By Melissa J. Anderson (New York City)
“Most of the conferences I attend are 90 to 95 percent men,” said panelist Beth Ann Bovino, Senior Economist at Standard & Poor’s, to the audience of over a hundred women (and a few men) at the Financial Women’s Association Economic Forum, held on November 16th in New York City. Gina Martin Adams, Equity Strategist at Wells Fargo Securities; Dr. Sherry Cooper, Executive Vice President and Global Economic Strategist at BMO Capital Markets; and Ellen Beeson Zentner, Senior U.S. Macro Economist, The Bank of Tokyo-Mitsubishi UFJ, Ltd. joined Bovino in sharing their thoughts on the shape of things to come in the recovery from the recent economic melt down.
Vanna Krantz, Chief Financial Officer for the Media Division of Thomson Reuters and moderator for the event, opened the evening with a rundown of this year’s major financial events: the financial collapse, AIG bailout, the government’s acquisition of a majority share in Citi, Bernie Madoff and other recent scandals, the stock market decline, loss of $12 trillion in capital – and her list went on. But Krantz emphasized that, rather than focus on the negative, she wanted to discuss the opportunities arising out of downturn.
Real Estate: Popped Bubble or Bouncing Back?
The panel first addressed whether the high valuations in the real estate market over the past few years represented a bubble, or whether we would see those valuations rise again once the US makes its way out of the recession.
Zentner made the point that the crisis in the housing market was actually a regional phenomenon, so it would be difficult to quantify the effect of economic recovery on future valuations. She did say that earlier this year, we passed the “trough,” due partially to the government stimulus, particularly the first time home buyer credit. While home prices are still dropping, “we’re now seeing a stabilization of prices.”
Cooper, however, pointed out that there may well be a “ticking time bomb yet, because of the many exotic mortgages issued in ’04 and ’05” which are due to reset in the coming months and years. “There could be enormous increases in a new batch of foreclosed homes.” She added that it is important to remember that “it wasn’t just banks or mortgage originators” that encouraged the real estate crisis, “but also the government,” citing incentives to overspend, such as tax deductibles.
Adams contrasted the housing bubble with the tech bubble. “The difference is liability,” the said. While the tech bubble was funded by venture capitalists, housing speculation has created accelerated liability as it was funded by credit cards or mortgages, which continue to cost borrowers even after the bubble has burst. She stressed that she felt the cause of the bubble was “a lack of savings and stretch to find the next way to make a buck.” Real estate speculation, she believes, seemed like easy money.
While commercial real estate is also going through a decline, Bovino said, “the good news is that commercial real estate is only 3% of the GDP.” At the peak of the bubble, she explained, housing was 13% of the GDP (although it is now 5%). “The size is just not as big,” so the downturn in this market won’t hurt the economy as much as the housing downturn, she believes.
The Outlook for Consumer and International Markets
After real estate, the conversation transitioned to the consumer markets. When asked which sectors or regions to bet on going forward, Adams replied, “not the consumer sector.”
She sad that, while the next two years will see slow consumption growth in the U.S., “luxury goods might do better….They see a bigger snap back” at the end of a recession as the luxury shopper comes back, but “stretch luxury consumer companies are in trouble” as their market is usually slower to return. The companies with the best outlook will be those with an international presence.
The conversation then turned towards China’s currency valuation. Cooper explained that the U.S. depends on China’s artificially valued currency for cheap consumer goods (including technology and luxury items) manufactured there. At the same, however, China needs to keep the Yuan overvalued because it needs to maintain its export rate. Otherwise there would be massive unemployment leading to political unrest.
Protectionism is another challenge U.S. companies currently face. Chinese solar panel manufacturers, for example, said Zentner, are required to use a large percentage of Chinese built components in their product. U.S. companies have no such requirement.
The U.S. Economic Outlook and the Future of the U.S. Dollar
Finally, the panel addressed the future of the U.S. dollar. Bovino explained that one reason for the real estate market bubble was the slashing of interest rates to near record lows by the Fed over the past few years. She expects the Fed to “hold near zero through 2010” adding that she is “anticipating $1.70 or $1.80” to the euro.
“But,” Zentner said, “the weaker U.S. dollar cheapens what we owe people.” Unfortunately, the weak dollar leads investors to “fly into commodities,” which causes energy prices to go up. Additionally, after the 2012 elections, Zentner believes we can expect to see personal and corporate tax increases, capital gains tax increases, and discussions of closing corporate tax loopholes, and low rate VAT taxes, she predicted. But, just as economic activity will be picking up, “the taxes burden will rise.” We can expect to see a “Nike Swoosh-shaped recovery,” Zentner joked.
Adams continued that it is unusual for the US dollar’s correlation with the stock market to be so strong. “We’re in for a wild ride if the dollar goes off course,” she said.
Cooper was optimistic about the dollar. “Gold is great, but it’s not liquid. You can’t go to the store and by groceries with gold,” she explained. “The dollar will continue to be a safe haven currency” for years to come.