Protecting the Downside

May 10, 2016 | Posted in: Business, Global Business, Real Estate

Although I consider myself an optimist, I know better than to assume that failure is avoidable. The fact is that failure is simply inevitable in certain situations, and I am constantly practicing and refining my ability to deal with failure. “One must continuously see and strive for the upside while protecting the downside” – Scott N. Beck— I would like to reflect on protecting the downside through the lenses of real estate, world economics, politics and life lessons.

Real Estate

Let us explore recent trends in American urban development. The rubber band effect, as I defined and described in my 2014 blog, is beginning to typify the growth patterns of metropolitan areas across the country. Rapid suburban growth in the United States proliferated in the Post-WWII era after successful housing projects like New York’s Levittown laid the groundwork for future development. The residential/commercial zoning code set forth by the landmark Euclid v. Ambler Realty Co. Supreme Court case set the legal rules for suburban development which was adopted by virtually all major American cities by the 1980’s via individual municipal zoning ordinances.

As a result of these zoning changes, suburban growth exploded: vehicle ownership nearly doubled between 1960 and 2002 (increasing from 411 vehicles per 1,000 people to 812), homeownership rates rose 5% between 1966 and 2006, and the American suburban population nearly doubled (from 62 million to 120 million) between 1960 and 2000. According to Atlanta Federal Reserve economist Karen A. Kopecky, rapid suburban growth can be partially attributed to rising real incomes. Equally important parts of the suburban equation include construction of the interstate highway system, which solidified the automobile, rather than the train or streetcar, as the dominant method of American transportation and the redefining of the American dream as a house with a white picket fence. Almost instantly, the scene of idyllic American life shifted from the street in front of your apartment to the front lawn.

Unfortunately, this rapid outward growth led to degeneration of the core of American cities and their public schools and has gradually led to the unreasonably high commuting times many Americans now face on their way to work. Further, we have become increasingly reliant on our somewhat crumbling highway infrastructure. In response, many Americans have adjusted their plans and now aspire to live in revitalized (or “gentrified”) urban neighborhoods closer to their city center. This trend has been led by the Millennial generation and is beginning to be embraced by baby boomers, who crave the walkability of an urban mixed use environment. The new urbanist prefers to use public transportation to get to work and strives to live within walking distance of entertainment and social options. This renewed attraction to urban living characterizes development in the 21st century. This New Urbanist trend has been noted by the New York Times, and is defining successful cities such as Denver and Portland.

Rural areas continue to see declines in population densities while residents continue to move to urban cities. Housing demand will be as contingent on predictable population migrations as on fluctuations in lifestyle trends. Some may say this is the beginning of the death of suburban sprawl which is anticipated to spur rapid growth in new retail and housing options. I view this as an incredible opportunity to reinvent urban infill sites with mixed use neighborhoods. To me, this rubber band effect represents a valuable lesson for developers in adaptability, and will be the new rule in development for the next 25 years.

The World Economy

Next, I would like to consider the implications of failure at the world stage of commerce. The Eurozone has experienced tremendous upheaval because of recent developments in Greece and increasing threats of terrorism along with other instability in the Eurozone. Last November, Greece defaulted on their third loan in five years, solidifying its position as the worst credit risk of any Eurozone country. According to Eurostat, Greece’s debt represented 182% of its GDP in 2015, 90% higher than the Eurozone average. As a result, many international investors are selling their Greek bonds while Greek bond interest rates peaked at 15% in late 2015. Greece also tops the Eurozone in unemployment with an unemployment rate of 25.6%.

Foreign lenders and the Eurozone have imposed strict austerity measures so that Greece can use the $2.3 billion received in bailout funds in late 2015 to pay off existing national debt. But this will only put a band-aid on the larger problem of the shrinking Greek economy. The Greek GDP has dropped to $235.57 billion in 2014 from $354.62 in 2008, a reduction of over 33%. Although proponents of an ongoing strategy of bailouts point to the Marshall Plan’s success in West Germany following WWII, they fail to acknowledge that the Marshall Plan effectively erased the post-WWII German debt. The Marshall Plan utilized a first charge clause that restricted all other European countries from levying claims against Germany until the $1.43 billion contributed by the Marshall Plan had been repaid. In the meantime, interest rates declined, reducing the German debt as a percentage of GDP to 20%, while that of Western Europe at large ran around 200%. Germany was able to pursue a policy of “macroeconomic orthodoxy,” according London School of Economics professor Albrecht Ritschl, that it has “seen no reason to deviate from ever since.”

Perhaps instead of relying on old habits, the Eurozone should consolidate its monetary policy-making body (the European Central Bank) and the fiscal policies set by the governments of each of the nineteen Eurozone countries into one entity. This would eliminate the welfare state that has characterized Greece in recent years by forcing the country to conform to a more standardized, Eurozone-typical notion of proper government and welfare spending.

The Greek debt crisis and current situation, to me, represents a failure of the Eurozone to learn from its previous mistakes. In this case, the Eurozone’s inability to properly reconcile a failing strategy of bailouts—Italy, Portugal, and Cyprus still have yet to recover from economic crises despite substantial bailouts of their own—has compromised the economic health of its more responsible constituent states, the most notable of which is Germany.

I think it prudent for us in the United States to understand that a weak global economy and troubled Eurozone is not good for the United States. While I certainly believe we should encourage the Europeans to come together we need to look at protecting ourselves as a country and protect our own downside. Oil independence, a clear foreign policy, healthcare reform, border security, massive investment in education and transportation, and stiff tax reform are all extremely important domestically to maintain our GDP growth. As our debt continues to grow the only way out is more rapid growth domestically. This will clearly assist in protecting our downside from the choppy waters ahead with the Eurozone.

Politics and Life Lessons

In conclusion, I would like to consider a quote by Donald J. Trump: “Protect the downside and the upside will take care of itself.”—The Art of the Deal. Trump basically says that one can set him/herself up for success solely by protecting one’s bottom line, by preparing for the worst possible situation. I continue to ponder if Trump has taken his own philosophy to heart in terms of this year’s presidential election. That is, what if he does not win the general election? Irrespective of whether he wins in November, I believe he has already won for himself. Trump’s brand recognition has gone through the roof and his downside is certainly protected as the business of Donald Trump is obviously thriving.

In a sense, Trump is reiterating thoughts voiced by classical philosophers such as Seneca and Socrates, who respectively preached the virtues of stoicism and logic. Seneca emphasized self-control through visualization of the worst-case scenario and realizing that one’s worst-case outcome isn’t that bad; his approach to stoicism was frequently utilized by Greek and Roman warriors in battle to control their emotions. Socrates posited that logic dominates public opinion, even when the logical position is the minority one.

These philosophies apply to the reconciliation of failure. One’s ability to properly recover from failure is, to a great extent, dependent on his/her ability to emotionally process a unfavorable outcome and apply logic to one’s situation, even if the logical solution isn’t the prevailing one. The US housing industry was able to process the failure of the suburbs as a long-term growth strategy and responded by providing housing to fit new lifestyles, whereas the Eurozone appears to remain unable to admit that a strategy of bailouts will not prove successful in the long-run.

Scott N. Beck, a Dallas Texas Greenhill alumni, received a Masters of Accounting from the McCombs School of Business at the University of Texas at Austin where he completed his B.B.A. Mr. Beck is a member of the Board of Directors of United Texas Bank and is President of Beck Ventures.

1 Comment

  1. Jeff Stein
    May 12, 2016

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    Very thought provoking. I certainly believe these are good life lessons. I will be following more of your blogs.

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