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Change is a Constant

I saw a tip jar on a takeout counter recently that had a small sign attached. It said “If you fear change… leave it here”. These days we are surrounded by change. Internet fueled and information overloaded change. The paradox of the Information Age is the credibility it awards to the uniformed. If you feel a bit overwhelmed by the torrents of advice thrown daily into the air like 4th of July confetti, you are not alone. We are surrounded by “experts” who often have no more than a blog of a website behind them as credentials. Are they showing the way, or just scaring us away?

No one can argue that we are in a seriously inflationary time, essentially the highest level of inflation in the last 50 years. As President Richard Nixon resigned the presidency in 1974 and inflation pushed over 11%, we suffered a housing bubble and the country fell into recession with financial markets losing 50% of their value. Those were times that then lead to interest rates over three times the levels that they are today.

A few years ago Rob Deitz the chief economist for the National Association of Home Builders gave a talk on the Cape. He said that we were on the longest economic recovery cycle (since 2008) on record for the US economy. I put up my hand and asked if this were an economic recovery or if it were instead the longest period of economic life support on record, with practically 0% interest rates for an unprecedented period of over 10 years running at that point. He was nice enough to agree with me. Let’s not confuse recovery with subsidy.

Nothing happening today is any bit of a surprise, it’s simply part of cyclical change. Morgan Stanley just put out a report that forecasts that we will continue in a secular (not bound by usual rules) bull market but that at the moment we are experiencing a cyclical bear market. Remember, the markets are digesting a lot, the trailing effects of the Pandemic, the unprecedented infusion of stimulus money put into the economy in 2020-2021 by the Feds and the resulting inflation that always follows wild spending. Although identified as 8.6% annually through May of this year, it feels much higher than that to most of us. The Fed will continue to raise interest rates, but we are still below the rates at which we have lived most of our lives. Financial markets have taken painful hits but are still in lofty levels we never thought possible twenty years ago. Most importantly we are still way underbuilt on the residential housing side and there is demand for housing.

A now retired developer friend of ours used to say he always looked forward to a good recession because that’s when he could make some money. I thought that comment odd until he explained it. He said land was hard to buy in good times, but in bad times he could find good properties for great prices. He had cash and he used it to make himself a king. Warren Buffet famously makes quotes to the effect of “When everyone else if going to town, head for the hills, and when they come back to the hills… you should head back to town.”

Yes, the economy will cool from a much overheated peak. The Feds may just get it right in controlling inflation without pushing the economy into recession. After all, they’re due for a win having gotten it wrong 8 out of the last 9 times. Funny, we can all think back to the many times they didn’t get it right, but when they do, we don’t remember it. The blessing in all this likely will be that we aren’t suffering from a housing glut and a broken credit system as we were in 2008. The 2000 Recession was one that hit high tech and internet stocks hard, but wasn’t even a glancing blow to the construction industry. We seemed to surf through that as easily as any re-set I can remember. Stay focused, be ready to step out of your comfort zone, and keep the long view. Markets are always self-righting, with time. Nothing goes up forever and if it doesn’t go down, then there is no room to rise again. This too shall pass!