Friends and Colleagues
This week Michael Swanson of Wells Fargo Economics talks with us about how we got into this economic situation, and how we will get out of it.
How did this recession (or so it seems) begin, and how will it end?
Swanson tells us that the current recession (whether labeled as such by the NABE or not) started differently than most.
He contends that as a result, it will end differently than most.
He proposes that businesses and investors should focus on housing and credit creation to lead us into the light.
How does a recession typically start?
Most recessions start when businesses build up unsustainable levels of inventory.
Business activity then slows down to reduce inventories, resulting in job losses which cascade to the demand side and reinforce weak sales.
This feedback loop continues until inventories fall low enough that companies need additional inventories.
Then production and employment expand, starting a positive feedback between employment and consumer demand.
What's different about this recession?
This recession started with the deflating of the residential housing bubble.
Housing represented a type of inventory-to-sales cycle similar to the manufacturing cycles that typically start and end a recession.
The cycle of this recession should therefore follow correction of the housing cycle.
How did it happen?
Home builders and buyers made a mistake when they (we) acted as if there was no limit to the value of housing.
In the long term, the value of housing can't grow out of proportion to the economy that supports it.
An asset bubble exists when current assets sell for a large premium to their cost of replacement.
Many housing markets clearly reached that point in this cycle.
So what happens next?
Swanson tells us that there should be some good news on the horizon for the economy, since housing values should be self-correcting.
He contends that the sharper they fall below their true economic value, the faster they'll recover.
Real demand for housing comes from personal income growth and household formation.
Currently, personal income growth has slowed, but household formation continues unabated.
Eventually, he projects that the fundamental drivers of growth will overcome the downward momentum of the housing market.
The question of course is when will that happen?
How long will it take?
Swanson points out that it takes time to turn the tide in either direction.
Many people pointed out that the housing market was overvalued in 2005 only to see it rise further.
Similarly, seeing that housing values have overcorrected to the downside doesn't mean that the market will turn right away.
Swanson projects that a downturn in the housing market could be a multi-year event similar to the housing market of the early 1990s.
And what about the credit markets?
Another depressing element is the negativity surrounding the consumer side of credit.
Currently, banks seem to be more skeptical of consumers than businesses, as the negative sentiment measure of Q1 2008 is the lowest since 1991.
In contrast, credit skepticism for businesses is currently less than the 2001 recession and it appears to be bottoming out.
Swanson projects that if businesses still find access to credit, then employment contraction should be limited, helping limit consumer credit losses as well.
Conclusion?
Swanson projects that this recession and slow recovery will be in place until both housing values and consumer credit have washed out the excesses and poor risk/reward premiums that resulted from the easy money environment of the past decade.
How long will this take?
That's the key question....and only time will tell.
We will do our best to keep you informed....so as always, stay tuned.....
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IN MEMORIAM
Our condolences go out to the family, friends and colleagues of John Jamison, Chief Credit Officer of Business Partners, LLC, who passed away in his sleep last week.
John was a kind and good man who had a keen eye for credit and a warm heart for people.
He will be missed.
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THOUGHT FOR THE WEEK
HELPING ONE ANOTHER....
This economy's challenges have become very real and very personal for many of our readers.
Each week we hear of more friends and colleagues who have fallen victim to the economic slowdown, as their names are added to the growing list of lay-offs in the commercial mortgage industry.
These are talented people....seasoned professionals....and human beings with hopes and dreams and families to support.
So as a community, what can we do?
We can help....we can listen....we can get together....we can make connections....
We can help!
In the days and weeks ahead, may each of us reach out to someone who is in need.
May we offer our support, our resources, our contacts and our creativity to help those in need as they look for a job or as they re-invent themselves.
Together, we can help!!
Have a good week.
David
David Rosenthal, MAI
President & CEO
Curtis-Rosenthal, Inc.
5959 W. Century Blvd., Suite 1010
Los Angeles, CA 90045
Offices in Los Angeles, San Francisco and Newport Beach
Proudly serving the California Marketplace since 1983
310-215-0482 ext. 225
drosenthal@curtisrosenthal.com
www.curtisrosenthal.com
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Friends and Colleagues
This week Eugenio Aleman of Wells Fargo Economics shares with us his thoughts about the pending? recession, and about the propriety of the Fed’s actions in the Bear Stearns matter.
Can We Finally Get On With This Recession Already?
· March was the 3rd consecutive month in which the U.S. economy eliminated jobs rather than creating them.
· Of course, construction and manufacturing contributed the most to weakness in the labor market.
· The service sector however was also affected, which is one of the reasons why Mr. Aleman says we are very close to recessionary levels.
· In total, the U.S. economy eliminated 232,000 jobs during Q1 2008, which confirms the very delicate condition of the U.S. economy.
· According to Mr. Aleman, this opens the door for negative economic growth during Q1 and Q2 2008.
It sounds like the dreaded “R” train is coming….Is there any hope of avoiding it?
· Mr. Aleman says, “Yes”….If the U.S. economy posts slightly positive growth during Q1, we would probably avoid a “recession”, since technically a recession requires 2 consecutive quarters of negative economic growth.
· But would we really? He goes on to explain that this condition was not met during the 2001 “recession”.
· It is possible that the powers-that-be may decide to call this a “recession” even if we do not meet the technical definition.
Does the definition really matter to those of us in the working world?
Would we feel any less pain if we skirt the “recession” label?
So Mr. Aleman, what do we have to look forward to?
· He projects that our weakening labor environment will add more pressure to the U.S. housing market.
· This time around, he contends that the problems faced by the market will not be limited to sub-prime mortgages but will also include the prime market.
· He believes that the fiscal package is going to have some effect during the 2nd half of the year; however, these effects may not be enough and may be diluted by a worsening economic environment.
In other words…it looks like more pain lies ahead of us…….
Looking back at the Bear Stearns matter…Did The Fed do the right thing?
First a quick primer on the workings of The Fed….
· The U.S. Federal Reserve is self-funded, which means it works as a private, quasi-governmental enterprise.
· They actually make lots of profits, and those profits are transferred to the U.S. government.
OK….but was it right for them bail out Bear with “quasi-public” funds?
· In the Bear Stearns case, the Federal Reserve decided to put measures forward to stem a potential collapse of the U.S. financial system.
· Yes, we can argue the “moral hazard” issue, but if Bear Stearns had failed causing a run on the commercial and investment banking system, would anyone have really cared about moral hazard?
Yes, but….was it the right thing to do?
· Nobody really knows whether the Fed did the correct thing; however, the risk of not doing anything was extremely high and could have caused severe damage to the U.S. and world economies.
· Mr. Aleman contends that we empower our leaders to make tough decisions in tough conditions.
· He argues that our perpetually second-guessing their actions when there is no written “instruction manual” on the correct course of action is counter-productive.
Well there we have it….
A Recession is coming….but maybe it’s not.
The Fed did the right thing in saving Bear Stearns….but maybe they didn’t.
The situation…like the economy….is as clear as mud.
As our saga continues, we need to keep informed…..so stay tuned…..
THOUGHT FOR THE WEEK
Leadership….
In this election year we hear much about the leadership void in our society.
But what exactly is leadership?
Leadership is defined as: “Going before; showing the way”.
Don’t we all do that at one time or another?
Who among us never has the opportunity of going before, or showing the way?
We are all leaders…..and our actions serve as examples to those around us.
Do our actions show others the way by cutting corners…complaining…blaming others?
Or do we choose to lead down the path of integrity…fairness…kindness?
We are all leaders…..but where and how do we lead?
In the week ahead, may each of us choose carefully how we will lead those around us.
Have a good week.
David
David Rosenthal, MAI
President & CEO
Curtis-Rosenthal, Inc.
5959 W. Century Blvd., Suite 1010
Los Angeles, CA 90045
Offices in Los Angeles, San Francisco and Newport Beach
Proudly serving the California Marketplace since 1983
310-215-0482 ext. 225
drosenthal@curtisrosenthal.com
www.curtisrosenthal.com
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