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FORGET THE SPACE RACE AND THE COLD WAR; THE NEXT RACE WILL BE FOR RAW MATERIALS
Napa, CA, October 12, 2007—If there was one message Brian Pretti had for the 300 Napa Valley business leaders gathered at the Napa County 2008 Economic Outlook meeting today, it was, “Globalization changes everything.”
Pretti, head of Investment Management for Mechanics Bank, which manages a $1.6 billion portfolio, told the crowd, “Everything has to be put in the context of a changing global economy.”
It might have been a frightening message for a local group—except for the fact that he emphasized the many opportunities that a rising tide of wealth outside the U.S. could present for Napa County.
“If you’re in the hospitality business or the wine business, your Web site should have Russian, Asian and Middle Eastern translations available,” he said. “Napa has an international reputation—and can attract wealth from other countries.”
Pretti didn’t mince words about what to expect domestically in the coming years: “accelerating inflationary pressures,” “fierce competition for scarce resources,” and “increasing volatility and magnitude” of swings in the international markets.
“It’s not the space race or the Cold War anymore,” he said. “It’s going to be about competition for natural resources and raw materials.”
Pretti repeatedly pointed out that U.S. consumers have been in denial for years about the impact that globalization is having on their lives. “Five years ago when I told a crowd of business people that oil would hit $100 a barrel, someone stood up and said, ‘Our government would never let that happen,’” he said. “Well, it’s happening today.” He also pointed to the fact that more than half of all U.S. Treasury notes are now in the hands of foreign investors, who also are turning their sights to U.S. equities. “They will influence future policies,” Pretti predicted.
Although his theme was global, Pretti offered plenty of local insight, too. For example, he predicted that despite the efforts of the Federal Reserve to prop up the housing market with lower interest rates, real estate values will continue to drop—maybe even another 10 to 15 percent. “Since 1980 every cycle has brought median housing costs to about 325 percent of median wages,” he pointed out. “In this cycle, either housing has to drop another 15 percent, or wages have to go up substantially. Which is most likely?”
Pretti also took aim at the Federal Reserve for its actions. “They are socializing risk by using interest rates to try to shore up the housing market and rescue over-extended institutions,” Pretti said. “The only people who think inflation isn’t a problem are the members of the Federal Reserve Board.”
On the other hand, however, Pretti said that the Fed is “doing what it has to do in an election year. There is zero tolerance for recession now, and residential real estate is still critical to domestic economic outcomes.” To illustrate the point, Pretti showed the close correlation between housing trends and personal consumption, payrolls and industrial production.
What advice did Pretti have for investors?
“Money chases inflating assets,” Pretti said. “That’s not housing and it’s not the dollar. It’s oil, metals, commodities and global financial markets.”
“A period of crisis means opportunity,” he concluded, “as long as we have our eyes wide open.”
Mechanics Bank, headquartered in Richmond, California, has two offices in the Napa area. The century-old family-owned community bank is one of the largest independent banks headquartered in Northern California, with more than $2.7 billion in assets.
Ms. Hatti Hamlin
Mr. David Louis