“Capital Insights” with Jack Kern: NMHC Pragmatists Try to Call the Bottom

“Whoever knows he is deep, strives for clarity; whoever would like to appear deep to the crowd, strives for obscurity. For the crowd considers anything deep if only it cannot see to the bottom: the crowd is so timid and afraid of going into the water.”
Friedrich Nietzsche (1844-1900)

At the NMHC Research meeting, just concluded in Chicago, the sidebar conversations were as interesting as the content. While the meeting was billed as the researcher's response to the year of the operator (in China, it's between the year of the Rat and the year of the Water Buffalo), the perceptions of the participants was interesting. As professional research people, I think the attendees almost all uniformly want to be able to figure out how the moving parts of the economy work. To that end, it was curious to see the divergent opinions. With varying backgrounds and differing perspectives there is a sense that somehow this process is orderly and definable. I suspect we're caught within the context of the quarterly syndrome, where it's going to be better at some mythical point in time, next quarter, second half of next year and so on.

I think the really prescient people I spoke with got it right.

What, exactly are we trying to forecast? As it was suggested so correctly, there isn't just one date or scenario, because in reality, different functions of the economy will run on their own cycles. For example, there will be a bottom in housing permits, there will be a bottom in home sales, there will be a bottom in new starts, and so it is true for other important indices and measures. The fact remains, none of these bottoms will occur at the same time.

Where we are in a recession and in a real estate cycle will not be trended and measured by our own lack imagination and qualification based on quarterly dates, but on a largely tiered structural change in the economy, beginning with modest changes in consumer attitude and business conditions and then followed by other largely ignored but important indicators, like shipping indices, semiconductor manufacturing and automobile sales.

There I said it, car sales. Believe it or not, automobile manufacturing is a core competency in this country and a critical technology as well. Can you imagine not having military humvees, but instead an armor plated Honda Civic with a gun turret on the front? There is a correlation between car sales, home sales and rental trends, and without them working together in a statistical ballet of amber waves of grain, you get amber graves of pain. That's where we are now.

The economy and the recession are moving in lockstep fashion, with minimalist turns to the right and left and deference to the failed policies from both sides of the aisle on the hill. The stimulus is working on some level and the global economy is seeking its own inexorable level.

But can we see the bottom?

The doctoral level cocktail chatter emanating from the far corners of the quiet side of the equation seem to think so, and we're hearing towards it now. If these birders from the deep end of the gene pool can count on their observations, we're presuming a year or so from now is when the worst will be pushed, to paraphrase F. Scot Fitzgerald, ceaselessly into the past.

Perhaps then, the timidity that Nietzsche is talking about will end, allowing the greater economy to move forward.

(Jack Kern is the Managing Director of Kern Investment Research and can be reached at JKern@KernIRC,com or 301-601-1900.)