Last Thursday, I got an email from a reader:
Love your site - check it every day. You're one of the few bankers I'd spare the guillotine.
Today felt VERY deflationary... a heavy whiff!! Also fun to see Gross heading for the hills this week.
We NEED deflation. There's a helluva lot of bad debt out there that needs to be defaulted and wiped off the books. It's mandatory, or we're screwed. Looks like incipient margin compression may just do it in spite of Tim and Ben's best effort to levitate this tarted-up pig.
I'm so glad I'm being spared the guillotine, it's such a gruesome way to go.
I agree 100% that we need deflation. As much pain as it would bring economically and socially, it's the ultimate cleansing process. Think of it as a heavy pruning of the rose bush!
I also agree that little Timmy G and Big Ben are doing everything they can to paint lip stick on a pig.
At the bottom of this email was a link that reflected the emailer was an owner of a design company in the construction industry.
The construction industry has been one of the hardest hit industries and still suffers from a variety of factors. After reviewing his website, I had to email this gentleman: "How's the Design Business." I got the following response:
Not bad, for me.... BUT.. I'm an 'old timer', well connected, and at the top of my game; So not a fair comparison to the average guy in the industry. Not being smug - just a fact. I earned it. I've got about 8 production consulting jobs running and two of my own commissions in progress... I'm at about 75% capacity.
That said, the overall situation for the AEC industry in my local area (Southern California) is lukewarm at best. Some remodel work going on (I'm working a couple myself), lots of repair activities on existing buildings (re-roofs, major to minor exterior refinishing) and that's about it. Definitely not what keeps contractors in their F350's.
Problem #1: Construction costs. They're NUTS. I'm still seeing bids for midrange caliber stuff at $150 to $175 per square foot. Almost the same as 2007... Actually, we saw NO deflation in construction costs through this whole mess (last three or four years).
Problem #2: Visibility sucks. Nobody knows how to manage their cash... if they actually have any. Tim and Ben have created so much uncertainty, you just don't know what to do. A construction project (especially a complex custom residential job) can last a year or two.... You need to have some forward certainty to embark on that sort of commitment.
Problem #3: Artificially elevated property values. This does tie into Problem #2, but it's also a cat of a different stripe. As long as banks can keep spoiled, crap mortgages on their books (or off!) at face value, there is zero, I said ZERO, real price discovery on any of the SIX YEARS of existing inventory. The idiots (Idiots: I substituted a less offensive word then the original text) at FASB should be taken out and shot for allowing this fraud to continue.
Oddly, I'm doing a lot of work in Hawaii with an associate over there. Some of the money for that is coming from Asia, for sure. I'm working on three luxury estates directly funded by Asian cash flows. It's crazy over there, it would seem. Just a few days ago, my buddy answered the phone for one of our conferences with the salutation, "Recession's over, Dave!!!"... He was being a little sarcastic, but hey... this quarter, for him and several construction crews around him... yeah, it's over.
I'm a saver. Inflation, especially the hyper variety, makes my jaw REAL tight. I'm pretty well hedged, though. My kids are grown and on their own, just me and the Mrs. here now; Mortgage 2x our currently lower-than-average income and a year's income saved... Hell, we could go a year without work and treat it like a vacation. We did go dry for about six months in 2010. That's us. For anyone with any kind of leverage over 2.5 or so, I pity them mightily.
Let's just flush this toilet and get it over with, I say. Once all the debt monkey idiots are BK'd, we can start fresh... and I can get some good deals. My wallet will remain slammed shut until nominal prices come down... a LOT. Like 80% or so. I've got cash and plans for the future, but it's my way or the highway. No fire sale, no buy.
I want to thank the reader for such an in depth response as it's in line with what I see as a banker. I'm glad to see he's weathered the storm so far and is more than surviving. His experience in the industry over decades has taught him a lot which has helped him survive by being smart and financially prudent. Kudo's!
Home Improvement and Repair Work
Absolutely, this is where the majority of the business is today in the construction industry, which is a relative minor amount of business compared to ground up construction. There's almost no speculative building of any kind compared to the good old days, and most of the business is in bathroom and kitchen remodels up to major remodels or repair work.
Problem 1# Construction Costs
Absolutely, since you can buy real estate for less than what it costs (construction costs) to build it, the construction industry will continue to be in a slow economy for months and years. Real estate is just too cheap to buy versus building something new. And shadow inventory will keep this dynamic alive for years.
Problem 2# Visibility Sucks
Absolutely, with little improvement on the Main Street economy, a glut of foreclosures and shadow inventory, and tightening lending standards, I doubt we see visibility improve anytime soon on Main Street.
Problem 3# Artificially Elevated Property Values or Lack of Mark to Market
Absolutely, it's a shame that banks don't have to mark to market the value of collateral. If they did, many banks are bankrupt. How many people are paying their mortgage on time that are underwater, but the bank doesn't have to adjust that collateral value or the value of that loan on their balance sheet just because someone is making payments for the time being?
Smart Money Management
Absolutely, this reader is so on the mark with smart money ideas. A years worth of living expenses in savings. I too have that, actually I can be quite tight if needed, so I probably have 2 years, but a years worth of living in savings is a must. Mortgage payment just 2 times below average earnings is brilliant to say the least. This couple could teach little Timmy G and Big Ben and congress on prudent fiscal mgmt. all day.
Smart Money Quote of the Year: "No fire sale, no buy."
Flush This Toilet
Absolutely, I couldn't agree more. All little Timmy G and Big Ben have done is encouraged people to do moronic things. People piling into junk bonds because Ben has kept rates so low so long that those who need income are chasing yield and taking on risk the have no idea what they are doing.
Ditto goes for Muni bonds, people have piled into muni bonds before the recent correction. Some dove in for the tax free yield and never understood the risk. If values continue to decline they will capitulate and take a bath.
While the smart money has been selling stocks hard, I'm afraid individuals will chase into the stock market during a major top sometime this year or next.
Little Timmy G and Big Ben are bad for Americans, but good for the wealthy while ever increasing the government debt load, which burdens future generations some day.
I say flush this toilet too. Lets purge the debt monkeys and all the fiscal irresponsibility and get it over with.
Hope all is well.
J.D. Rosendahl, Rosey