|
|
Musings Report #42 10-18-14 Can We See a Bubble If We're Inside the Bubble?
You are receiving this email because you are one of the 450+ subscribers/major contributors to www.oftwominds.com.
For those who are new to the Musings reports: they are basically a glimpse into my notebook,the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Can We See a Bubble If We're Inside the Bubble?
If you visit San Francisco, you will find it difficult to walk more than a few blocks in central S.F. without encountering a major construction project. It seems that every decrepit low-rise building in the city has been razed and is being replaced with a gleaming new residential tower.
Parking lots have been ripped up and are now sprouting condos and luxury rental flats.
The influx of mobile/software tech into the S.F. Bay Area has triggered not just a boom in tech but in all the service sectors that cater to well-paid techies. This mass of new people has created traffic jams that last virtually all day and evening, and overloaded the area's BART transit rail system such that trains at 11 pm are as jammed as any during rush hour.
This phenomenal building boom is truly something to behold, as it has spread from S.F. to Berkeley/Oakland and the East Bay as workers priced out of S.F. move east across the Bay, driving up rents to near-S.F. levels.
This is of course a modern analog of the Gold Rush in the 1850s, and the previous tech/building boom in the late 1990s: an enormous influx of income drives a building boom and a mass influx of treasure-seekers, entrepreneurs, dreamers and those hoping to land a good-paying job in Boomland.
The same phenomenon has been visible in the Oil Patch states every time oil/gas rise.
We know how every boom ends--in an equally violent bust. Yet in the euphoria of the boom, it's easy to think this one will stabilize rather than collapse.
I distinctly recall the mass excitement of COMDEX in 1999, the big computer-tech trade show in Las Vegas. The city was packed, the convention centers were packed, and an enormous banner announcing the then revolutionary slogan "the network is the computer--Sun Microsystems" welcomed the faithful.
I saw Bluetooth demonstrated for the first time in that show (at a Morotola booth?), and dozens of other consumer technologies that never quite caught on--kits to turn your PC into a TV, etc.
A year later the bubble had burst, and a decade later Sun Micro had lost its edge and would end its glorious run in the ignominy of being sold to Oracle for pennies on the dollar.
Rents in San Francisco are now so obscene that there is even a Hitler parody in which Hitler tries to rent a flat in S.F.
Across the Bay in Berkeley, new 700-sq.ft. 1-bedroom flats are asking $3,300 a month. The same flat in S.F. would fetch $4,000 or more per month. Techies working for free on a buddy's start-up have famously rented the space beside the washing machine in a tiny laundry room--enough to lay out a sleeping bag--for $400 a month.
How many average workers can afford to pay $40,000 a year in rent? After taxes, even techies earning $80,000/year would have little to show for their labor once they paid $40K in rent and $20K in taxes and deductions.
The current Gold Rush will collapse, and as the newly fired workers pack up and leave, nobody will be renting vacant flats for $4,000/month. The owners will try reducing the rents to $3,000/month, and with no takers, they will go bust and the gleaming towers will be auctioned off. Eventually rents will decline to what people can actually afford.
This process will take a few years, as owners are reluctant to accept secular declines in rent and the resulting insolvency. Restaurants and other secondary businesses that arose to serve the techies will hang on, paying insane rents for a few months and then give up and close.
We naturally cling to the euphoria and glory of a boom; they generate such hope and positive emotions. The bust is no fun at all, a slow cascade of layoffs, insolvencies, reluctant moves to cheaper and far less exciting locales, and the mourning that accompanies the shattering of dreams and hopes.
Knowing all this doesn't prepare us for the bust, any more than the initial signs of a boom prepared us for the bubble. We want this time to be different so badly that we can almost taste it. But this time is only different on the margins; the flavor of the bust remains the taste of ashes.
Summary of the Blog This Past Week
Our New Robot Overlords & The Third Type of Capital 10/1/8/14
Why Nations (and organizations) Fail: Self-Serving Elites 10/17/14
Why the State Has Failed to Reform Our Broken Financial System 10/16/14
What Options Are Left for Central Banks? 10/15/14
Why Is the Put-Call Ratio (Fear Gauge) Higher Than in the Lehman Collapse of 2008? 10/14/14
Will the Fed Let the Stock Market Crash Before an Election? 10/13//14
Best Thing That Happened To Me This Week
My niece's 40th birthday brunch with the family. (She still looks 29...)
Market Musings: Qualified Buy Signal, Looking for H&S
The VIX issued a classic buy signal on Friday, but the longer-term picture is still suggestive of a long-term topping pattern.
Here is a chart courtesy of Lance Roberts, plotting the SPX against the analogous period in 2011 when the Fed ended the second QE (monetary easing) program. The stock market responded by tracing and a classic head-and-shoulders topping pattern and then diving down.
If the analog pans out, the SPX might rise back to the 1970-2000 range and trace out a right shoulder before falling again.
The technical picture is especially muddy now, as conflicting signals abound. The VIX issued a buy signal, but the huge open gap it left begs to be filled, suggesting the possibility that the VIX might climb back up and fill that gap before dropping further.
Analogs are notoriously unreliable, and some technicians expect the SPX to rally for a few days and then drop further to the 1740 area. A relative few expect the nascent rally to run all the way to new highs.
Forecasting such volatile signals is a day-to-day process, and very short-term trading in which profits are skimmed immediately may be a lower-risk approach than the "buy the dips and hold" tactic that has worked so well for the past 5 years of central bank easing.
Now that the Fed has ended QE, the past 5 years may no longer be a reliable guide to the future.
From Left Field
The Petroleum/Economic Endgame -- squeezed between the cost of energy and borrowing money to get more energy...
Cold fusion reactor verified by third-party researchers, seems to have 1 million times the energy density of gasoline (via Mark G.) -- classic game-changer if it can move from lab to the real world and scale up....
Lockheed says makes breakthrough on fusion energy project (via Mark G.)
U.S. College Staffing Changes, 1987 - 2011 -- fascinating: look up your alma mater. Mine: University of Hawaii at Manoa: 253% increase in administrators, 21% increase in enrollment.
Students Fail After College, By Professor Doom
The Genetics Epidemic: The Revolution in DNA Science -- And What To Do About It -- free registration required... worth the effort.
Ending This Fee for All (via Joel M.) -- all those mystery cellphone charges and other junk fees....
Texas Health Presbyterian nurse: 'We never talked about Ebola' (via Ishabaka)
These Scientists Made Huge Discoveries About Ebola--But 5 Died Before The Paper Was Published (via Mark G.)
Marisa Meyer: "I have a theory that burnout is about resentment" (via Daniel G.G.) -- thank you, Daniel, major insights in these two articles...
My secret to getting rid of burnout permanently (via Daniel G.G.)
Beautiful Maps -- an under-appreciated art form?
China’s Dangerous Game by Howard W. French (via Maoxian) -- highly recommended....
The country's intensifying efforts to redraw maritime borders have its neighbors, and the U.S., fearing war. But does the aggression reflect a government growing in power—or one facing a crisis of legitimacy?
"Easy to be powerful, hard to be safe." As far as I can tell, this was coined by cryptographer Adam Back in a tweet.
Thanks for reading--
charles |
|
|
|
|
|
