solitude and harmony. Truly every surfers dream...a perfect wave, in warm waters with only you and your friends to harness its beauty.

As we approached the mesa's edge, which served as the descending point to the sea, we were welcomed by dozens of turkey vultures, roosted upon gigantic Cardón cacti. With wings fully expanded and gently feathered by the soft offshore breeze, they patiently awaited the scent of their next carcass. These vultures are scavengers, not predators, and feed on bodies of already dead animals. (It felt like home already). The only other evidence of life was the occasional side-winding flurry of a rattlesnake slithering to safety from our vehicular invasion. This welcoming committee reminded us that one animal taking too much risk becomes another scavenger's meal even if it wasn't it's prey. The objective in the Badlands was not to become the next carrion.

The emotions were high and our anticipation immense as we prepared ourselves for the first view of SS Bay, which was just over the next rise. As we slowly pulled up to the cliff's edge we could see the rolling perfect waves stretching from Point Cloud. They were five feet high, perfectly formed, a gentle offshore breeze nurturing and holding their form as they broke without interference for what looked to be a mile across the bay. For those of you who have seen "The Endless Summer" it was as if we were reenacting that penultimate moment, coming over the sand dune at Cape St. Francis. The boys were yelling and screaming and although we could not yet see the sand and shore we had laid our eyes on the perfect wave. Not as large as we had hoped for but perfect form and conditions. For sure, this was the spot and the time was right. We had pulled it off!

As we serpentined down the shalely cliff, the glistening white sand started to come into view. As we crested the final hill that stood between us and nirvana our hearts fell to our sandals. Our worst nightmare had come to fruition. There, on the three-mile pristine shoreline of the most beautiful surf spot we had ever seen, were eight or nine other Jeeps and a dozen or so people. How could it be! How did they find it! What are they doing here this time of year! There were only a handful of gringos who knew about this spot! We were sure we had been more intelligent, more clever, more silent, and more strategic in picking the place and the time. The young masses of surfers all preferred the known spots with more action and easier access. Why would they be here? Our euphoria had just been transformed to overwhelming disappointment and trepidation about what now lay in front of us.

To make a very long story short what we actually found was quite amazing. The surfers that we met on the beach were one of the greatest group of guys we had ever encountered. They were all in their 50s and up, all long boarders, and all committed to keeping SS a shrine to how surfing used to be: soulful, fun, mellow, and harmonious with nature. More importantly they had all been there before. They knew the arduous journey it took to get there and the persistence and dedication required to reach this non-threatening oasis. So rather than sending us away they embraced us. They showed us the small tricks they had learned through trial and error, the secrets that make the whole experience more enjoyable and less dangerous. Rule number one - no amateurs allowed in the water.

Rule number two - you go when it is your turn. No one jockeyed for a wave, no one cut each other off, no one raced for positioning. This was truly unheard of in surfing culture. There were so many perfect waves...one after another after another and all day long. The pros at SS had realized that the best way to enjoy the place was to enjoy each other. Rule number three - it is all about fun and no one getting hurt or upset.

There would be enough waves for everyone. Greed was a one-way ticket back home past the patiently perched Cartheus aura. After two hours in the water everyone had gotten so many perfect waves that they had to take a break. No one got hurt, no one wiped out, no one put anyone else at risk and, most importantly, my young sons laughed, relaxed all while being mentored by a gang of seasoned veterans. They had no need to put everyone at risk to increase their own adrenaline rush. Most of them had nursed a multitude of injuries from years of conquering monstrous waves and harrowing conditions. They were now content tucked within the "sweet spot" and finding paradise in the perfection of their own form and surviving to surf yet another day.

As the yellow shimmering sun began to slowly fall into the blue horizon, I sat with legs dangling in the blue and orange streaked shimmer of the Pacific, watching the seamless ripples from a pod of porpoises make their way home, and my mind wondered back to the realities of our business and our investing world.

What is risk????? How much more important is preservation?
As I look around the landscape of institutional investment I am concerned. Concerned not for the quality of our "banks." These scandals arise as a result of complexity, confused expectations and misunderstood events. Most large institutions do the best job possible to keep the shop straight and orderly. Regulators in turn are amazingly adept and focused on properly enforcing the rules and regulations, which Congress has mandated in order to keep the institutions in order. I am more concerned about our notion and understanding of "risk" and all of our individual increased appetite to sacrifice preservation for "non-labor-based yield."

Of course the recent Goldman scandal is a real concern to the general market and our industry. The facts will become more amplified in the weeks to come and like all mishaps it will be handled and discarded. Chinese walls are "Chinese" because they are complicated to understand. Financial firms serve many masters and many times those masters have different, but legally acceptable objectives. Those differing objectives don't necessarily make them morally corrupt, it simply makes it confusing and disclosure and transparency become even more difficult.

We work for a living - not invest. Investing is what we do with the hard earned money from our job and the goal for the normal person in the past has been to preserve capital and make some ordinary return.

Only cows like crowds
The world is a panoply of contrary visions, recriminations and viewpoints. Good men everywhere realize that the financial world we have manufactured is also a world filled with unforeseen hazards, imperfect and sometimes-misguided information, and vagaries caused by political and regulatory misfirings. We have also created a virtual world of information controlled by a few who in turn are regulated by a few. They are all professionals administering to the amateurs. The complexity of the environment and the products that are being manufactured and disseminated has increased exponentially. It is not the fault of the banks and dealers. It is our fault. Everyone feels that they are entitled to the "wave of the day." Everyone is seeking the magic elixir which will allow them to get more for less.

How can both a buyer and seller be right? Is information perfect?
The heartbeat of capitalism is that in every aspect of trade there is always a buyer who believes that he is getting the best price in a particular transaction and a corresponding seller who coincidentally believes that he is selling at the best price available. They both believe at that moment they are correct. There are billions of those "parity bargains" taking place all over the world every day and every day one of them is right and the other wrong. However, value is also based on the trading of those same, or similar, items by other buyers and sellers after that particular parity bargain. Is the next buyer willing to pay more or the next seller willing to sell for less? A transparent and complete flow of information provides basically the same information to all buyers and sellers. This is what we believe provides smooth and efficient markets. Everyone has access to the same information. Of course this is not the reality. Both buyer and seller more often than not believe there is a "mispricing". One or the other has an edge.

Information and knowledge are the first necessary ingredients to accurate pricing and subsequently an ability to arbitrage or protect the flow of information regarding supply, demand and pricing. Incomplete or confused information creates an arbitrage or profit making event by finding a "mispricing." The more efficient the market, we think, the fewer mispricing opportunities.

The problem is that along the delivery chain of an "investable opportunity" in the public markets there are a multitude of constituencies who have a vested interested in making sure that pricing is not too efficient. For example, many CEO's and CFO's spend as much time on governance and compliance as they do on strategic planning or marketing. This occupies more and more time of senior management and requires more and more predictability and smoothing. However, the proprietariness of a business is usually the distinguishing characteristic to its value in the market place so the detail of much of the business's operating information for valid reasons must be opaque from its competitors. Competition requires "an edge" not "a level playing field". At times it is hard to balance this with full and transparent disclosure to investor constituencies.

Furthermore, in order to access this investable opportunity brokers and dealers make markets in the stock, debt or bonds and buy and sell those pieces all day long. Their primary job is to make a profit for their firm by earning a commission off a sale. Investors have lots of long and short choices and salesman do what they do best - sell. Their responsibility is not to make sure everyone makes money, their responsibility is to make sure they follow the law and feed the "customer animal" the product that it wants to eat. However, the reality is that if their clients do not make money they will soon be out of business.

The banks and broker dealers also have clients who have particular needs for particular purposes. Shorts, options, puts, calls, CDOs, caps, CDS's, collars, IPO's, private placements, public debt offerings etc., etc. Groups within the Banks have expertise and specialize in crafting these products for their users. Again, these products may prosper or flounder with greater or less transparency and incentive to create and sell these products are well founded because it is there business to create new investable opportunities. The complexity of derivatives and financial products is in its first trimester. The products were created and sold. We are now in the second trimester in which the products and their engineering are being tested. The outcome is not yet known and there is no impropriety in and of itself in the creation of the instruments. The "downside" mechanics of many of these instruments had never been tested before and is only now undergoing live testing. CMBS land is a new frontier���special servicers, traunche warfare, waterfalls, REMIC legislation are all new experiments in resolutions. The third trimester will be the reengineered investment vehicles and downside tested instruments that will soon surely audition.

Rock, Paper, Scissors
The investment banks and banks become the concierge for the investable public as well as companies seeking capital through information and product. $50 trillion of value get's disseminated through them that you and I cannot access without them. Thinking that these billions of transactions can all take place with perfect information and without an occasional mishap or slant every now and then is quite honestly naive. The risk we all take in that "investable community" is that we are buying a piece of paper that represents something. We are not buying the something. We are relying on a cadre of people who are all earning money from selling us that investment product and it is almost impossible to make an independent assessment without them. As a consequence, we are buying the integrity and motives of the hundreds or thousands of people who created, crafted, drafted, executed, monitor, sell, buy, borrow or touch that piece of paper. There undoubtedly is a lot of leakage along that road which is not intentional or malicious or corrupt or illegal. Higher risk for higher reward produces more vulnerability. The more people you rely upon the more things that can go wrong.

To add to the confusion, banks also engage in "proprietary trading" for themselves. They buy and sell the same stuff that they sell to you and me and they do it for their own account. Once again there are litanies of Chinese firewalls that are intended to make sure that the firm itself does not take advantage of the information that it has from the transactions that are taking place through its vaults every minute. Compensation to the senior executives of these firms is appropriately based upon the amount of money which the firm makes from selling products to its customers as well as the amount of money the firm makes from its proprietary trading. Once again, these are simply tough lines to draw as the institutions serve a multitude of masters that at times have differing objectives.

Unlike SS bay the water is crowded and filled with a frenzied mixture of amateurs and professionals. There is barely any room to move, and when a wave is seen in the distance everyone starts maneuvering for position. The professionals tell some amateurs to paddle for it and they tell others not to, while they can't decide between themselves if it is really a good wave or not. A mass of people take off on the wave and it is a roll of the dice as to who will make it. Most tumble down the face in horrific fashion and a couple will make the ride. However, the variables of risk to catch that wave are immense.

What keeps these financial firms growing and going and outsized gains being realized within them is all of us. We are not happy with holding cash under the bed. We somehow feel that we can make more money by investing in a market we don't control and a business that we don't understand than we can from doing the job or task for which we were trained. We are trying to paddle for a wave that is way out of our league. Many of us become unhappy with having cash in a bank account or Certificate of Deposit. The yield is too low! Treasuries considered to generally be risk free, at some point do not offer enough yield. Investors of every type are seeing higher and higher returns. The only problem is that the average investor is uninformed as to the true risk or "risk premium" of the investment they are making. It is too complicated.

Real Estate on the other hand is clad in simplicity and moves very slowly.

Keep it simple and go where they are not!
The trip to Baja and the simple and consistent waves at SS reminded me of the real estate business. There is so much real estate in the world that one does not need to be in a frenzy to acquire it. Since there is no real exchange and it is definitely not homogeneous there is plenty of it for everyone. My first partner in life used to tell me, "Every time you think you are so brilliant at real estate look out the window and see what you did not build, what you do not own and what you did not finance." No one anywhere owns more than 1 percent of any market in any asset. There are really relatively few big players who know the way down the signless dirt roads to the pristine spots and it is simple and easy to see what they are doing. Real estate is a simple business and bricks and mortar can be exchanged privately without the parade of horribles that we have discussed. There is no need for a "digital odometer." It normally moves in a lumpy fashion through private treaty trades and in a lagging fashion to the world around it.

The challenge with real estate is simply one of the amount of "risk" which is inherent in the investment. Usually, that risk is measured in terms of the perceived quality of the assets and the quantity and cost of debt used to acquire or refinance an asset. Real Estate on a cash basis is very forgiving and a simple and effective "capital preservation" tool. We change its risk profile by demanding higher and higher returns from the same asset by changing the capital structure or adaptive re-usages. The use of debt and debt instruments turbo charges yields and raises the risk curve without regard to the underlying cost of capital.

What is the perfect wave?
Many investors believe that the safest wave is private treaty investing in Core real estate. It is also the easiest to find. Everyone has the map and the odometer to determine the metrics of what it is. We all know that we can find it at that "Tiffany Location." The notion is that Class A fully tenanted buildings with credit tenants bear the least risk. In essence safer investments than value-added, core plus, or opportunity funds. Actually, time has shown that it may not be true. Triple AAA Tenants only have one direction to go. Down!!! A decade ago General Motors and XEROX were the tenants of choice. As their usage needs waned and their credit ratings suffered, so did the obsolescence of the buildings they were in for the Microsofts, Apples, Yahoos and AOLs. The next decade produced different tenants with different needs for different space. Real Estate always needs to be worked and sometimes a perceived lack of stable income and some confusion is much better than fully priced stability. Whether private treaty, closed end fund, open end fund, public REIT, private debt or public debt the most important part of a real estate transaction is the "Buy." In our opinion the perfect wave is found at the secret spot with the fewest maps and the least traveled roads. Today in the real estate business the best and most significant mispricings are in the debt market. Debt is the new equity. It is complex, hard to find, harder to leverage, best risk adjusted pricing in the market, complicated when you find it and takes a lot of experience and talent to properly handle it.

Settling for more modest returns at this point in the cycle by investing in the real estate distressed debt arena reminds me of the lucid pleasure of the perfect waves at SS bay. The Badlands Banditos surfed the biggest and toughest and fastest waves in the world at various times in the last two decades. It was thrilling and at some points exceptionally fulfilling. It was also dangerous and at some points they found themselves slugging through a few tons of white water to grab a breath of air. They were confident enough to share their lessons learned with us if we were smart enough to adhere to them. The sweet spot for veterans is finding the road less traveled in which there are complicated mispricings that can only be navigated by the pros. Then with patience and good manners pick your waves and be happy with another "non death defying" ride. Survive and wait for further information. These times are confusing and volatile and it is as easy to be wrong as correct on bold moves. It is important to stay in the market, feel the patterns, stay strong and tuned, and lower your expectations until one day you see the "perfect big equity wave" clearly. It is most likely not here yet!

Lessons Learned
This brought to my meandering mind a few of the important and very basic lessons I have learned over the last three decades:

• Buy on the way down and sell on the way up - don't wait for the trough or peak of either
• Seek mispricings and inefficiencies - stay away from the crowds
• Bad loans are made in good times and good loans are made in bad times
• In a crisis buy debt and confusion not equity and clarity
• Call your Mom often
• Real estate debt is the drunk driver on the highway of the US economy in every decade
• Maintain liquidity and ability to double down when things get tough - vote on your instincts with your dollars
• Debt is the new equity
• Punctuality is the courtesy of kings
• Banks can fail -thank goodness for the FDIC
• A flexible investment theme is a necessity during a crisis - theme drift is essential not optional
• Control is essential when liquidity is light
• Don't confuse efforts with results
• Invest in markets that others do not like
• Deliver the bad news first
• Make the tough decision if it is the right long-term decision, no matter how painful it is in the short-term
• Significant skin in the game on behalf of JV partners is a double-edged sword
• Remember first names
• Find a relationship lender who keeps loans on balance sheet and beware of syndications
• Debt restructurings with varied debt holders is like swimming with the piranhas in the Amazon - logic will not help you and none of them want you to make it to shore
• In a crisis first take care of your team, your investors, your partners - then they will take care of you
• The jungle is a safer place with professionals than a paved road with amateurs
• Capital preservation is more important than increased yield
• In a crisis communicate, communicate and communicate
• The acres of diamonds are your mistakes not your victories. Comb through them thoroughly for your next opportunity
• Humility trumps arrogance
• If you are a leader and unsure where you are going...Go anywhere--just go!!!
• All excesses end badly
• Relationships are built in inches and lost in miles
• DO IT NOW!!!!!!!!
• Buy the Brand not the vintage
• No one ever remembers the lessons learned

A good day may be survival
As I watched the seamless order and effortless cadence of a few really seasoned professionals, on perfect but small handleable waves, in great conditions with no novices or death defying unforeseen acts - I became sure that investing in the debt stack of the real estate capital structure was the right execution for this moment. I also realized that it was more fun and comforting to be in the water with a few guys that really knew what they were doing than to be in huge and risky waves with amateurs. I also knew that it was equally dangerous for me to be in huge waves with professionals who were equipped differently than was I. Paddling into a wave is much different than tow in behind a jet ski. Different costs of capital so to speak!!

As my boys paddled in synchronistic harmony down the five-foot glass face of the last wave of the day, side-by-side, and swept across the feathered face of the backlit wave in perfect harmony and rhythm, laughing and giggling for the entire three minute ride, I took a sigh of relief and gratitude that we had finished the adventure without incident or injury.

As we climbed in our Jeep and started to exit SS bay, we crested the mesa and once again viewed the ominous yet poetic stretch of the venue of voracious vultures that had viewed us as potential appetizers on the way in. We all looked at each other with a furtive glance as if to silently acknowledge our victory. We may not have been towed into a 30-foot wave at Jaws, bobbing and weaving between teams of restless jet skiers and thrill seekers. Nor were we being cheered by throngs of dazzled onlookers. We were, however, content in knowing that we had exceeded our own expectations and that the vultures would go hungry tonight!

---

Short and Sweet
April 15, 2010
by Tom Barrack

High octane investing is a series of near misses –
that is salvaged by luck –
which is bred by preparation and experience –
meeting opportunities which are disguised to others as problems.

The more confusing the available information –
the higher opportunity for gain as a result of speed and instinct.

---