Hurricanes and Housing
One of the better performing sectors since the credit crisis unfolded in the fall of 2008 has been technology. The robustness of the sector's balance sheet allowed those companies to "shallow breathe" while other sectors needed trauma care for oxygen. It is important to look back upon a time when technology was the poster child for an economic crisis fueled by a bubble, and in need of trauma care.
Think back to the tech bubble at the turn of the century - I know we are still programmed to assume that means Teddy Roosevelt and the early 1900s. But I am talking 2000, a great year for Yankees fans and not so much fun for Mets fans. The following analogy for what happened to technology in 2000, and the next 8 years, positioned it well for the next crisis in 2008.
Let's say a hurricane rumbles through your neighborhood. Your family lives on a block or street that, except for your own house, escapes the hurricane unscathed, no damage. You need to rebuild your home. Others will watch the construction, feel badly for your plight, but will go about their business with no improvements to their homes - they survived with no damage. But did they really? Technology was the most damaged house during the hurricane of 2000.
Technology was the sector that had to rebuild its home from scratch over the next few years. Smartly, it rebuilt with "hurricane prevention" as the building code, desiring never again to have its home damaged by a hurricane. While technology rebuilt and lagged the broader market during the mid-2000s recovery, the rebuild positioned them for the next hurricane. Technology kept inventories lean, restored cash balances, worked off debt, and improved productivity throughout the mid 2000s.
As much as we desire an "American style" instant gratification recovery in housing, I am rather certain that U.S. housing needs to rebuild for many years using the technology template. Investors should take the possibility for a surprise V shaped recovery in housing off the table. The knock-off effect from that will be a missing variable for the "wealth effect" creation we are familiar with. Therefore, expectations for moderate GDP growth over the next few quarters are warranted.
This is not about whether to invest in technology going forward. Rather, looking forward, it will be important to ask yourself when making investment decisions about a particular asset class "does the structure of the home satisfy hurricane / bubble codes?" If not, understand that a "bust cycle" could occur at any moment followed by a long period of rebuild. That is exactly what U.S. housing is experiencing.
U.S. Housing Starts 2004-2010