When it opened its doors in 2006, Marcus Investments LLC, a family investment firm owned by the Marcus family of Milwaukee, did not like what it saw.
The fledgling firm was founded to acquire and develop companies for the family. However, in 2006, the end of a frenzied period of mergers and acquisitions that spanned the globe, market conditions did not fit in with the company’s sensibilities. Banks were willing to lend larger amounts of money than Marcus Investments was willing to pay for the companies it wanted to acquire. Sellers’ expectations were too high.
Instead of buying companies outright, Marcus Investments decided to build its own brands. To date, the company operates two firms: Berengaria Development, a real estate services company; and the Zaffiro‘s restaurant chain, which Marcus acquired the rights to last year.
In his role as vice president of Marcus Investments, Chris Nolte is charged with sourcing, financing and overseeing the acquisition of companies, as well as other hard assets in alternative investment classes. Before Marcus Investments was founded in 2006, Nolte worked as director of real estate for Marcus Corp. Prior to earning a master’s degree in business administration from the Kellogg School of Business at Northwestern University, Nolte worked as a capital strategist in the financial services industry for New York-based First Manhattan Consulting Group.
In his role at Marcus Investments, the 35-year-old Nolte keeps a close eye on the banking industry, the stock market, the real estate market and many other investment areas. He recently shared his perspectives on the economy with BizTimes Milwaukee reporter Eric Decker. The following are excerpts of that conversation.
BizTimes Milwaukee: Over the past year, economic transparency has been hard to come by. Last fall and through this spring, it was easy to tell that we were in a recession, but it has been difficult to see when recovery might occur. Do you think we’ve gotten to a place where we can at least get a bearing on the economy?
Nolte: “The financial crisis that we experienced was exceptional and incredibly painful. The good news is that basically the country has found its way back to the basics. Consumers and businesses are saving again, borrowing less and focusing on needs and not wants. While the prognosis isn’t good for the economy; high unemployment, declining housing values and a relatively stagnant economy; at least business owners and consumers have a better idea of what the future holds, albeit in a world of diminished expectations. This assumes that capital flows continue as they are.”
BizTimes: If we can get our bearings, what is our course?
Nolte: “There are two important indicators – employment and housing – that measure the financial health of consumers and the business health of the economy. Unemployment will likely find its way north of 10 percent. And housing, despite recent activities, is probably going to turn down as fall and winter sets in because it’s fundamentally a seasonal business. But I think as people constantly put it, it’s almost cliché at this point, it’s getting bad more slowly. And that allows people the opportunity to plan, where before there was no planning, it was just shut off the faucet.”
BizTimes: Have we hit the bottom yet?
Nolte: “It’s going to take us a while to absorb all of the people that have been made unemployed, aside from the fact that some of the businesses that employed them are no longer important or necessary. Those people will need to be retrained, and we need to find a place to put them, and that takes time.”
BizTimes: A bottoming out or recovery phase could last how long?
Nolte: “Years. Years. And when you talk about recovery, it’s a return to ‘normal,’ and because normal hasn’t existed for a couple of years, you have to set your expectations appropriately about what normal is. I think what normal (will be) is that things won’t be as robust. And that has nothing to do with the fact that, by the way, we have a lot more debt than we had a year ago and the year before that or 10 years ago.”
BizTimes: Are you afraid that we may see false signs of recovery, and we might see a W-shaped pattern, where there is a slight period of recovery before another crash?
Nolte: “First of all, we don’t want to mistake market volatility for business activity. Unless capital flows change, i.e. to the extent that we’re spending more money than we’re making and the rest of the world is willing to finance us, I think we’ll slowly recover as we burn off the debt and we find productive opportunities for the unemployed workers and for the new people that are coming into the system. The analogy is sort of like a boa constrictor that just ate a huge animal. It’s just sitting around trying to digest, and while it’s sitting there, it’s incredibly vulnerable. And that’s kind of where we are – we’re digesting all of the debt that we took on.”
BizTimes: The federal economic stimulus package was intended to solve all of these problems. Has it had any effect yet?
Nolte: “Most of the actual dollars in TARP (Troubled Asset Relief Program) have not been spent yet. To date, the government commitments have meant more than the actual dollars deployed, in the sense that it backstopped demand projections, housing values and bank solvency. In this sense, the stimulus did everything and nothing. And really, as I see it, it’s a master stroke by the top economic officials – (Federal Reserve Chairman Ben) Bernanke, (U.S. Treasury Secretary Timothy) Geithner, former Treasury Secretary (Henry) Paulson and (National Economic Council director) Larry Summers. We can be proud of these people for pulling that off, because they accomplished a lot without spending very much. The interesting thing is you could make the same point about the bank stress tests – they did everything and nothing.”
BizTimes: What effects do you see the stimulus having in both the short and long term?
Nolte: “To the extent that the world is willing to continue financing us, I think that the stimulus is a reasonable step in the right direction. We’ve run out of monetary options. We can’t lower the interest rate any lower to stimulate the economy. I only wish that we could improve our productivity with this new money rather than simply replace old infrastructure.”
BizTimes: What effects have the so-called bailouts had on the banking industry?
Nolte: “With regards to TARP and bailing out the banks, we were in a financial tailspin. It was incredibly important to tourniquet the largest institutions in this country, but it wasn’t practical to tourniquet every one. The emergency room is simply not that big. We had to triage, and we went for the biggest players with the biggest problems and tried to hide, at least in the short term, some of the injuries sustained to some of our largest banks. I do think that the TARP money did get us something in that it stabilized the system and gave new investors to the banks some sense of stability. It gave them the feeling that the government of the United States was behind the banks. And that allowed the banks to raise billions, dozens of billions of dollars.”
BizTimes: Commercial credit has become much more difficult to obtain and nearly impossible in some sectors. Will the banking industry be loosening its credit standards later this year or sometime soon?
Nolte: “To me, it seems doubtful. The banking business is built upon the idea that you should lend conservatively. And it appears that credit discipline has returned. The banks are acting completely rationally when they withhold credit from a business that has an uncertain future because they simply don’t get paid enough to take principal risk. Equity investors do, and you might say other parts of the capital (markets) do too. But banks do not. And more generally, because the landscape of financing has improved for those banking institutions that remain, there’s going to be an excellent opportunity on a go-forward basis for banks to replenish their capital with higher interest rates, with more control through their covenants and with less credit risks. Those are really good things.”
BizTimes: Are you afraid of inflation in the near future?
Nolte: “Yes. There are ways to control inflation. Unfortunately, a lot of those tools were either expended or there isn’t a political will to protect our currency, partly because we owe so much to so many other people. One of the best things that can happen to a borrower is inflation because you’re paying back yesterday’s debts in today’s dollars. But for losing our status as the reserve currency, this might be a good idea. But not good for people that are getting paid fixed amounts over a long period of time or are storing their wealth in cash, or are holding long-term Treasuries at 3.5 percent. You’ll get no return or a negative return on your money.”
BizTimes: What would you tell people about the state of the market, mutual funds and stock indexes?
Nolte: “If your horizon is long enough, then the stock market is a pretty good place to put your money, especially in light of the alternatives, which is Treasuries at 3.5 percent. Those are fixed payment securities that will, in an inflationary environment, be severely impaired over a long period of time. As Warren Buffett put in his annual report for 2008, he said, ‘We remember the Internet bubble and we will remember the real estate bubble, but the bubble we will probably remember the most is the Treasury bubble.'”
BizTimes: Wisconsin recently surpassed Indiana to have the largest percentage of its workforce in the manufacturing sector in the country. What does this mean for the state’s future, its competitiveness and the prospects of its residents?
Nolte: “I think that’s great news. It makes sense within the context of our region’s history. And I think it says something about the products that are being manufactured here today. Those businesses that didn’t have defendable product lines are gone. As it relates to Indiana, I suspect it might have something to do with our (lower) exposure to the automotive business. The water industry is an interesting example of a base of manufacturers that didn’t want to just make pipes anymore. They wanted to make smart pipes and things that were related to some of the businesses they understood. That has much more staying power than commodity manufacturing. I think we can learn a lesson from that in our other businesses.”
BizTimes: The Obama administration has been talking about changing both the rules that regulate the financial system and the way the health care system operates in America. Both would have consequences. What are your thoughts on both proposals and how will they affect our economy?
Nolte: “High level, the way I would assess it is the same way I would assess anything that would purport to create overall growth. Does it increase our productivity? Is it going to add more people? And will we be able to sell it beyond our shores? As I think about health care, clearly if we can deliver health care more effectively and efficiently, that will bring value to our country by basically lowering our costs per individual and by having more productive people. Increased banking regulation will likely slow the prospects for near-term growth because bankers will have fewer tools at their disposal and they will be more closely watched. But that will provide stability for greater growth longer term. We won’t have to do what we just did over the last six months – go through the same financial pain and stress, hopefully (ever) again.”
BizTimes: What lessons do you think America will have learned when we emerge from this recession?
Nolte: “Doing basic things well can more than make up for the slim benefits that greater complexity brings – and here I’m talking about lending, generally. We created a lot of complex financial products that no one understood, and we lost focus on what it was that those lenders were doing. As long as you keep it simple and think in those terms, I think we’ll be better off. The other thing is that debt should be the exception, and not the rule. There are a fair number of Americans that have no debt, and I think that is a couple of things – it’s living within your means, but it’s also a culture of delayed gratification. And if we could sort of adopt at least a little of that, we’d be better off.”
