Chuck Ponzi January 12th, 2010

Andy Xie of Morgan Stanley has written some of the best commentary describing the innerworkings and problems of the Chinese bubble (don’t ask me if there is one, although it sounds like there is, I have not done my homework, as I’m sure Andy has).

Some time ago, he wrote Chinese asset markets have become a giant Ponzi scheme that perked up my ears and got me to thinking.

But, his more recent piece in Caing has me thinking he’s talking about Southern California:

The overwhelming desire for getting rich quick dominates every nook, fissure and strata of Chinese society.

Ok, replace “Chinese” with California, and you’ve got a definite match.

Bubbles exaggerate reality but are not formed out of thin air. Cheap money and strong growth are the usual ingredients for bubble-making.

This is almost exactly what I wrote with “What is a bubble?” several years ago.  However, most interestingly is what is happening in China, and happened in California:

China’s property market is creating winners and losers based on timing. All other factors – including education and experience — have been marginalized as the economy rewards speculators. And as more play the game, the speculator ranks rise and fewer people work, perhaps contributing to a labor shortage.

This is exactly what happened during Southern California’s property bubble.  Many people got rich simply by being in the right place at the right time.  Many of them were incapable of understanding the circumstances of the rise, and so therefore simply did more of the same (buy real estate) without understanding the underlying problem that widespread repetition of that practice would cause a housing shortage (too many people “storing” housing instead of allowing it to be bought).  Rents reflected the “real demand”, and appreciated strongly.  Meanwhile, properties exploded with enough appreciation in 2 years to account for 30 years of inflation to support the prices.

The most poignant in my mind was a short-sale that Brad (my co-blogger and realtor) and I visited.  The original owner was trying to sell from a purchase made in 1996 at more than 300K lower than the short-sale.  The “owner” was so destitute that when the pool pump broke and they were unable to replace the $800 unit, the resulting ground shift due to hydrostatic pressure when quickly emptying the pool caused many more thousands in damage to the surrounding concrete.  They had been trying to support a 600K+ mortgage with a single income from working at Macy’s.  When regular equity withdrawals worked, the Ponzi scheme continued.

In normal times, the ponzi would have never worked, but because of the bubble, it allowed the “owner” to continue to persist in a property many times more expensive than they could support.  At the peak of the market, this would have sold for more than $1M, requiring the income of several well-paid professionals, not a single retail salesperson’s income.  The world did not make sense in 2006.

This separation of is true of a speculation/investment-centric economy.  This is part of the reason why most people make terrible investors; the concept of time is nebulous and fraught with uncertainty.  Indeed, I wrote (and bolded) in What is a Bubble? the following:

The most fundamental concept of investing is the concept of timing. The most fundamental flaw in most participants logic is that the asset provides more than just money… everything that costs money is an investment and can be traded again for money, nothing more.

This Southern California phenomenon of irrational belief has been covered extensively in another blogger’s repertoire, Irvine Renter’s Southern California’s Cultural Pathology.

We are quickly approaching the Day of Reckoning in our housing market. In my view this will be Armageddon for California debtors: the spending will stop, they will lose their homes and with it their illusion of wealth, and they most definitely will not be enjoying life. The cause of all the weeping and gnashing of teeth will not be some exogenous event, but rather a direct result of the circumstances they themselves created.

My thoughts exactly.

• Credit Bubble , Housing Crash , Speculation , Unemployment
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Chuck Ponzi June 2nd, 2009

I love it when a plan comes together – A-Team’s Hannibal

Arnold Schwarzenegger has fired off his assessment of where California is today.  In short, we’re screwed.

Declaring that “California’s day of reckoning is here,” Gov. Arnold Schwarzenegger said today the state should turn its dire budget straits into an opportunity to make government more efficient.

Speaking to a rare mid-year joint session of the Legislature and other constitutional officers, Schwarzenegger acknowledged the billions of dollars in spending cuts he has proposed to close a $24.3 billion hole in the budget will be devastating to millions of Californians.

“People come up to me all the time, pleading ‘governor, please don’t cut my program,’” he said. “They tell me how the cuts will affect them and their loved ones. I see the pain in their eyes and hear the fear in their voice. It’s an awful feeling. But we have no choice.

“Our wallet is empty. Our bank is closed. Our credit is dried up.”

There’s still some hope:  Here’s where the cuts are coming from:

Schwarzenegger has proposed a plan that relies partially on accounting maneuvers and borrowing funds from coming fiscal years, but mainly on deep cuts in nearly every program funded by state government.

Those range from cutting spending on K-12 schools, community colleges, the University of California; releasing some non-violent prisoners a year early; cutting pay for most state workers and laying off others; closing 80 percent of the state’s parks, and wiping out or paring back on health and social service programs for California’s neediest residents.

California is broken and needs to be fixed to keep people here.  Maybe that’s not what we want.  Growth for growth’s sake has proven to be an untenable solution for us.  While we mourn the loss of programs, let us be happy for the new found frugality and self-sufficiency.  Maybe some day we can save up in the fat years to prepare for the lean years.

• Deflation , Panic , Psychology , SoCal , Unemployment
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Chuck Ponzi April 17th, 2009

It’s inevitable that once one issues a forecast, it is almost immediately disproved with current information:

As part of my 2009 forecast, I saw California unemployment rising to 11.5% by year’s end.  That single tidbit is likely to be proven wrong, as it is obviously too optimistic in the light of what the BLS has offered today.  Their estimate of regional and state unemployment weighed in at 11.2% for California. At the rate we are bleeding jobs, that’ s not likely to be the end of it.  Besides, employment typically lags tops and bottoms of business cycles, so even if the recession were over tomorrow, we’d likely blow through the 11.5% rate.  Though, to be fair, 11.2% is already a record, so it’s hard to predict what will happen next.

Over the last year, Caliofornia has lost some 637,400 (est) jobs.  In Feb 2009, the rate of unemployment stood at 10.6%.  There is no pricing pressure (except downward) on houses with job losses like this.  We have now left the barn of bubble-delfation driven price decreases, and have now entered into the economic eqilibrium impacts that job loss creates.  The number of jobs in California now stands at 14,474,700.  March of last year the state reported 15,112,100 jobs.

Due to the relationship of jobs to inflation, it is unlikely that absent even more massive money creation, business or homes will have any pricing power in 2009.

At present course and speed, and assuming some moderation of the the the rate of increase, I’d say it’s likely that we exceed 13% unemployment in 2009, and that California is still receeding economically until 2nd half 2010 or so.  (The national recession, I believe, will end sooner than that at the end of this year or early next year.

• Deflation , Unemployment
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