I have been coming to the Outer Banks (OBX) for over 20 years. Its a magical beach that offers the best of all worlds — large, smooth sand beaches, very unpopulated shores, good surf — body or board – and lots of nearby diversions — great golf, good food.
On this trip, I am most struck by the similarities between Wall Street and OBX weather patterns. The recent mortgage crisis is a good basis for my analysis, which can be summarized —
When the wind shifts to an easterly breeze (out of the west) , the changes are dramatic and change behavior equally dramatically.
- The shift is sudden
At OBX, the wind shifts can happen in mid-day suddenly and silently. No major storm or forewarning has to occur for the change to occur. Its on you before you know it.The changes on Wall Street have been equally sudden. Sure, some prognosticators are saying “I told you so”, but the lack of transparency of companies like American Home Mortgage make determining the “when” much harder. And like the shifts in the winds at OBX, nearly impossible to predict precisely. - The air temperature changes by over 10 degrees
When the wind shifts, the air coming over land brings a far hotter temperature than when it comes off the ocean. A full 10 degree shift is felt. The beach is much hotter, people stay out there less time.
Wall Street seems to suffer similarly — the mortgage market has shut down. No one wants to loan. Its too hot to sit outside. - The water temperature changes — much colder
When the wind shifts to an easterly breeze (west to east), the ocean water temperature drops over 10 degrees (from a very comfortable 70’s to chilly 60’s). The breeze shift moves from everyone being in the water to only a few brave souls willing to dip their toes in, even though the desire to swim is much stronger (#1 above)People who need mortgages are feeling this shift profoundly. Credit markets are drying up. Prospective purchasers have less options, and those fewer options are far more restrictive. Fewer people are willing to brave the icy temperature even though the need is there. - The biting flies come out when the wind shifts
When the breeze shifts to an easterly breeze, the flies come out in force. Not only is it hotter and the water colder, but the flies are everywhere, nipping at you and bothering what little quiet you seek. Beach-goers see the calm seas and the strong sun and assume that their beach experience will be lovely.Mortgage delinquencies are rising and are projected to get worse. The feeding frenzy among collection agencies is growing. For those poor souls who thought the mortgages looked enticing, they are now facing the reality of hot sand, cold water and no biting flies. - No interest in other activities — stagnation ensuesWith the weather getting hotter, playing golf, putt-putt or other outdoor activities become unbearable. All anyone wants to do is sit inside air conditioning and avoid the heat and the bugs.If credit markets contract beyond the mortgage space, we will see equity markets suffer — prime takes a hit because of sub-prime. No surprise that the Times article “Putting the Clamps on Credit” highlights Oneida’s difficulties in raising funds in the debt markets — a company as far afield from the mortgage business as one can get.
What’s next? Well if you are on the beach, you pray for a wind-shift. Otherwise, you make the best of your circumstances. You enjoy each activity, but less of each — you sit on the beach for fewer hours, you hit the water more often but for shorter periods, you drink much more water and you use bug spray.
I am not sure the beach prescription holds for future Wall Street activity, but until the wind shifts, we had better get used to it. Financial advisors can speak on the right approach, but for all of our intelligence, we are still strikingly similar to our surroundings.