We’re in a fair value vacuum, adding to the perplexing issues leaders face to continue to secure liquidity and solvency.
This construct–the soul of trade–is at the crux of confidence, or its inverse, in what to expect next. Inflation, disinflation, deflation? The answer for each possibility is “maybe.”
Fair value, when what had been assumed to be essential parts of our economy have either been lopped off or put on “sleep mode”, is a troubling construct to nail down right now. The best that can be hoped for is that markets will work as they should, with enough participants, and enough exchange of this for that, they they behave as they’re designed to operate.
In conversation with investment research whiz Jim Bianco, president and Macro Strategist at Bianco Research, The Big Picture blogger and Wall Street commentator Barry Ritholtz put the construct under a magnifying glass. In Bianco’s own words:
I think there is one … thing the people need to remember about markets, that there is a fair value. There is a level that you would look at to say that this is where the market should trade.
If the Fed is successful in keeping the market relatively near those levels, I think then, the Fed put is successful and that’s largely been the case over the last 10 or 12 years. That as the market has gone up and as the Fed is pushed, they were fairly close to what you would consider fair value.
But today now, the real question is what is the true value of the market? Where should a trade, if the Fed wasn’t in the market right now? And the big debate is how much of a long-term effect is this shelter-in-place pandemic going to have on the economy.
Do you believe that this is a supply issue? What mean by that is all we really need to do is have the governors just allow all the businesses to unlock their doors and open them up and we will return to something very, very close to normal. That’s all we need.
Or do you believe that there will be some longer-lasting demand issue? In other words, these businesses unlock their doors and open up, but now we need to get people to be convinced to resume 2019 again, that they’re going to voluntarily stay away, voluntarily change their habits, voluntarily take a more conservative approach.
If you believe the latter, that they are going to voluntarily take a more conservative approach, and I’m in the camp, then I think the markets might be a little bit ahead of themselves. If you believe the former, they just — just let these businesses open up and everybody will return, memories are short, then I think that these markets are probably appropriately valued.
So, to me, that’s kind of the crux to question. And how much of this is being held back by just the rules or how much of it is being held back by people’s attitudes that have now changed?
This is our limbo. What Bianco and Ritholtz pry at in their conversation is as essential as it gets to understanding, as we needed to in 2005, or 2006, or 2007, whether “the model” of supply, demand, and value is broken or mend-able with invisible- and visible-hand of policy measures that the Federal Reserve–with its fully-loaded access to the U.S. Treasury, and Congress are applying now.
What they explore is the construct of fair value’s dependence on supply and demand that behave at least somewhat as they did prior to COVID-19’s impact. And they presuppose, “what if?” neither behave at all that way.
We can look at and learn from history. The 1918 Spanish Flu pandemic, efforts to contain its spread, and the bi-phasic trajectories of the pandemic phenomenon and its multi-phasic economic consequences–on both supply and demand–are recoverable in data points and narrative. But, how much can we really know.
Our world and its systems–seven-fold larger in population than it was when more than 675,000 Americans perished in the influenza epidemic of 1918, and exponentially more complex–pose challenges both for those who look back and look out (and listen).
Fair value as it applies to homes–given a backdrop of scarce inventory, muted new-construction over an extended period, stiffer mortgage approval criteria, and age demographic lifestage shifts–is assumed to be relatively intact. Spotty areas of deep distress, but not enough to drag down national prices by much.
So the question is, will that current condition provide the floor upon which the rest of the economy can mark to market and constructively move forward? Or, alternatively, will the contagion of mass job loss, mass bankruptcies, and mass financial dislocation spread into a new home sector that now believes its profits and volume should be in the 20% ballpark of budgets established last fall.
We keep coming back to four common, defining, denominators in a harsh cathartic moment of home building history in America.
- COVID-19 is, above and beyond all else, a leadership challenge.
- Firms–big, medium-sized, and small–will either be a winner or a loser, with more losers. A sector, nor even a business model, will rise nor fall with a single tide. Those who take share will thrive. Those who can not take share will be vulnerable to perishing.
- Most important. Home buyers no longer buy simply a house. They buy an ownership lifecycle, with services, experience, and a set of living solutions that add up to well-being.
- Finally, this crisis pivot–whether or not we like it–is toward who’s next. Talk of attracting a new generation of talent, of skills, and of business model vision had gone on as long as it could. Now, it’s about more than talk. It’s do. Or die.
That’s what will fair value its next structural stability, once seismic forces calm.
