Wednesday, November 28, 2007

The Perfect Storm

The mortgage market is hurting, real estate is down, oil is near historic highs, the stock market is volatile, troop levels in Iraq are as high as they've been since the start of the war, consumer confidence is low. The stage is set.....for an economic rebound of monumental proportions.

Given all of the factors listed above, the economy is growing at around 4%, unemployment is around 5%, mortgage rates are historically low, the stock market is still near an all time high, the surge is working and consumers say they're not confident while they continue to spend. If this is a low point in the current economic cycle, it's got to be among the highest of low points in recorded history.

Fortunately, the United States is still a relatively free market. Free markets make adjustments on the fly. The mortgage market will correct, real estate will come back, energy (oil or no oil) will be had. Troop levels will decrease and consumer confidence has become irrelevant as it is more a reaction to what people see on the news than a prediction of what they'll do.

Let's take them one at a time. Mortgage companies don't make money by not selling product. They got sloppy and they're now paying the price. CEO's who don't recognize and correct problems in their business model soon become former CEO's. The model will be fixed because there is no alternative.

Real estate prices are coming down. It's a buyers market. Prices are coming down because fewer people are qualifying for loans. Demand is still there. Houses for sale will be converted to houses for rent. Consumers will adjust to higher standards for borrowing and prepare accordingly. Builders will incorporated new materials and techniques to make homes more affordable.

New technologies in energy are becoming more and more competitive with oil. Back in the 70's there was optimism for alternative fuels, but it never panned out. Oil got cheap again and many alternatives were shelved by investors. The focus is different this time around. First, many of the technologies show the potential to compete on price with fossil fuels in the very near future if not already. Second, the emphasis this time is not on curbing energy use, but on using different energy. Lower emissions is a strong motivator as is national security. Jay Leno also recently disclosed another motivation. He outfitted his very large garage with a wind generator and expressed satisfaction with being able to use "home-made" energy. Just as home-made pie tastes better somehow, home-made energy just feels better than energy taken from the grid.

The stock market has been all over the board recently, but is still within 10% of an all time high. The worries are short-term. The long term view is for good times ahead.

The situation in Iraq has improved dramatically. The strategy of securing neighborhoods rather than chasing bad guys is working. The politicians still need to come around, but the movement is working from the ground up. Troop levels will come down over the next year which will bring down federal expenditures, increase demand for housing and generally boost consumer morale.

Consumer confidence has been waning for several months. This has not translated in any significant slow down in consumer activity. It seems people are answering surveys based on their perception of reports on the news and not based on their own reality. Bad news sells, so it will always top the headlines. Reporters always look for the "what if?" that would lead to the worst scenario. I remember asking a friend who commented once about the "runaway crime wave" in the country, "When was the last time you actually had to dodge a bullet?". The situation in his mind was not borne out in reality.

We have a unique situation right now in that several sectors and situations affecting the economy are poised for significant improvement at the same time. There is a convergence of technological and economic advancement going on around the world as information exchange continues to grow. Changes and adjustments take place faster than ever before. Betting on failure takes no imagination. Hunkering down is not a growth strategy. Be prepared for the opportunities ahead rather than bracing for the pitfalls.

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