You should have been there for “How High is the Water Mama”
By Larry Blumsack, President, Zoka Institute
Larry guest blogs a Should Have Been There column for ACG.
How High Is the Water? When Will Today’s Flood Recede & How Will We Know It? That was the challenge at the Dealmakers Breakfast on October 15th. According to Joe Morgan, Chief Investment Officer, Silicon Valley Bank Asset Management the key to recovery is held in the hands of the U.S. Consumer.
Step by step Morgan took the audience from the current deep, rough, dry, economic river bed to one ever too slowly filling with financial water. In his vision, it will take 20-30 months before any significant water is flowing in the deep abyss we are now in. He pointed out that with $1.4 Trillion of private investor money sitting on the sidelines waiting, fixing the mortgage market is the key step to restoring consumer and investor confidence. And that confidence is contingent on the consumer knowing the “true” value of their home.
Even though the stock market is bouncing back up Morgan noted that overall the market is down 41% since its high of October 17, 2007. He stressed with charts that the stock market and Libor are false indicators of economic health. The statistics are gloomy. Increasing bank failures and huge government intervention are not indicators of recovery. Job losses are a magnitude higher than the recession of 2001 resulting in a huge impact on consumer spending. He also stated that in his eyes the Federal Reserve has lost credibility as the means for inflation control.
On the upside he contends that the U.S. is the strength of the global economy. The consumer is our strength. Even though we have lost manufacturing to Asia and he predicts that eventually manufacturing will shift to Latin America. Once business investment and consumer spending increase we will start on an up-slope of recovery.
To that end, Morgan offered his long-term 5 steps to recovery. He defines recovery as the time we achieve – in 20-30 months – a consistent GDP of 2-3%.
• Determine what to do with Fannie/Freddie – and do it.
• Other mortgage-lenders will find their place.
• Housing values stabilize as the mortgage market “functions”
• Consumer confidence returns.
• Which leads to corporate profits and investor confidence
His advice to corporate investors is to “stay in the kiddie pool by maintaining a high credit profile, keep strong liquidity positions and continue to seek relative value opportunities. “
So how do we tell we are on a path to recovery? Morgan’s 4 step process begins with restored confidence in Federal Reserve controlling inflation. We see a resumption in mortgage activity. Mortgage spreads decline. And private investor confidence rebounds with the release of the $1.4 trillion cash waiting on the sidelines.
