Fautty Forecasts

(Continued from page I I ) can be the death knell for companies that don't have deep reserves.

Attention Driven

You can easily spot these analysts, because (l) you've never heard of them, and (2) they are calling for either the end of Western Civilization as we know it or the market equivalent of Armageddon. I recommend just turning the page on this type.

lgnorance Driven

Do you trust a reporter for your local newspaper (in my case The Oregonian) to tell you when housing will stabilize? Even when the most out-of-touch industry people become aware of new trends, you can rely on an additional two to three months before the wamings appear from local newsrooms.

Question: What do all these forecasters have in common?

Answer: They are too narrow in their thinking.

A while back, a well-known planning consultant and I were discussing why this happens. His answer was immediate and concise: our society is over specialized. American universities are rated the best in the world, but our students are victims of the conventional wisdom that they must specialize to get ahead. So Liberal Arts and the broad vision that they engender are avoided like the plague. Think of a HR interviewer at a big industrial company: "You're an English Lit grad? That's too bad ..NEXT!"

Being a German Lit major in college may have given me an axe to grind, but it also gave me a much greater level of curiosity in how the world works. I have found that a broad knowledge of economics, history, psychology, science and even philosophy have created insights that do not occur to most analysts.

"An inch wide and a mile deep" does not help in strategic thinking. How many sawmill owners spend most of their strategic capitol developing machinery that will save $2/MBF on their cutting costs, when they could be developing markets that pay an extra $30/MBF? How many trading companies spend their time thinking about getting the cheapest price on the next carload of studs when they could be developing specialty markets or creating long-term two-way relationships with mills and customers?

It is the same with forecasting. In the summer of 2006 I saw a small article that gave a telling statistic. The percentage of subprime housing loans generated had climbed from l5Vo to 407o over the previous year. What that told me was that the demand in the prime sector was exhausted and the rapacious appetite for loan fees among lenders, along with the equally rapacious buyers of the various mortgage-backed security packages, were still in full throttle mode.

I had already been concerned by the fall in risk premiums and adding a whole new dimension of risk was a ticket to disaster. By August 2006 my '07 starts forecast had dropped to 1.6 million and by September to 1.3-1.4 million. The consensus among many even at that point was at 1.8 million.

Another simple exercise would have been enlightening. A report in February 2007 stated that business plans submitted to lenders by private equity groups predicted that rents in New York City would increase an average of annualy over the next l0 years. Did the banks really believe that renters would be willing to pay 1507o more for their office space in 10 years? Probably not, but that was the only way the deal could pass their own financing requirements. So winkins and crossed fineers (the formal term is "Covenant Lite") seemed to be intrinsic to multi-billion dollar transactions.

After observing this exercise in delusion, I calculated the California housing prices assuming a median price increase in the next five years at the same pace as the previous five (after dumping all my commercial real estate holdings). Does a $1.2 million median price make for a vibrant marketolace?

Why was my thinking so contrary from and more accurate than the established sources? Since I am not clairvoyant, I used a broad knowledge of how markets work using all the components I have previously mentioned, while consciously rejecting the "drivers." Deleting the "drivers" allows the more uncomfortable facts to become part of the concepts, which is not just important, but mandatory for forecasting.

In closing, I know the reader may say, "All well and good, but will this guy stick his neck out for next year in print?" Yes, I will.

2008: 950.000 to I million starts. Lumber will test the lows in the first half and then recover some in the second. A bull market is still 1.5 to two vears awav.

I had stayed with l.l million since last summer, as it is very difficult to accept a sub-l million mark given the size of our economy. But I have become very worried about the regional lenders recently, considering the year-end (mortgage as well as SIV) write downs many will face.

Meddling from Washington is heating up. and that is invariably bad news. Finally, we have already seen median prices fall nationally for the first time since the Great Depression. So much for "It can't happen here."

- Mr. Krier is a 30-veteran of the lumber industry. Formerly president of Stora Enso Timber U.5., he is now president of JLK Global Inc., Tigard, Or. You can contact him at j ohn@ jlkglobal. com.

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I-Jorsrs ro BE 66% wrprn THAN YOUR TYPICAL LUMBERJOISTS. THAT MEANS MORE STABLE FLOORS WITH LESS BOUNCE AND FEWER HEADACHES FOR BUILDERS.

Tnar's wHAT wE Do. We uexr rHE PRoDUcrs THAT BUILD THtr HOMES. SIMPLY BETTER.

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