THE UNDERWEAR FACTOR

Now that the summer rains have started in South Florida it reminds me that there are cycles to the weather, life, financial markets and it seems everything around us. Three months ago we were commenting about the cool weather and when would it be warm enough to go swimming. Now the water is warm and we wonder will the weather ever become cool again.

As hard as it is to believe the financial struggles we are going through will pass and the clock of financial markets will turn and the economic cycle will go from bad to worse and then start to get better. My explanation for this is the “Underwear Factor.” It could be called the bed-sheet factor, towel -factor or automobile tire factor. Things will need to be replaced and no matter how long we wait to replace them they will eventually wear out.

The wear-out cycle for cars used to be three years, for copiers five years, for computers four years. A good copier salesman would contact an office and ask “how old is the office copier.” If the answer was two years he would set a reminder to contact the office in three years. If the copier was more than five years old he had a good prospect for a new copier.

The result of this natural cycle is that some things are replaced because the technology has changed, other are replaced because they have worn-out and others because fashion and styles have changed. Think about the things you use every day. Eventually, they will need to be replaced. As much as we hold off on buying new things eventually we must. The “we must” starts the cycle over again and goods are produced to meet this demand.

For an example consider the automobile industry. They produced cars with a life cycle of three to five years. At the end of this period the paint failed, the body rusted out and mechanical parts need replacing. Of course, also the styles changed and we all wanted to stay in fashion. The result was a continuing demand for new cars. Then there was a change, car manufacturers started producing better cars than last six-seven or even ten years before they need to be replaced. This reduced the demand for cars by 50% but I guess the manufacturers never figured this out.

Now let’s look at the current economic cycle. Beginning in the summer of 2007 the overbuilt and over financed real estate market began to collapse. This meant that homeowners had less equity to obtain loans, employment declined, consumer spending declined and the “Economic Clock” started to wind down. Hopefully, the “Clock” will start to rewind when the “Underwear Factor” comes into play and consumers will need to buy more goods. The decline in home prices will end and with lower prices more buyers will move into the market. It will be a slow process because of the excesses of the past several years, but it will happen.

How long will it take to rewind the “Clock”? I’m reminded of the statement of my real estate professor in college, “housing is the hand maiden of the GNP.” The real estate and housing market has brought the economy down and it needs to recover before it can bring the economy up.

WE WILL LET YOU KNOW WHAT TIME IT IS ON THE ECONOMIC CLOCK

By Tom Dixon