Next year’s economy: Both hope, peril loom
EAGLE COUNTY, Colorado – After the last couple of years, adults and kids alike are asking, “Are we there yet?” For grown-ups, “there” is better economic times.
Encouraging signs are starting to pop up, locally and nationally. Here in the Vail Valley, businesses generally are celebrating a successful holiday season. Travel in general is starting to show signs of life, too.
But oil prices are climbing back toward $100 per barrel, the national unemployment rate is still uncomfortably close to 10 percent, and the world remains a perilous place, both economically and politically.
Andrew Tisch of the Loews Corporation will talk about the economic scene in Vail Jan. 16 as part of a Vail Symposium. While on the phone to talk about that event, Tisch also talked about what trends he and his company are tracking.
The Loews Corporation is in the hotel business around the country, and Tisch said occupancies are getting back to 2007 levels, although the average daily rate paid for those rooms is still less than it was then.
The airline industry offers another positive sign, Tisch said.
“Planes are full after the industry has right-sized,” he said.
Beaver Creek resident Richard Bard, owner of Bard Capital, will be the moderator at the Vail Symposium event. His company is in the mergers and acquisitions business, and Bard believes that an economic recovery is starting to take hold.
“It’s getting better, and it’s pretty broad,” Bard said, adding that a combination of a “tremendous amount” of government stimulus, combined with very low interest rates and low personal tax rates, are starting to have an effect.
Unrealistic interest rates?
But the amount of government intervention may be keeping interest rates artificially low, Bard said. The Federal Reserve Board is holding down rates and Fannie Mae and Freddie Mac, the two federally chartered – and now mostly federally owned – purchasers of mortgages originated by other lenders, are now buying most of the country’s mortgages.
“With that amount of stimulus, the economy has to turn,” Bard said.
But there are still potential pitfalls, and big ones, on the horizon.
Gary Miller of Vail Capital Partners is in the business of buying commercial and residential real estate. He said there’s a looming crash in the commercial real estate business that may rival the housing market crash that started in 2007 and has yet to work itself out.
While home foreclosures may have peaked nationwide, Miller said that at least $1.6 trillion in commercial real estate loans are coming due between 2013 and 2016.
“There’s inadequate capital out there to re-finance most of that by the due date,” Miller said. “People are seeking to re-finance one to three years ahead of those due dates.”
Opportunities – for some
What that’s going to create is “tremendous opportunity” for those with cash who want to buy those properties at a discount. Miller said that’s what happened with Condo Capital Partners’ purchase last year of the condo project once known as The Gates. Condo Capital Partners bought the bank note on that project, took it to foreclosure, remodeled the project and re-named it The Ascent.
The new owners then put the condos on the market at half or less of their 2008 asking prices, and announced last week that more than half of the 49 units are under contract. More of that sort of deal is likely, Miller said. That’s an opportunity for buyers, but sellers are going to lose money.
Besides real estate, energy prices are back up. Miller said his company expects that gasoline will hit $5 per gallon within the next five years.
“Five-dollar gas would be awful,” Bard said, adding that gas prices of $4 per gallon or less could probably be tolerated by consumers.
“There’s a point at which consumer habits will change,” Bard added. “But it’s not going to be helpful.”
Then there’s government debt.
David Walker is the former comptroller general of the United States. He’s held government jobs under Presidents Ronald Reagan, George H.W. Bush and Bill Clinton.
Walker, who’s also scheduled to speak at the Jan. 16 Vail Symposium event, has spoken in 47 states about what he sees as a coming debt crisis for this country and the need for fiscal responsibility at all levels of government.
“Washington lost its way when the last debt controls expired in 2002,” Walker said. “We knew we had longer-term problems, and now the longer term is here.”
Walker said the country’s short-term debt, while daunting, isn’t the real problem. That, he said, is the country’s long-term debt, which is now more than 90 percent of the country’s gross domestic product when national “trust fund” accounts are factored into the equation.
The question, then, is whether the budding recovery can withstand the forces arrayed against it. And whether the Euro zone will implode this year. Or if Iran, North Korea or Pakistan uses a nuclear weapon. Or … you get the idea.
Better times may be on the horizon, but we may have a hard time getting there.