Fundamentals 101

By Beacon Staff

Last Wednesday morning, I scammed a free yuppie breakfast, courtesy of Montana West Economic Development. MWED hosted Jim Kelley from Kelley Appraisal and PhD economist Gregg Davis of FVCC before a jam-packed room.

I’m glad we ate before the presentation.

Back in the old days, before environmentalism, the Internet, the “new West,” hedge funds and derivatives, well, when times got tight, things always turned around. The mills might cut back to all senior people on one shift, and even then, the younger set had a chance to fill in for vacation. Crop prices might be poor, but eventually the market would rebound. Things might be slow on the railroad, but eventually there’d be a boom – somewhere – where empty boxcars would be filled. The fundamentals stayed the same – we had a reality-based economy here.

This time, it’s different. The fundamentals are all wrong.

Mr. Kelley gave a numbers-packed presentation, fortunately with hard copies for those of us who write real slow. One shot between the eyes was the “income multiplier” for determining the price point of a home. Back in the Stone Age, before 1991 or so, the fundamental rule was you mortgaged yourself for a house roughly two-and-a-half times household income, unless of course you lived in San Francisco. In Montana, (ranked 39th) that’s based on U.S. Census income data around $43,000, or about $100,000 worth of house. Hah, good luck there … Kelley put the median in Flathead County at $239,000 – and the multiplier at an outrageous 5.5.

Kelley also posted a couple foreclosure-rate slides. Flathead County is now leading Montana in foreclosures, about five per thousand. Not surprisingly, the other Montana counties leading the pack are Gallatin and Ravalli … the state’s amenity-migrant “new economy” magnets.

He also slapped up the regional foreclosure figures: The two states with the highest foreclosure rates are Nevada and Arizona, at 46 and 30 per thousand last year. Both are, you got it, amenity retirement destinations. Anyone seeing the pattern?

Then Dr. Davis dropped a couple more bombs. In the 1990s, Americans’ net worth grew an average of 5.3 percent a year. From 2000 to 2007, our net worth only rose 2.29 percent a year. Why didn’t things tank earlier? Might be because our savings rate dumped from 8 to 2 percent…buying Chinese stuff on the plastic, floating funky mortgages, investing with Bernie Madoff, and flipping real estate like cheeseburgers, trying to keep that bubble floating. Four-buck gasoline was all the needle needed.

So what was wrong? Again, the fundamentals.

Davis made a point of reminding attendees that the current round of layoffs – not just in Montana – are in our “best jobs” category, family-wage, benefited private-sector jobs that give the economy fundamental support by creating new wealth – not just shuffling “money made elsewhere” around.

In terms of “money made here,” well, guess what? We might be losing that option. CFAC is dealing with a fundamentally changed power market. The timber industry really no longer exists, as almost all the major players, including Plum Creek, have become real-estate trusts. Our “high-tech” players, like Semitool, swim in a global pond – and the tide isn’t blocked by our mountains at all.

The 1929 crash was caused by numbskulls who thought they could make money forever without actually creating anything of substance. When the margin calls (look it up) came in, the sky fell. They ignored the fundamentals, and boy, did it hurt.

So, while I don’t want to be unduly gloomy, this latest, much-lamented “boom,” just like a lot of the fiscal instruments that created the bust, was an illusion of false wealth.

How could so many people ignore the grubby fundamentals of creating the sort of genuine, tangible wealth necessary to maintain a truly sustainable society? Sure, fundamentals are boring, and reality is often ugly. Turn away, though, and that’s when you get kicked.

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