January/February 2010

Tomorrow Will Look A Lot Like Today

As we begin a new year, Stevan Buxbaum urges secured lenders to take advantage of the great opportunities that exist in tumultuous times. But, he advises, such opportunities will only pan out if approached with discipline, diligence and perhaps most importantly, the realism that was lacking in the days of irrational exuberance.

The popularity of the A&E show Hoarders is, on the face of it, a bit puzzling. This documentary program takes viewers inside the unbelievably cluttered homes of people who suffer from a mental illness called “compulsive hoarding.” In a typical episode, the hoarders are on the verge of losing their children, being evicted or getting thrown in jail because their homes are so packed with stuff they have become unlivable hazards.

Despite its depressing content, however, Hoarders is one of the highest-rated shows on cable TV. Forgive the pop psychology, but it could be because these sad stories function as a kind of mirror in which Americans glimpse something of themselves. The U.S. self-storage industry racked up more than $20 billion in sales in 2008, and there are now about 52,000 of these storage lots dotting the country.

Americans, in other words, have packed their already huge houses with more stuff than they can hold — this, despite closets that are the size of a bedroom from a 1930s bungalow. Like the compulsives on Hoarders, many Americans now face personal crises that are a direct result of their zeal to consume: Some face eviction because they leveraged themselves to the hilt to move into McMansions they could never afford; others are in bankruptcy because they maxed out their credit cards filling those closets with clothes and shoes they will never wear.

And yet, in the public discourse about the prospect of near-term economic recovery, hopeful voices explicitly or implicitly suggest everything will be “back to normal” sometime soon. These prognosticators fail to realize that the runaway housing prices, limitless credit and outlandish spending of the mid-2000s were anything but normal.

Take consumer spending. Time was when Americans saved their money, favored need-based purchases and put a premium on quality and durability. Remember your grandparents’ closets? There was just enough room for a few suits, dresses and pairs of shoes, all of which lasted for years.

By contrast, Wal-Mart’s battle cry is “Low Prices, Every Day.” The modus operandi here is to encourage an unthinking consumerism in which people fill shopping carts with unlimited amounts of plastic trinkets from China. And why not? After the 9/11 attacks, nobody urged Americans to sacrifice and save — their duty was to be “Teflon shoppers” armed with low-interest, sky’s-the-limit credit cards. When the country goes to war, the brave go shopping.

But there is a difference between mentally ill hoarders and regular folks who have fallen prey to a society that encourages conspicuous consumption — the latter are far more able to wake up to the destructiveness of their behavior, and change their ways. This is precisely what is happening today as more Americans realize that happiness is about more than having a flat-screen TV on every wall, or being able to shoot the pits out of cherries using a stainless-steel gadget from Williams Sonoma.

Indeed, even those Americans who are foolish enough to seek a return to their former ways will be unable to do so for years to come. Amid the hangover from the credit crisis, they will instead continue to struggle to pay off the ridiculous amount of debt they accumulated during the housing bubble. Others will simply walk away from their homes, thereby deepening a residential mortgage crisis that is in itself a major obstacle to recovery. To make things worse, ailing retail and office tenants are creating a glut of excess space in commercial real estate, where yet another crisis looms.

What about those ballyhooed gains in the stock market? Rather than a hopeful sign of recovery, they are largely the result of companies using the downturn to lay off thousands of workers and replace them with advanced technology. Once a futuristic fantasy of the Atomic Age, automation has truly arrived, and not just on the assembly line. You can see it in the automated trading programs that have eliminated white-collar jobs on the Chicago Mercantile Exchange, or in the rise of RFID-enabled warehouses run more by conveyer belts and computers than by armies of forklift drivers.

The simplicity and reach of digital tools like Facebook, Twitter and e-mail make it easier for marketing departments to lay people off and do more with less. And even the most highly paid professionals are using technology to trim their payrolls, like the neurologist I heard about who fired his stenographers and now saves $20,000 a year by using voice-recognition software to dictate his notes into Microsoft Word. Indeed, the coming digitization of healthcare records will slash costs as promised, but thousands of paper-pushers will lose their jobs in the bargain.

Amid talk of recovery, then, a critical question remains: Where will the decent-paying jobs of the future come from? I am not heartened much by the minor — and quite possibly temporary — improvements we have seen in the job market. After all, underemployment is the real issue here. Some are crossing their fingers that a new bubble, perhaps something akin to the technology and housing booms that floated the economy out of its previous doldrums, will come to the rescue. And yet, an argument can be made that we are in the midst of a new bubble already. With record-low interest rates in the United States, the dollar has become the currency-of-choice for investors aiming to snap up appreciating assets. These speculators are driving up the value of commodities in ways that defy common sense and should give secured lenders pause.

The price of a barrel of oil, for example, is up nearly 70% this year despite plummeting consumption and the discovery of massive new reserves. Meanwhile, speculators have driven up the price of gold to over $1,100 an ounce — this, even as the actual use of gold, either in manufacturing processes or in the moribund jewelry business, is way down. Is gold a store of value — or a measure of desperation? But at least an ounce of gold is an ounce of gold. There is now serious talk about an investment market in diamonds, even though the quality of individual gemstones is both variable and subjective. When such schemes are in the air, one might as well ask the shoeshine boy for a stock tip.

Speculation is helping to drive up the stock market and spur hopes for an imminent recovery, but the reality is that the economy actually is resting on an asset bubble that could burst at any moment. These commodities, now so overpriced, happen to be the stuff manufactured goods — the collateral upon which many secured lenders make their loans — are made of. Forced to overpay for these raw materials, manufacturers are now raising their prices and overvaluing their inventories. Meanwhile, “70% off” is the new “50% off,” lured only by truly margin-busting discounts, the “aspirational” shopper has become the “desperational” shopper. Deflation is real a possibility. When this latest bubble pops, secured lenders that made loans based on today’s outsized valuations will suffer.

Compulsive hoarders might be unable to change their ways, but the rest of us, whether consumers, commodities traders or secured lenders, ought to recognize the simple reality that business cannot defy the basic law of gravity: What goes up must come down. The old paradigm was one in which it was widely assumed that the value of just about everything — lumber, home prices, oil, retail goods, the Dow — could somehow defy this basic law, ad infinitum.

That kind of “normal” will not return until prices have reset to a lower level so that they can again begin their inevitable rise. We must also find answers to some basic questions: How can we revitalize traditional industries such as manufacturing in ways that bring back good jobs? What are the growth industries of the future, and what can we do to promote them? What does a reasonable and sustainable consumer-spending culture look like, and how can we start moving toward that goal?

As they make new loans, secured lenders should think carefully about these dynamics. Tomorrow, after all, will have little in common with the go-go days of, say, 2005. (Indeed, we will be lucky to avoid a still-possible double-dip scenario.) All of this does not have to be interpreted as terrible news. After all, there are always great opportunities in times of turmoil. Taking advantage of them, however, will take the kind of discipline, diligence and, above all, realism that was lacking back in the days of irrational exuberance.

Welcome to the new normal.

Stevan Buxbaum is executive vice president of Agoura Hills, CA-based Buxbaum Group, a North American liquidator and appraiser of retail and wholesale inventories.