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Wednesday, August 26, 2009

Coming Soon - a Recovery Near You

I often think I might have liked to be an economist or a meteorologist; you can always be wrong and still keep your job. The economists are indicating that we’ll have recovery in the end of the fourth quarter, and if they measure the national economy, I bet they’re right. Although, hearing about the national economy is good, it is like watching the national weather report on CNN (“wow, its 106 in Seattle!”). Nice to know, but doesn’t help me much if I don’t live in Seattle. What does Michigan look like?

Bob Dylan has a line in a song ‘you don’t need a weatherman to find which way the wind blow’ (yes I am aware that this line also spawned the Weatherman underground movement, Daniel and Philip Berrigan were Jesuit priests at U of D when I was there). But I wanted to know the economic activity around Michigan. The numbers are dismal, enormous unemployment, devastated real estate, shuttered businesses. To be sure there are signs things are getting better. The decision by GM to use the Orion assembly was big, Wisconsin was offering everything under the sun and moon. The nabbing of four lithium ion battery plants was huge, and Michigan had to offer everything under the sun and moon to get them from Kentucky.

But in my humble experience and studies, nothing is ever really solved by governments. Solutions come from entrepreneurs, from workers, from creativity. Lee Trevino said ‘a hungry dog hunts best.’ I think we Michigan dogs are plenty hungry. To look at the weather here, I stuck my nose out the window to see which way the wind blows. Here are some observations:

  • Unemployment increases productivity. Everywhere, in every business I talked to, they are doing as much or more (maybe with no profit) with fewer people. This ranges from the car companies (GM has way fewer employees now, in addition to no debt and two shareholders (or 300 million shareholders, depending on how you look at it) to suppliers (a friend at a big supplier said they were at the lowest head count in years) to more importantly, small businesses. More productivity is good, but it also makes it clear that increases in demand will generate demand for jobs.


  • Unemployment increases creativity. We have a client who started a car company. And it’s working. Start a car company in the worst recession since the Great Depression? It’s crazy, crazy like a fox: he’s finding all kinds of smart engineers, excess plant capacity and deals on everything. When times are tough, businesses and people get creative. Creativity fosters innovation. Innovation fosters growth.


  • The rumors of the death of the world are greatly exaggerated. For about 12 months, for sure 6 months, it looked very grim. The sub-prime, or as it might be better defined, the credit-derivative mess made it appear as if the entire financial system may collapse. Everything retreated accordingly, from oil to stocks to housing. Everything, except GDP, which retreated, but nowhere near as much as everything else. So if we do a little math, the GDP is now probably even to its normal level, but we have 6% fewer people working (unemployment was 4% at the beginning of the recession), we have commodity prices lower, and everything cheap. We have doomsday prices, but we are now in a regularly scheduled recession.


  • Stuff is now just moving. The new car companies are back in business, and I have seen a whole range of new contracts being let. Funny thing though, there are way fewer suppliers out there, so new GM and new Chrysler are not trying to squeeze every penny out of the supplier, they just want to get going. Copper, small parts, and shipping are moving. Suddenly, this first week of August, a flurry of activity is going on in the car business. And as we painfully know, a buck in the car business moves about 7 bucks around elsewhere. Suddenly, we’re looking at real estate closings. Suddenly, we’re seeing mortgage applications approved.

Brad Reynolds, our chief investment officer and I, are calling this the ‘coiled spring’. The economy is like a coiled spring: nothing took place for the last 12 months or so, no real estate, no cars, no major business. Now we’re getting back to the races with 12 months backlog. In the last 12 months, every car in the United States got a year older, and 7 million less were sold. To me, that means that there are 7 million more that will be sold, someday. The spring is coiled, and I think it is about to be sprung. Stay tuned for the recovery, I think it could be a doozy.

Cheers,
Leon