Waiting for Sideways
There’s trouble in the Capitol Hill methadone clinic, or what was apparently masquerading as one for $350 billion and six or seven weeks or so. Leverage, and lots of it, has been an addiction for years and accounted for such heights of euphoria that we collectively began to take it all for granted. Now we all have to get off it, but doing that instantly puts us at our peril. Shrunken balance sheets–both granularly in the home, micro-economically in companies, and macro-economically in nations–are now where it’s at. All the norms of lifestyle, market position, and GDP contribution have now been exposed as grandiose. They must be reset. What do we pick when we can only pick two things to retain in our lives for every five?
Now, the line-up for a fix has suddenly stalled in lame-duck limbo; withdrawal symptoms don’t look or sound pretty, so get ready for agony incarnate in all its gory forms.
De-levering is deflating, and record amounts of wealth and worth and wherewithal vaporize in flashfloods of sell-offs. Lower and falling prices look mighty attractive on goods and services we might be interested in buying but when they cross the line and whack the market value of our own goods (i.e. home prices) then deflation becomes a scourge. There’s so much about deflation we like that it has to tell us something about ourselves–such as, we often like what’s not good for us.
- See The Wall Street Journal report: “Congress Postpones Stimulus Plan to ‘09” for more insight into the transition timewarp that indicates elected officials are calling a time-out in dealing with a series of crises that worsen each day.
As the course of the economic cycle gobbles up corporate earnings and jobs sector by sector, the viability of stimulating home purchase demand even with the lovely inducements of hefty tax credits and seductive mortgage rate buy downs pencils with more futility with each passing day and each large-scale layoff. A rate of 250,000 job losses a month easily trumps even a $22,000 tax credit and a 2.99% temporary rate on buying a home.
Duration and depth of this thing hang in the balance of what’s done both at the policy level, the household level, and the company level. Each has its say in whether we’re looking at a “U” shape or an “L” shape for the recession–we’ve already probably gone beyond the possibility of the preferred “V”-shaped snap back. If we take our medicine willingly, will it make things move more quickly? It’s the safest bet.
Since psychology–fear, greed, confidence, and trust–is playing a co-lead role in the debacle of asset-revaluation, leadership at every turn needs to put all its conviction behind restoring trust as an anchor stone to eventual recovery.
In the high-volume home building business, restoring trust will need to occur across several plains, each essential, and each probably indicative of transformational business restructuring during the consolidation phase that will occur over the next 18 months. Trust among home buyers that their homes will carry every bit the value they promise across the parabolic swings of the market will be the first job. Trust among capital providers that equity positions, loans, credit lines, etc. are a sound solid means of gaining a return on capital is another. Trust among associates at all levels of the enterprise that strategy will steer clear of the Kool-Aid of lot appreciation as a growth hormone. Trust among trades, materials and products suppliers that the goal of true business partnership rule each relationship.
Home building’s leaders, in addition to petitioning Congress for action that would redound directly to their business fortunes, would best send a message to their customers, stakeholders, and workforce that maps a high-road willingness to work through the painful consequence of all of our addiction to leverage.
The Wall Street Journal names names among corporate titans, including home builder CEOs, whose compensation draws conspicuous attention as shareholders lose their shirts in “Before the Bust, these CEOs Took Money off the Table.”
As companies in housing battle with the dilemma over how to shrink their balance sheets and at the same time retain talent, they might look at the work of Big Builder ‘08 keynote speaker, Dan Ariely, who writes in today’s New York Times, “What’s the Value of a Big Bonus?”
Ariely at BB'08
“It turns out that social pressure has the same effect that money has. It motivates people, especially when the tasks at hand require only effort and no skill. But it can provide stress, too, and at some point that stress overwhelms the motivating influence.
When I recently presented these results to a group of banking executives, they assured me that their own work and that of their employees would not follow this pattern. (I pointed out that with the right research budget, and their participation, we could examine this assertion. They weren’t that interested.) But I suspect that they were too quick to discount our results. For most bankers, a multimillion-dollar compensation package could easily be counterproductive. Maybe that will be some comfort to the boards at UBS and Goldman Sachs.
Once trust and confidence peek in from the recesses of the gloom, what we’ll see is less vertical change and volatility in the markets, be they for real or paper assets. We’ll see sideways trades, slow moves up or slight moves down. That will be a welcome harbinger of better times to come.
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