Friday, January 9, 2009

Greetings from the Consumer Electronics Show in Las Vegas. It has been a year since I was here last, and much has changed here as everywhere.

Las Vegas looks the same in many aspects. The hotels are still of a scale that defies description. They're so big that even though a particular hotel seems close, in reality, it's a good half mile away. The lights still burn brightly, and CES still creates a very long cab line at the airport.

However, the cab line didn't take an hour this year as it has in years past. It took half that long. The casinos have many, many empty tables and not just at 3 pm. There are few lines at the restaurants. When I asked a doorman at the Venetian where a restaurant was, he told me he needed a break and would walk me there. While we walked, I asked him if the Venetian was feeling the recession. He told me they had laid off 250 people! The place you really see the difference is in the Casinos' malls.

If you really want to go to Ground Zero of what's going on in our economy, check out retail. Steve Wynn figured out that people enjoy shopping and being entertained when on vacation, and he aimed to please. These ideas took hold, and every casino built enormous malls. The high-end properties have high-end malls, and each property shares many of the same stores. It's not quite like having a Starbucks on every street corner, but how many Chanel stores, Jimmy Choo stores or similar does two square miles need?

In previous years, the stores were busy. This year? I bought a tee shirt at Banana Republic and could have gone bowling in the enormous store; it was that empty. As I paid for my shirt, the cashier asked, "Did anyone help you today?" I asked, "Is there anyone here other than you?" Many stores display sale signs, and when I asked what "sale" meant, most people told me "70%". The NYT and others have reported that large chains, notably Saks, started this trend of 70-75% off before Christmas. The small, luxury boutiques are following.

Why does this matter? If consumers, who make up 2/3 of GDP, aren't spending, then every business and everyone suffers. Apple sells fewer iPods, chip manufacturers sell few chips to Apple, IT suppliers sell less gear and software to the chip manufacturers and to Apple, everyone does less advertising and on and on. I'm not biased about tech here. The same value chain can be put together for any product that consumers buy. The net-net is that I think we will be here, skating along the bottom, for awhile.

Sunday, January 4, 2009

The Price of Delaying Pain

Sorry to allow a month to elapse between postings!

Most articles tell people that this is no ordinary recession. In early December, the National Bureau of Economic Research announced something that should have startled no one: we have been in a recession since last December. The longest recession in the last 50 years was 16 months long. As a result of hearing this, the CEO of a prominently backed start-up asked me if that meant things would be turning around in early-mid 2009. My answer was, "absolutely not." Just because this recession is vying for the record of longest is by no means any guarantee that we must somehow get out of it!

On the contrary, I believe this recession has another year of life left in it.

It's odd to me that as much as I have read about the crisis that no one (whom I have read) has written about the relationship between the 2001-2 downturn and the current mess. In my opinion, these two events are somewhat linked.

In the run up to the "tech wreck," "the bubble bursting," or whatever you want to call it, the US (and much of the world) benefited from an enormous stock market bubble. Ordinary Americans became day traders, as people saw the value of their equity investments go up, up and up further still. Those equity riches enabled people to buy all kinds of things ranging from expensive cars, pied-a-terres in New York City, big, fancy houses in expensive cities such as San Francisco and Boston. Real estate values went through the roof all over the country, especially in and surrounding San Francisco, Boston, New York, Chicago and Seattle. Now there are people who disagree with this assessment; there are people who aver that only a small segment (tech) of our economy was truly affected by the tech bubble collapse. I disagree because that tech bubble fueled an incredible amount of individual investing, an enormous influx into institutional investing (hedge funds, mutual funds), investment banking fees, etc. That largess led to the run up in real estate values in many places.

Typically, when the stock market falls, the value of real estate also falls, but it lags. Real estate is much less liquid than equities, so it takes 18-24 months for residential real estate to fall. At the end of 2001, I turned to friends in the Bay Area and suggested that we were in for a housing market correction and that it should be occurring sometime in the next year. People looked at me as if I had two heads. I responded, "We were in a stock market bubble, what makes you think we weren't in a real estate bubble?"

I waited for the correction. It didn't come, and I didn't understand why. I didn't foresee that interest rates on many mortgages would essentially become zero as the real estate industry created exotic, never seen before mortgages that enabled people to pay nothing upfront for the privilege of buying a house. There were also mortgages offering incredibly low teaser rates that would disappear in a set amount of time, but that was in the future... So, people bought big, expensive houses they couldn't afford. Of course we now know how that is playing out.

Finally, the previous recession was not deep enough. I was stunned at how shallow and short it was. Real estate's buoyancy was the enabler of that short recession. People continued to buy many, many things ,ranging from cars to heaven knows what, using their home equity lines. Consumer spending is the key to what kept the economy afloat and prevented the recession from running deep. That's not the basis of a healthy economy in my opinion.

I am a big believer in taking pain early. If you don't face whatever pain is nagging at you, it hurts ten times as much later. This is why I believe the downturn in 01 is linked to what's going on now. Alan Greenspan overplayed his hand, the mortgage industry took advantage, Americans overspent, and here we are today. Is it ten times or a hundred times worse than it would have been if 01 -02 had been as bad as it should have been? We will never know.