By DAVID MOON, Moon Capital Management
When I decided to build a barn, I
called my buddy Glenn to help. I wasn't going to pay someone else to build a
simple shed. Glenn and I, both amateur, would-be, pretend carpenters, started
digging holes and sticking 20-foot poles into concrete.
We had almost all of our poles in the ground and most of our banding
boards nailed up when a real carpenter with a couple of his real carpenter
friends came by to do some work for my wife.
They were as polite as they could be, but they just couldn't help
giggling at our construction job. With one look, the professional carpenter
could tell that our 3,000-square-foot amateur structure was out of square by 'at
least three or four inches.'
Not only could I not tell that we were out of square by a measly three
inches, I didn't care. That seemed close enough to me.
The carpenters remained polite, even if I couldn't see something that was
painfully obvious to them. They didn't need a string to determine that the
building wasn't square and they didn't need a tape measure to make a good
estimate of the size of the flaw.
They could also look ahead and see what would be the ultimate results of
that flaw: a waving roofline, crooked walls, awkward board cuts ' a difficult
and poorly constructed barn.
I shouldn't be surprised that it's possible to miss obvious signs of
future problems. It happens on Wall Street all the time. I hope we're not about
to be surprised by a crooked economic barn that should be obvious to anyone who
bothers to look at the foundation.
David Rosenberg, a Merrill Lynch economist, has calculated that in the
last three years, cash-outs from home equity loans have been responsible for 40
percent of the increase in household spending. These cash-outs are possible as a
result of continued low interest rates and years of increasing home
Increases in household spending usually come from increases in household
income, which occur in most years. But how often will consumers be able to
refinance their homes and take cash away from the closing? Rarely, unless
mortgage rates remain low and home prices continue to
If either of those conditions fails to persist, folks aren't going to
keep having that easy money to take out of their houses and spend on TV sets,
restaurant dining and a new Xbox each year.
People are buying consumer items and financing them with 30-year mortgage
debt. Without this spending, Rosenberg figures that the GDP would have been 25
percent lower in the last three years. Retail sales would be 20 percent lower.
And there would be a million more people out of work.
When refinancing boom slows, the ripple effect in the economy will extend
well beyond the mortgage market. It's just like seeing problems early in a
construction project and knowing the ultimate outcome.
Is it so difficult to see that a part of our economy is out of
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).