Friday, October 5, 2007

You can't outsmart a bubble, because there is no smart in bubble.

A bubble will wear you down. It will last so long, and seem so strong, that even skeptics will start to look for reasons. They will see people seemingly getting rich, and the desire to join in gets stronger and stronger.

Even when the bubble pops, people will stay wedded to the illogic.

But the mostly coldly logical guy will come out ahead. The guy who is willing to cut his losses, to sit on the sideline and wait and wait for the bottom, and then buy when the psychology is worst. How many people can do that? Not many.

But I can at least try to sidestep the bubble. By constantly reminding myself that while I can't do anything about the bubble or its bursting, I can try to deal with the consequences. And the best way for that is to take my worst case scenario, and double it. (I have to do that because....despite everything you might think....I'm really an optimist. Optimism being the triumph of hope over experience.)

Rather alarmist sounding, I realize. I'm not saying we should build bomb shelters. I'm just saying, try to imagine a world without the bubble. You're in the bubble, so it's like Sherlock Holmes trying to imagine Arthur Conan Doyle, but try.

And realize its a bubble and has not reason. Don't try to outsmart it.

12 comments:

IHateToBurstYourBubble said...

Well, I do think that typically in a bubble there IS a "localized" rationality: It something along the lines of:

Historical recent returns have SHOWN [Bubble Good X] to return Y%/year, that is PROVABLE FACT. Now, if you pay $N today with the ROI of Y%, you can clearly see that in 5 years it makes sense to actually pay as much as you can for Bubble Good X, right? Pay lots of money + Y%/year = You Get Rich!

This goes against basic economic dogma that humans maximize the utility of their money, and actually want to pay as LITTLE AS POSSIBLE for things. In a Bubble, this logic is turned on its head. Believable, provable, historical HIGH recent ROI is almost always required to get a Bubble rolling. There can also be leverage driven Bubbles, where unusual financing make buying something extraordinarily easy. This can lead to high, recent ROI that bootstraps the Bubble.

I say that Bend would have had no bubble without a land shortage, and that would be better stated as Bend would not have had near the appreciation it's had w/o a land shortage. Had we thousands of buildable acres, we would have run up, but not the tripling & quadrupling we've had.

I'm not sure I agree with the idea that Bubbles are an "Unknown Quantity"... they all seem to bear a very striking resemblance to each other, have fairly predictable characteristics, and all ultimately implode. One of the "predictable characteristics" seems to be their ability to draw in the masses, and the ability to go far beyond reason, several times, and to have a completely unanticipated & impossible-to-time demise.

Maybe it's just semantics, but you seem to be saying that the "unpredictability" of a bubble makes it impossible to predict, but I think these "unpredictable" characteristics are very predictable... I KNOW it will draw in neophytes, I KNOW it will be cocktail party talk, I KNOW morons will make $ in the runup which draws in more neophytes, I KNOW it will go up farther than I ever thought possible, I KNOW I will not make a cent & stay out, and I KNOW it will end and end badly, far worse than I ever thought.

It's happened several times, and I'm always surprised by the similarity. I think you, possibly the most battle-hardened Bubble battler (like that?) in this town, also are learning from it and are also beginning to recognize the "symptoms". Otherwise they would have hauled you out long ago.

Duncan McGeary said...

"I say that Bend would have had no bubble without a land shortage..."

And that's where we disagree, because you are looking for a reason. And anything attributable to a 'reason' isn't a bubble.

Talk about semantics.

I think you can analyze the symptoms and consequences of a bubble, but not the reasons.

I know it probably sound ludicrous for me to say I'm an optimist, but I've never once had dire results from being too pessimistic, and I've had many an occasion of regretting my over optimism.

For me, skepticism is an innoculation for optimism.

Even before I know what a 'bubble' was, I knew there was something wrong. And even after I knew what a bubble was, and experienced the downside, I still fell for them.

The tendency to look for reasons, to try to outsmart, to go along with everyone else, to think that others, 'experts', know something you don't know.

Now, I just identify a bubble, and skip everything else.

Doesn't keep me from making bemused observations, however.

Bike said...

IHTBYB - Talk about "drinking the cool-aid! You sure seem to "KNOW" an awful lot and sound way too much like Tim Knopp of COBA when he gave his 2006 RE Forecast complaining about other things the "Lack of a 20-year supply over the last 5 years has created an artificial
increase in land costs" [www.gobend.com/Documents/2006_Real_Estate_Forecast.pdf]. Based on his presentation he should be run out of town by the members of COBA. Dude, this bubble and those prior and those yet to come are mostly about greed.

Duncan McGeary said...

I mean, look, I was almost ready to open a second store!

In my defense, the credit crunch was just starting and I didn't yet see it was the precipitating event (not the cause -- bubbles burst without cause) but would be perceived as the cause.

But that is one of my rules. Bubbles always burst before you think they will.

I thought I had until the end of the year, at least. That when it burst, spending wouldn't slow for a while longer, and even then, the perception of a slowdown would take even longer. That that perception would last past the time when I was negotiating a new lease.

Instead, I think sales are going to slow sooner, which would've made the new store harder to function, that the perception will set in earlier, which will make a new lease easier to negotiate.

I have a good example of why I think we look for 'reasons' later which are actually symptoms.

Sports cards became unprofitable for me in 1991. Because there were any number of nitwits willing to sell for a loss, and any number of chainstores who where using cards as 'loss leaders.' But for me, it became impossible to make money.

The same way, it may be impossible for responsible construction outfits to underbid the irresponsible ones.

Because more and more outlets were selling cards, it became impossible to see that cards were actually selling smaller numbers. When it finally became clear, the producers started to create more brands and raise prices to make up the difference.

In other words, a symptom of lower sales.

But today, it is the common wisdom that too many brands at too high prices caused cards to drop. Whereas, I see that as a consequence. The irrational purchasing of cards was a bubble, and it didn't take a rational reason to pop.

BilboBend said...

"I say that Bend would have had no bubble without a land shortage..."

And that's where we disagree, because you are looking for a reason. And anything attributable to a 'reason' isn't a bubble.

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IHTBYB, first of all this is Oregon, and we have UGB, and yes there is an artificial land shortage. This is a given fact of Oregon, if you don't like this fact, then LEAVE. We have our city which is a full-time PR marketing machine to bring in out of town suckers. Then you have all the resorts that have been built just to skirt around UGB.

The fact UGB isn't what caused little bo-peep to BUY five homes with nothing down on speculation, and almost every bo-peep in Bend did this, had there been more supply bo-peep would have bought ten.

Removing UGB from oregon isn't going to fix the problem, but many folks including yourself will use the aftermath of the bubble as an excuse to kill UGB.

There will be plenty of affordable housing in the coming years. Just wait.

Duncan McGeary said...

Once the mania sets in, the irrational exuberance, anything can become grist for the mill.

So, if in the middle of the baseball card bubble, Topps publishes a card of Billy Ripken with the 'Fuck' written on the bottom, that can ignite a variation of the bubble, the mania for 'error' cards. In the normal course of events, it would have had little or no effect, except maybe for the card.

So the UGB, the baby boomer migration, the high california prices, the revival of downtown can all look like rational reasons, but they're just grist, just excuses to Build, build, build, sell, sell, sell.

BilboBend said...

So the UGB, the baby boomer migration, the high california prices, the revival of downtown can all look like rational reasons, but they're just grist, just excuses to Build, build, build, sell, sell, sell.
*
Everyone that could buy bought, and most bought one or two. Calis bought, and they bought a second in Bend. Thanks to Bend's great PR scam

The real issue here is that every realtor in Bend was telling every sucker coming to Bend that 30%/yr appreciation was yours, and everyone could and did participate in the money tree. In 2004 builders were coming from all over the country and paying $300k for lots anywhere in Bend that were only 5k-sqft.

Everyone did this to get rich quick. There is NO amount of supply, as quite often most people bought promises. Most bubbles folks buy before the stuff is even built, and sell their contract before its built for +20%.

There's a lot of newbies including IHTBYB who think UGB is artificial and strange, get over it, we all have its been in Oregon since 1972.

The bubble has essential elements yes it played all over america, but Bend was the biggest.

1.) A city that literally blew taxpayers dollars to inflate the bubble on PR, to SELL BEND.
2.) 24 golf courses and resorts in the area to bring in tourists and sell them condos/time-shares.
3.) Easy-Money, nothing down, up to four homes no problem, no-doc.
4.) Get rich quick, in Bend a monkey can make +30%/yr on other peoples money.

Certainly other places had 3&4 above, but Bend artificially created 1&2, which led to the biggest boom, and will yield the biggest bust.

What do we have to show for it? Not much, more than likely the city will be bankrupt within 2-3 years.

I live by one motto "If it were easy to be rich everyman would be rich". Look around guys, most folks live hand to mouth, paycheck to paycheck, always have, and always will.

BilboBend said...

There are two major problems in the Bend Blogger Bubble Brigade that I can see.

1.) A complete disregard for the common man, the majority of the BBBB's tend to be newies ( less than ten years in bend ), that rent or own a large 'cali' type tract house. They're doing 'fine'. They blog purely for amusement. ( I call these callous assholes "timmys" ).

2.) I agree that the bend bubble is purely built on speculative insanity, greed, and irrationality. There is NO structural reason like UGB or Bend City Code that caused the bubble, if UGB were the reason, then Burns, and Pendleton was have exploded.

People came from all over in 2002 to BUY in Bend, CACB investors of that day, Sebastian Homes PDX move operations to Bend, everyone knew it was time. Brooks spent a fortune on "Smart Growth", in order to justify NWXC. The City of Bend spent a ton of money marketing Bend. The State approved every resort in the area using UGB loopholes.

Then you throw in easy money to borrow ( OPM ), and the promise of infinite 30%/yr returns on such, and the ability to purchase four homes with no-doc, interest only, nothing-down. All the big boys saw this coming, that's why sebastian came, and that's why brooks built NWXC when he did. They knew the easy-money would cause people to purchase as quick as they could build.

Today the typically blogger is such as "I have my I'm fine", or "Oregon Law created the problem"

First of all the little guy is essential to our happiness in Bend, if +25% are un-employed, then crime will skyrocket. Oregon's UGB laws are not what caused the Bend-Bubble, the most over-inflated RE in the country. IF UGB was the cause then every two-bit city in Oregon would have had a bubble, they didn't. Only Bend, and mainly because the city was and still is ran by developers, who telegraphed their crony's all over America that a RE gold-rush was going to take place post 2002.

I personally think the essential problem here for the majority of the bloggers is that they haven't been here long enough, and they're not old enough to have seen bad times.

BilboBend said...

It's NOT just UGB that being blamed for the bend-bubble, the M49 is being SOLD by the SORE as a solution to the problem, the problem of course is that the SORE is a mouth-organ of Brooks PR, and M49 will even create MORE destination-resorts along century drive out by lava-lake, because this will bring in BIG money.

*

The biggest liars in Bend are the SORE, and the BULL.

M49 allows pre 1972 development rights to be sold to foriegners. Something that M37 didn't allow.

M37 said if you owned the land pre 1972, then you can develop. M49 says that you can transfer those right to someone other than the owner. What the people who wrote M37 failed to realize is the average person doesn't have enough money to build a mega-development.

Thus M49 will make ALL pre-1972 land saleable to REITS, and thus MAKE ALL the big boys like JD-Gray, and boss hogg hollern, even richer.

BilboBend said...

The point that needs to be stressed is that our little bend-bubble is going to be used as the perfect storm, to completely change the area forever.

If lackey IHTBYB and his handlers get their way, Bend area will be forever changed.

Today over & over IHTBYB and the SORE/BULL repeat that UGB is the cause, and that M49 is the solution.

Too many people are using the bend-bubble to advance their politics's, and nobody gives a hell about what it does to normal people.

The essence of IHTBYB and his politics are that they're generally right-wing conservatives that recently arrived, and don't realize that we had to fight in the past to have what these folks found here when they arrived.

Duncan McGeary said...

That reminds me of the gallery owner I met in Joseph, Oregon.

Have you been here long?

I've been here for 15 years. To the locals, I'm a newcomer.


But yeah, what the newcomers found here was hard fought. Never a certain outcome. And it's been tossed aside like old news.

So, if the fundamentals haven't changed, we are about to find out if the newcomers will be as willing to duke it out as the people they replaced.

I suspect not.

Duncan McGeary said...

Bilbo,

I think that is what is bothering me. There is a blithe disregard for the fundamentals.

Jobs? Who needs jobs?

High paying jobs? Who needs high paying jobs?

It was difficult to make a living in the past? So what. This is today.

So what has changed? Aren't we still a tourist economy? Take the housing bubble out, and what's left?

Yep, the same economy we used to have, minus timber.