Saturday, October 25, 2008

As the worm turns...

Existing home sales were up across the country by 5% in September. Inventories were down to a 9.9 month supply, and that's based on a very lackluster pace. This took place before the bail out package was executed.

I predicted a few weeks back that the recovery in the overall economy will come from the housing market. As banks unload homes from people who couldn't afford them and sell them to people who can, we may be seeing the beginnings of such a recovery.

The model is changing from short term to long term. People with cash on hand and good credit are going to have access to assets at bargain basement prices. Flipping is out. Investment is in. Even if you rent out a home for a bit lower than your current mortgage payment, you're building equity in an asset that's very likely to increase in value while writing off capital improvements and maintenance expenses.

In reviewing the history of the stock market, I find it fascinating how money flow has an uncanny ability to find the most productive path. Like running water or electricity, it takes the path of least resistance. If the stock market proves unproductive, private venture capital will flourish. Risk takers will still take risks. They'll just move to other playing fields.

We could also see a resurgence of the small business community. New tax policy and regulation may reduce the optimum economy of scale for many industries and businesses. Smaller may well be better. Layoffs from mega-corp will also feed this trend as business professionals choose to strike out on their own rather than compete in an oversupplied labor market.

The tricky part is that government will be cash hungry. They will be quick to pounce on any perceived new source of revenue. Entrepreneurs must not only think smaller, but faster. They must be nimble and quick to adjust in an environment where the rules can change at any moment. This favors less reliance on employees and more reliance on outsourcing and strategic alliances with suppliers, distributors and network associates. Iron clad, long term commitments are not a good idea. Voluntary association with people you trust for as long as it serves both parties is where you want to be.

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