The 2009-2012 Recovery Is Over
It's time to abandon any tops-down framework based on trends in the economy and asset prices since 2009.
- Normalization in economic output
- Normalization in the housing market
- Normalization in risk premia
- A private market bull market in new Internet companies driven by social networking, smartphones, and tablets.
Normalization in Output
Real GDP (blue line) is back at all-time highs. Industrial production (red line) is just about back at its pre-recession highs. So is capacity utilization (green line). Unemployment remains high, and we're below the long-term growth trend, but on output, we've recovered what was lost.
Normalization in Housing
The NAHB housing market index has been perhaps the best leading indicator for the housing market over the past year. It's been surging and stands at a new post-recovery high, and gains here lead to gains in housing starts (see chart). The SPDR S&P Homebuilders ETF (XHB) is at a four-year high. Building permits are at a four-year high. House prices have bottomed. At this point the question isn't whether the housing market will get better or worse, or if prices are done falling, but how fast residential construction, home prices, and home sales will rise from here.
Normalization in Risk Premia
We've come a long way since 2008, when the VIX (^VIX) hit 80 and single-B rated high yield bonds yielded over 20%. Today the VIX is around 14 and single-B rated bonds yield less than 7%.
The S&P 500 (^GSPC) is trading around 14 times this year's earnings. Relative to Treasuries and corporate bonds stocks are still cheap, but on an absolute basis in a slow-growth world with plenty of external concerns, they're neither overly cheap nor expensive.
Tempered Expectations for New Internet Stocks
In late 2008 Facebook (FB) was valued at around $2 billion. When it went public a couple months ago, it had soared to $100 billion. Now that many of the new Internet companies formed between 2004 and 2008 have gone public, we can close the book on at least that phase of the Internet growth story. For a variety of reasons – from company missteps, to being in the middle of the mobile migration, to insiders and venture capital firms selling sooner than they did in prior cycles – many of these companies have seen their stock prices struggle. Going forward, if they are to work, they'll likely need to succeed on their own merits. But, as Sarah Lacy writes, at least one of the builders of those 2004-2008 era companies thinks that cycle is over.
In tech, if you're looking for inspiration from Facebook, Twitter, LinkedIn (LNKD), Zynga (ZNGA), Groupon (GRPN), Pinterest, Instagram, Airbnb, or anything of that ilk, you're probably looking in the wrong places. That gold, in terms of innovative new company ideas, has been mined. The revenue phase of these businesses may still be in childhood, but many of these companies at least know how they're going to make money, it's just a question of execution. But if you're looking for the next Facebook, it probably won't look anything like Facebook.
In the real economy, though, I argue that the normalization/repair has ended, but a new cycle of fixed investment-led growth is just beginning. That's how deep the 2008 hole was. It's hard to see the investing nirvana that we've had since 2009 – rising corporate profits and equity prices alongside low interest rates, wage growth, and inflation without needing to invest in new capacity – continuing any longer.
Either we'll get an external shock – something out of Europe or China, or botched fiscal and monetary policy here in the US – with the economy turning down again, or we'll have 4% nominal growth in GDP and profits without any significant change in unemployment and asset prices, or we'll finally get that fixed investment cycle, shaking up many of the relationships investors have come to know and trust since 2009 as capital invests in labor and new capacity instead of bonds, buybacks, and balance sheet repair.
But it's time for all of us to abandon any tops-down framework that we've developed based on trends in the economy and asset prices since 2009. That era is over, and it's time to hunt for the next one.
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