Back home in the U.S., the economy feels like it is coming out of a recession. Consumer confidence is low, but retail spending is reasonably strong. Corporate America has been in recovery mode since June 2009, but the tepid recovery has restrained hiring. Consumers are hampered by both high unemployment and punitive savings rates (what economists now call “financial repression,” which describes the Fed’s practice of forcing rates down in order to subsidize the recapitalization of the banking sector).
The great news is that the problems in the U.S. seem to be evolving from one of excess supply to one of not enough demand. We are moving forward from The Great Recession to a run of the mill recession. With a little more activity, we could move beyond recession to recovery. But, hey – this is America! If there’s one thing we still know how to do, it’s shop!
Since 2007, the economy has been dealing with an excess of housing inventory. At first, we just built fewer units. Soon, however, unqualified borrowers who should never have received loans began receiving foreclosure notices, pumping up the inventory of foreclosed but not yet sold homes. By 2009, the excess inventory had shut down the U.S. building sector. A million construction workers lost their jobs and a huge segment of the U.S. economy closed down. Bank regulators forced banks to call loans on struggling builders, wiping out all but the most deep pocketed firms.
The recession we face in 2012, however, looks much less daunting. Although the inventory-to-sales ratios are still high, the “problem” has shifted from the numerator to the denominator. Home inventories are still a bit high, but nothing like the levels seen in 2009. If economic activity was anything near normal, and household formation wasn’t in collapse, then the industry might be fairly close to stabilizing.
At a Grand Junction Chamber luncheon this week, Richard Wobbekind, the Senior Associate Dean for Academic Programs at the University of Colorado, agreed that household formation as been far below norm, and that an employment recovery would dramatically improve the construction industry’s supply/demand balance. He also agreed with the notion that the recession we’ve experienced for the past three years, as a result of supply excesses, will look a lot different than the slow growth period ahead of us, which results from a lack of economic vigor.
Stimulus efforts in 2009 failed to revive the U.S. economic engine. We are now much closer to economic equilibrium. Real estate inventories are down. Over-leveraged businesses were forced into foreclosure by the banks, while low savings rates have encouraged consumers to de-leverage as well. Only the government sector lags in the de-leveraging department. If regulatory or monetary stimulus were used, today, I think that they would have a much improved chance of succeeding. In 2008, we applied the wrong type of stimulus, at a time when the economy was just too moribund to keep going once the stimulus ended.
In spite of continued strength in the leading economic indicators we watch, the market can’t seem to muster a sustained rally. Furthermore, market volatility is extremely high, with the market seemingly locked in crisis mode in spite of strong corporate profits and an over-priced bond market. What’s keeping the stock market cheap is the crisis in Europe.
Arguably, it’s a great time to be investing in stocks, for many reasons. Unfortunately, because of the crisis in Europe, an even better opportunity might be just around the corner. Having reduced our exposure to equities during the third quarter, we are busy kicking the tires on opportunities as the crisis unfolds. We intend to take advantage of the opportunity to buy solid assets selling at very attractive prices if events unfold as we anticipate.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .
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