Saturday, September 20, 2008

Half a trillion here, half a trillion there....

and before you know it, we're talking about real money.



Randy Sebastian has filed for Chapter 11 (news in the Oregonian, nothing in the Bulletin.)

I thought one very revealing remark was:

"By then, real estate sales slowed across much of the country. But Renaissance's honeymoon continued into early 2007.

Renaissance sold 116 homes in the first quarter of that year, its biggest quarter ever. In February alone, it sold 48 homes for nearly $30 million in revenue.

"Nationally, we heard sales were going down. Our sales were up," Sebastian said. "We were thinking, man, Oregon's going to survive this."

Hey the invaders have pillaged and torched the next village over, but we're fine. Don't bother to man the ramparts or close the gates!

I mean....what a doofus!

I'll say it again -- the damage is done behind the scenes and when you ain't looking. But the time it reaches the point where the public notices, the closing of doors, the clearance sales, the damage is done.

After watching the sport card, comics, magic, beanie babies, pogs, pokemon bubbles burst, I'm just a tad risk averse.

You can't stop working it, though. I've pretty much decided to pursue the books angle in my store, and just ordered a huge number of new books. More about that later on the Pegasus Blog.

(After the preceding, I realize the last paragraph is a bit contradictory. So I thought I'd try to explain myself. Because of the way billing works, because I have a certain amount of money to spend for Christmas, I'm ordering the bulk of my estimated material earlier rather than later. If I'm going to be getting xxxx amount of material, somewhere between now and late November, but the Christmas is going to pay for it either way, I may as well get it now.)

12 comments:

RDC said...

An important item to keep in mind is that the end cost of the programs is not the same as the amount of money allocated to the program. People are taking the dollars of liability, or the investment into this programs and adding up the debit side of the balance sheet, but ignoring the asset side of the balance sheet.

Take for example AIG. Now the Government is putting up 85 billion. So most people are thinking of it as a cost, as if the government was funding another stimulus program. They are forgetting that in return for that 85 billion the government is getting 80% ownership of AIG and an 11% interest rate on their money. AIG will end up generating a profit for the Government. Freddie and Fannie will probably be less than break even, however, the end loss will be only a small fraction of the published liability.

While the terms are not clear of the broadbased program I expect that it will involve getting paper at a substantial discount. Now the banks cannot use this paper today because noone will buy it and its long term value is uncertain. However, because the government can hold it for a long time, until its end value becomes clear, it is likely that even that may return a profit or at worst the end loss will be a small fraction of the total envestment.
The biggest issue is that in order to enable the companies to deleverage, the government is increasing its leverage.

tim said...

I was amazed in 2006 that the Real Estate people I ran into in Bend seemed to think bend was going to be an island out outperformance in a nation of sluggishness.

It seemed to be a case of people only listening to people who thought the same way they did, because there certainly was enough sane talk out there for Randy Sebastian to have tapped into, if he were so inclined.

blackdog said...

The problem always is distinguishing a fad from a trend. When Gary Fish started the Deschutes Brewery in 1988 people said microbrews were a fad and he would go broke because he didn't sell Bud and Coors at the pub. But microbrews turned out to be a trend, not a fad, and today Gary Fish is a very well-off guy.

OTOH a lot of people bet on rising home prices being a long-term or permanent trend, and lost their shirts.

How does one know what will be a trend and what is only a fad? If I knew that answer I'd be relaxing in my villa on the Cote d'Azur right now.

blackdog said...

"It seemed to be a case of people only listening to people who thought the same way they did ..."

Human nature. We all tend to screen out information that conflicts with what we already believe and/or what we want to hear. Some of us are better -- or worse -- than others at doing this.

Duncan McGeary said...

There are two type so of people in the world -- those who see two types and those that don't.

No....I mean, those who see the similarities and those who see the differences.

Of course, there are similarities and differences in all things, and it's whether you give credence to the similarities or to the differences which counts.

I tend to see the similarities. Because of that, I have to force myself to see the difference.

Pogs=houses in that both are bubbles.

Pogs don't=houses, because they have no intrinsic value.

So I tend to see the similarities
in the situation in California and Florida and Oregon, especially Bend.

Which would mean we have a long ways to fall.

Those that see differences will say Bend is 'different'; that Bend doesn't have as many 'sub-prime' loans, etc.

RDC seems to see lots of similarities between this financial crisis and other crises like the savings and loan, the Nasdaq.

His attitude is, more of the same, this too shall pass.

I tend to see more similarities to the 20's and 30's, which of course makes it a much bigger deal.

RDC said...

Duncan,

Look at it this way, if I am right then at some point the economy will recover and all will be well. If I am wrong then what is the end result the economy never recovers, everything fails and then it really doesn't matter what you do.

So if I am right I can plan for it and if I am wrong it doesn't matter. i would rather be planning.

Duncan McGeary said...

That's good point, RDC. I'd pretty much decided the same thing.

I could drop in half in sales and still have the same take-home pay.

I doubt very many businesses can do that. (Could you pay your bills at half the wages? No?)

Worse than that?

No one survives. We're all up shit creek. The landlord has to adjust, the electric company has to adjust, EVERYONE has to adjust.

So plan for very, very bad. But you can't plan for the end of the world.

(Though I do have a third of an acre in my back yard to plant....)

blackdog said...

"if I am right then at some point the economy will recover and all will be well"

Well, of course at SOME POINT in the LONG RUN the economy will recover, so you have to be right. The problem, of course, is HOW LONG is the "long run."

"In the long run we are all dead." -- Keynes

Duncan McGeary said...

So help me out here. According to Wiki there are 215k full service restaurants in the U.S. (Along with 250k fast food.)

Being generous in population, Bend has 100k population. There are roughly 160 restaurants in the Gusto listing (which probably leaves out a few.)

My math says a full service restaurant for every 140 people in the U.S. but 71 people in Bend.

Worse if you count the actual 80k population, better if you count tourists. (But then, every one else can count some tourists, too, so that should even out somewhat.)

So...what am I missing. My math could be way off...I'm open to correction.

RDC said...

Duncan,

You have to adjust for transitory population (tourists, travelers passing through, etc). When it comes to fast food demographics a tourist counts significantly more than a permanent resident in planning potential locations

RDC said...

Blackdog,

My time horizon for the markets is always built around 10 years. There are relatively few times where the return on the market is negative over any 10 year period. While we will probably be negative over the next three because in 98-2000 we were in the .com boom. However, there has never in history been a time where the return for a 10 year period has been negative when starting in a period where the previous 10 years has been negative. THe lowest return for such a period has only been below 100% once and then it was 95%. I feel pretty comfortablein predicting that 10 years from today the value of your current portfolio will be substantially better.

Duncan McGeary said...

Still......I have a sneaking suspicion we might have a few too many restaurants....