A year ago, at the Global Gypsum Conference in Paris, the question was asked, several times and by a number of people, 'What will be the date of the start of the recovery from this awful mess that we are in at the moment.' The response, from the assembled experts, was that if things go well, then we should be seeing the start of recovery by the autumn of 2011. Oh dear.
You need to remember, that in autumn 2010, we had just witnessed two years of mind-blowing financial market turbulence, company failures, house repossessions and deepening unemployment. Back then it looked like things could not get much worse, and - as a result - things would shortly start to improve.
Ah, the triumph of hope over experience (the definition of a second marriage by some wags). What we had not realised back in the halcyon days of autumn 2010 was things could get worse. And indeed they did.
The banking crisis (when those overpaid idiots in their glass towers made stupid bets with money they didn't have and then went crying to their host governments for help, claiming that they were too big to fail*) has morphed into a sovereign debt crisis. Governments bailed out the banks and now whole countries look like going bankrupt: our spineless politicians have just transferred the debts from companies to states, effectively nationalising the crisis.
Now the sovereign debt crisis is entering its 'dangerous new phase,' in the words of Christine Lagarde, head of the IMF. When countries owe more than they make (in just the same way as the guy who makes $40,000 each year but who has borrowed $54,000 - analogous to Greece's debt of 140% of GDP), the money to pay off their debts has to come from somewhere. They have a very limited number of options:
- Refuse to pay it all back (default) - which Greece has already done to the tune of 21%, but it is expected to default to the tune of at least 50% and possibly as much as 70% (if other countries then also default due to 'contagion,' the current thinking is that their creditors will get the following amounts back 'on each Euro:' Ireland 60%, Portugal 60%, Italy 80% and Spain 80%).
- Borrow more: The more indebted you are and the shakier your future prospects, the more borrowing is going to cost you. Eventually you are going to spend an awfully high percentage of your available cash just servicing your loans. As an indebted householder, company or government will tell you, this is not a nice place to be.
- Make some more money with which to pay back their debts.
Wow! They can really do that? Just make some more money, out of thin air? (Try to do this for yourself and you will soon become accustomed to the inside of a jail cell). Yes, they can do it: you and I cannot.
Governments used to just crank up the printing presses and print more money. Nowadays they do it by Quantitative Easing: Central banks create money 'Ex nihilo' - out of nothing, and then spend it on buying up financial assets of governments and companies (including the rotten stupid banks that got us into this mess in the first place*). The money washes around in the economy, theoretically boosting GDP and in theory everyone is happy.
But like a sugar rush or an armful of heroin, there is a downside. Banks can simply hang on to the extra money, and the increased money supply will inexorably lead to inflation which makes countries less competitive, eats into people's savings and depresses economic activity. Inflation, already relatively high and climbing, can be expected to rise to damaging levels in the next few years.
So what comes next? Well, the construction industry in both the US and Western Europe is still on its knees, and house prices (and the value of commercial property) continue to fall. Until property prices stabilise, there will be no recovery in the wallboard market, since there will be very little incentive for property developers to put their spades in the ground. Once prices stabilise (and Prof Schiller of Case-Schiller housing index fame thinks that they may yet fall another 25% in North America), we will see a leap in prices (of both boards and of wallboard factory assets) now that the industry has closed so much capacity. Effectively managing the un-mothballing of viable industrial capacity will be crucial for the industry to make a profit in the next few years.
Once governments have nationalised the debts of their irresponsible and incompetent banks (*do you get a hint of annoyance at the banks from me?), one other option is to 'share the love,' by making their citizens pay off the debts, through increased taxes. It is we, after all, who bankroll our governments. However, as Winston Churchill once said, "For a nation to try to tax itself into prosperity is like a man standing in a bucket trying to lift himself up by the handle."
So, the answer to my initial question, 'When will the recovery start?' is 'probably not for a while yet.'
