Eric Von Berg - Newmark Realty Capital - 595 Market Street, Suite 2550, San Francisco, CA 94105 - for loan quote: 415 956 9922

October 15, 2010

Great recession or a great bust?

I know a boom when I see one.
I was at ground-zero during the dot-com boom that ended in the tech-wreck of 2001 to 2003. It is my job to interpret local economic drivers for Newmark Realty Capital’s life insurance and pension fund mortgage lending clients. During the dot-com boom, we pointed out to our lenders that our local boom was unsustainable. They were cautious and Newmark’s commercial property loan servicing portfolio sailed through unscathed. I was happy the dot-com boom did not last any longer than it did. If it had, the damage in its wake to the Bay Area economy would have been worse.

In my opinion, the word “Recession” needs to be banished from the current debate. We are not going back to normal, or at least the “normal” of the last 10 years.  The seven years from 2000 to 2007 will someday be seen for what it was: a Great Debt-Driven Boom

What's a Debt-Driven Boom?
We had a number of unsustainable stimuli hyping the economy at the same time. Each of these stimuli created or encouraged excessive private and public borrowing. Between 2000 and 2009, the total annual increase to non‐financial debt averaged more than 11% of annual GDP. The result was similar to a family who lives the last 6 weeks of each year totally on credit cards and never pays off the bills; a nice life style that is not sustainable.

What will follow will not be a rebound.
It will not be a “V”, a “W” or even an extended “U” recovery. Because what we are experiencing is not the down-side of a business cycle. 
The USA and most of the developed world needs to prepare instead for a slow rebuilding. This time, hopefully, the economic rebuilding will be upon a sound foundation focused on investment and production versus on an economy built on finance and consumption as in the Great Debt-Driven Boom.
Faced with what will likely be a long recovery, my advice to investors is to stay conservative, de-lever and maintain cash reserves. Plan for a slow rebuild, not a quick rebound.

Click here to download Eric's article "the great recession is really the great bust", including his comparison of the debt-driven boom to the dot-com boom.