May 29, 2002

Commercial Mortgages & Real Estate Loan News:
Needles and Haystacks

Although most of us would love to operate in a world where our goals could be achieved simply through hard work and discipline, the fact remains that some one or some thing will ultimately "move your cheese", to use the metaphor from the book Who Moved My Cheese by Dr. Spencer Johnson where "cheese" is the thing that you most want in life.

In an effort to bring further perspective to our commercial real estate loan focus, I'd like to quote some excerpts taken from the recent Investment Outlook published by Bill Gross, Managing Director of PIMCO (Pacific Investment Management Company). It will be your job to apply it to the pursuit of your own "cheese"!

"Since the fall of the Iron Curtain in the late 1980's and until 2001, the global economy (and the US in particular) experienced a period of sustained disinflationary prosperity based upon the following:

1. Globalization - Globalization has induced competition, limited pricing power, and promoted a strong dollar as the primary beneficiary of cheap emerging market labor.

2. Technology/Innovation - Led by the Internet mania, the 1990's promoted a rarely seen surge in commercial mortgages, investment and related equity market prices. Productivity may have moved slightly higher but corporate profits did not directly benefit - the consumer did via lower prices. It was, as we headlined last year, the New Age Economy's "Weakest Link" but disinflationary nonetheless.

3. Shrinking Government/Defense Expenditures - With Cold War gone and capital gains on the rise, the private sector surged while citizens and Presidents questioned the need for big government. Supply-side economics reigned supreme, inflation melted away.

4. Favorable Demographics - The ascendancy and maturation of the boomers in their quest for early/comfortable retirement, fed 401(k)s, markets, and a wealth effect unparalleled since the roaring 20's.

5. Financial Engineering - Technology, innovation, and the greed for Wall Street investment banking profits revolutionized finance, transferred control of money creation from the Fed to private/semi-private entities and in the process, lowered the cost of credit to almost every US homeowner while creating a corporate and consumer loan and debt bubble in the process.

Together, these five secular forces form/formed the foundation of our New Age Economy, now partially discredited by 2001's recession and equity market hangover, but by no means dead and buried, especially with regards to their disinflationary/deflation effects on prices and loan interest rates."

Mr. Gross goes on to explain that each and every of the above secular forces are definitely under attack and will ultimately lead to demonstrable change. If you'd like to read the full report, go to www.pimco.com to view his Investment Outlook online. Going back over each "secular force", it would be hard to argue against his sentiments. In a nutshell, not only is there a lot to understand about our current economic cycle, but no one really knows how to assess the future.

My suggestion is to take a moment and extrapolate from the secular forces what each might mean to the underlying fundamentals of your commercial mortgage investment strategy. Although I see opportunity in examining each point, I would like to briefly comment on #5: Financial Engineering. The machine is in place to crank out low cost, long term commercial capital. Take advantage of the commercial real estate loan interest rates that are available now - I'm sure some will argue that loan rates aren't likely to rise any time soon, and I'm sure there is some truth to that, but given the myriad of moving pieces out of one's control - I'd typically vote to eliminate the loan interest rate risk when possible.

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