Against a backdrop of what some say is the worst recession since the Great Depression, Robert L. Morgan, a Conshohocken, Pa.-based, nationally known investment advisor, spoke to approximately 200 paving and excavating contractors and landscapers at a recent dinner for the Inter County Contractors Association at the Shady Maple Farmers Market and Smorgasboard in East Pearl, Pa., in Lancaster County.
Attendees didn’t want to hear Wall Street doublespeak, according to Don Harnsberger of Plasterer Equipment Company Inc., who sponsored the event. They wanted a frank assessment of how the economy got steamrolled, how it might recover, and what it might all mean for Pennsylvania.
“Generally, there is not a lot of good news,” said Morgan, a retired naval submariner and former chief investment officer of Fulton Financial Advisors, who is now president of Dearden, Maguire, Weaver and Barrett LLC.
But there is some less-bad news in Pennsylvania. “The unemployment rate in Pennsylvania is a lot lower than the national average,” he said. In addition, the housing boom boomed loudest in places like California, Arizona and Florida. Consequently, those places are hardest hit by the market collapse. “Central Pennsylvania did not really have a housing boom like on the East and West Coast, so we never really had a bust here,” Morgan added.
“That’s the silver lining, I guess. Construction markets [in Pennsylvania] should pick up a little more rapidly than what we see around the country,” said Morgan, a regular commentator on CNBC, Fox Business News and Bloomberg TV and radio once or twice a week.
The housing boom was shakily built upon an overabundance of risky loans, a lack of federal oversight, artificially low interest rates and consumer irresponsibility, Morgan said.
The nuts and bolts of the economic collapse lie quite a distance from the day-to-day, diesel-driven, ground-pounding world of construction. Morgan pointed to four major causes of the current economic collapse: deregulation, tinkering with interest rates by the federal government, changes to the Community Reinvestment Act of 1977 and consumer irresponsibility.
“I tend to be a deregulation guy,” Morgan said. But the deregulation pendulum may have swung to a point so far out that “it even made the deregulation crowd blush.” Mortgage brokerage houses sliced and diced, confused and deceived, he said.
The credit default swap market was out of control, he said. Credit-default swaps are a type of insurance against complex debt securities — government, corporate and municipal bonds, preferred stock, certificates of deposit, etc… — that default. Default occurs when debtors cannot make the required payment of the bond.
Morgan contended, along with many others, that deregulation led to lessening of collateral requirements — essentially piles of money on hand to cover losses. Through credit default swaps financial institutions reduce risk — or that’s the theory. “When homes started dropping in value and going into foreclosure, these swaps started falling in value,” Morgan said.
As the economy recovers, Morgan believes that the regulatory pendulum so far on the deregulation side will swing back with equal power to the regulation side. “That’s the bad part.”
Tinkering by the Feds
“Alan Greenspan has to share in some of the blame,” Morgan believes. After the tech-bubble burst in 2000, the feds cut interest rates. “They really made credit too cheap and too available,” he said.
Approximately 62 percent of Americans owned homes prior to all the tinkering with the interest rates. Afterward, that percentage leapt to about 67 or 68 percent, Morgan said. “That five or six percent difference just didn’t have the credit worthiness to own a home.”
The Community Reinvestment Act
The Community Reinvestment Act was designed to require banks to make a certain percentage of loans to creditworthy, low-income borrowers. Changes to that act in 1995 created a friendly atmosphere for risky loans, Morgan contended.
“All Americans share in this to some degree,” Morgan said. “There are good reasons for submitting mountains of paperwork and a 20 percent down payment to buy a home,” he said. “I don’t think we can just point to other places. I think people have to bear some of the responsibility for it all.”
“Right now the government is working on the biggest one-two punch of fiscal and monetary policy ever,” Morgan said. The federal government is cutting interest rates to close to zero, and at the same time flooding the market with money. The hope is to get banks lending and money flowing again.
Franklin Roosevelt’s answer to the Great Depression relied heavily on government intervention, while Ronald Reagan’s solution to the fiscal crisis of the early 1980s was to get government off the strained back of the economy.
“They both worked,” Morgan said, adding “this — the current stimulus package championed by the Obama administration — is much more of a Roosevelt approach.”
From an investment standpoint, Morgan urged caution with an emphasis on lower risk investments. Growth stocks — companies expected to grow at an above average rate — are preferred, he said, over value stocks — companies that trade for less than they are worth.
Slower growing domestic markets are safer than faster growing international markets that are subject to wider swings, Morgan believes.
Healthcare stocks are solid because they are “recession resistant,” Morgan said. “If you’re sick, and you have to buy medications, it doesn’t matter what the economy is doing. In the last year they were one of the better sectors.”
Finally, Treasury bills, bonds and notes are relatively safe investments, Morgan said.
It all comes full circle for the guys out there pounding and paving the ground, according to Morgan. As investment fright subsides, money should start flowing again. He tends to agree with predictions that the recession will end this year. “The economy,” Morgan said, “is very resilient.
At the conclusion of Morgan’s presentation, Plasterer Equipment awarded two door prizes: a $1,000 certificate toward a rental, which went to Dave Warihay partner of Warihay Enterprises, Manheim, Pa., and a $500 certificate toward a rental, which was won by Brian Ressler, project manager of D.H. Funk & Sons Excavating, Columbia, Pa.
A John Deere dealer, Plasterer Equipment has locations in Lebanon, Sellersville, Bethlehem and Lewisberry, Pa. For more information, call 800/225-4001. CEG