It’s Different This Time? Really?

If you have been around for more than a day or two, you have undoubtedly heard the saying, “It’s Different This Time.”

Former Fed Chairman Greenspan, when talking about the inverted yield curve, “It’s different this time.”  (It wasn’t.)

A quick search on Google for the term, “It’s Different this Time” and “economics” yields over 25,000 entries.

There are many ways that it can be said that this current economic downturn is similar to past economic struggles.   However, John Maudlin wrote a compelling article laying out why This Time It Really Is Different. In it he talks about the major reasons why this recession/economic mess really is different than others.   We’re going to hit the highlights of what he says and then talk a bit about the significance of those issues for the mortgage and housing market.

The first reason why it’s different is leverage. I’ve heard it described that America woke up with a “debt hangover.”    For many years we lived in an economic situation where the only thing that mattered was “how much was my payment.”   We have loaded up on debt and in many instances, we’ve pulled it from our homes.    Calculated Risk has a graph that illustrates the absolutely massive amounts of debt that we’ve taken out of our homes and spent on other things.   We did it by means of refinancing our mortgages and taking out equity lines of credit.

Guess what?   It’s going to take a very long time to pay down all of that debt and unwind how highly leveraged the consumer and the businesses are.    It’s different this time because this is a problem brought on by too much debt and too much debt doesn’t go away in a year or two like most recessions.

The second reason it’s different this time is because it’s a New Normal. What’s the new normal?   It’s a realization that is coming from all areas of society that says:

• Real Estate doesn’t always go up.
• There are more things that matter than “How much are my payments.”
• There is more to life than the size of your TV.  (This commercial still irritates me)

“What really struck us in the employment report of a few weeks ago was the fact that the only segment of the population that is gaining jobs is the 55+ age category. This group gained 224,000 net new jobs in May while the rest of the population lost 661,000. In fact, over the last year, those folks 55 and up garnered 630,000 jobs whereas the other age categories collectively lost over six million positions. This is epic.”

So what’s up with that category getting more new jobs where as everyone else lost jobs?

They are going back to work or taking an additional job because they have to.   They lost too much money in the stock market and the value of their home and they can’t afford to retire otherwise.

The fifth reason it’s different this time is jobs. Look at the capacity utilization and combine that with what we talked about above in terms of a lack of consumer spending.    We aren’t going to see a revision in consumer spending that will spur massive job growth any time soon.

So, now that we’ve looked at my summary of five main reasons why “it’s different this time.”   Also known as “Five Main Reasons This Won’t Be Over in 2009,” what do we do about it?  A few thoughts in an effort to guide your thinking, planning and assisting clients over the next period of time:

• Be methodical.    Think clearly and plan and run your business methodically.    Now is not the time to be similar to Don Quixote and chasing windmills.
• Pace yourself.  Is it a tough market?  Yes it is, but as it’s been said, we’ve stepped back from the precipice of financial Armageddon and so now it’s just going to be a long slow “slog in the mud” to get through this.
• Urge your clients (and yourself) to take the bigger picture (pun intended) and to look at any and all financial decisions in light of all of the information available.
• Don’t attempt to be a professional of everything.   I can’t tell you how many times I’ve said, “I’m not an accountant, so talk to your accountant about that.”    “I’m not an attorney, so…..”
• As they say on the Charles Schwab commercials, “I’m rethinking everything.”   Don’t assume that what has always worked in the past will work in the future.   If you are working with a Realtor, builder, lender who is always talking about the way things were and doesn’t seem to be adjusting to the new realities of the market, get a different one.

It’s not a pretty picture, but it’s a picture that we can get through.   I’m working on a plan that will help my clients navigate through the difficult market that we’re in.   Stay tuned for more.

Tom Vanderwell

It’s Different This Time

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This entry was posted on Wednesday, July 8th, 2009 at 12:00 pm and is filed under Market Musings. You can follow any responses to this entry through the RSS 2.0 feed.