Why all the talk of a "V", "U", "W" or "L" shaped recovery

As real estate investors it is very important for us to watch the economy. All of the alphabet soup listed in the title are options for how the recovery might look (in the rear view mirror).

A “V” shaped recovery means we will come back as fast and as sharp as we went down. As an investor this means you need to push all your chips to the table now. We don’t see this as likely as too many of the problems still exist and other are still in front of us namely resets on Pay Option Arms and commercial real estate. But don’t be confused the government will do all it can to produce a quick recovery as a 20% rise in real estate would fix a lot of the problems and make banks wildly profitable as the “write up” their portfolios of loans they have marked down to nothing.

The “U” shaped recovery means we will spend a fair amount of time on the bottom but as we come out of this mess it will be fast and profitable. An investor that sees this market should be placing strategic bets over the next 6-18 months as we put in the bottom. The type of recovery seems more likely than the “V” shaped recovery because it takes into the account that we have a few more shoe’s to drop.

The dreaded “W” shaped recovery means an investor should be very picky with any investment now and wait for the next wave of stress in the market. This particular recovery option keys off the idea that any up-tick has been artificial and it won’t hold once the stimulus is taken a way. You need to know this is the least favorite outcome to our government. We are confident that if they smell anything close to a double dip recession that the printing press will go on overdrive. They will create a second stimulus focused on shovel ready projects and they will spend – spend – spend.

That leaves the “L” shaped recovery. In this case the investor has time to make their investment decision. They should buy investments as they make since and plan to hold them for 5-10 years as we take a very slow grind out of this recession. This slow grind will rebuild the foundation of the financial system, consumer balance sheets, etc. It will not be fun by any stretch but we have survived worse and we would survive this too should it come to pass.

In the end you need to understand the environment we are in at a macro level so you can make wise micro decisions. Not that we are experts by any stretch but as of today our current guess of the likely outcomes is as follows (Assuming these were the only options):

V Shaped = 5% - Doesn’t seem likely give future pain ahead
U Shaped = 30% - If the stimulus holds and no other major surprises are found
W Shaped = 10% - Government would fight this with every dollar they could print
L Shaped = 55% - Capitalism works it self out and we reset the balance sheet

Good Investing