Monday, November 1, 2010

Dead Cat Bounce.

You know the saying, Hindsight is 20/20.

Well, I think ironically enough, foresight can also be more accurate than current sight.

Going into this downturn, I could make some educated guesses about how it would play out. I had experience in multiple bubbles (cards, comics, pogs, magic, beanie babies, pokemon), I had experience in local downturns (most of the '80's). I could make some pretty solid theories about what was going to happen.

Measuring the size of the bubble, I could make some overall guesstimates about how deep and how long this thing would go.

Add to that some research into previous recessions, and especially housing bubbles (California and Texas), I went into this downturn thinking it would take at least 7 years, that it would be deeper and longer than anyone expected.

Roughly speaking, I was telling myself to be aware that I'd be wanting to constantly call an end, to believe -- to hope --we were over the worst. And to remind myself that it can take so long to come out of one of these downturns, that you more or less give up looking for it. That when the recovery starts happening, you're still dealing with the wreckage and often don't recognize it

By my count, it has been about 3 years since Bend's bubble burst: for me, Sept. of 2007. I started this blog in Nov. of 2006, so I had about 10 months to prepare. (I was preparing before that, obviously, mostly adding inventory and new product lines, but that's when I really got serious about getting debt out of the way.) Again, by my original estimate, we have at least 4 more years to go.

I was remarking to Linda yesterday how no matter what sales do, the store keeps turning a profit. My cash flow remains manageable. How could that be?

Pretty simply: I don't have debt. Debt is what caused all the stress in the past, no matter what my sales were doing at the time. I've had sales much higher than now, and been unable to pay my bills. There was a point in time where 40% of Gross profits were going toward debt. So this has been a walk in the park, compared to those bad old days. That plus having sufficient inventory to go week to week. And having actual cash and credit to call upon. All I have to do is adjust spending to results.

So, even as severe as this downturn has been, it's been relatively easy to maneuver.

Another thing going in that I knew was going to happen, was that I wouldn't have any real idea how anyone else was doing; (nor, given the secrecy of small business owners, was I likely to know) ; I warned myself that I'd see things that didn't make sense; that I'd sometimes feel like I was the only person going through it. I used to have a saying that "If I'm feeling it, chances are everyone else is too." Which is fine, but in the midst of it, can be small consolation, especially if everyone else appears to be thriving. Finding out later that everyone else was in the same boat is reassuring, but doesn't help much in the moment.

When the actual details, the actual numbers, start rolling in, it becomes easy to lose sight of the overall plan; the overall theory I had going into the bubble.

Another thing that has kind of thrown me, is how well Bend seems to be doing retail wise. Lots of new stores, not a whole lot of vacant spaces. But here again, I have some previous experience. The surge of stores often happens well after the bubble has popped. And I believe that Bend has retained it's appeal to a surprising extent.

The final little insight I had going into this, was that I thought that Bend -- having had a relatively late and relatively large -- hell, huge-- bubble -- would also be out-of-sync with the rest of country, hell, out-of-sync with Oregon. There would be continue to be a delayed reaction here in Bend, no matter what was happening elsewhere.

In the end, it doesn't matter how anyone else is doing. It's in my best interest for them to be thriving, because I don't live in a vacuum; and a rising tide raises all ships. (if you don't mind a few mixed metaphors.)

Anyway, around September of last year, sales started to increase from the previous year. I made a bunch of posts about how this was in comparison to probably the worst economic drop since the Great Depression; Sept, 2008 was when Lehman went down, and there a whole bunch of down months following. So, as I kept saying, it was like beating up a 90 pound weakling.

But frankly, I missed the most obvious metaphor.

A Dead Cat Bounce.

It was the very epitome of a Dead Cat Bounce.

After a string of seven up months, the recession took hold again, and sales started dropping back down. A double dip, if you will.

The Dead Cat Bounced, and rolled toward another ledge, and has started rolling downhill.

So far, except for the initial surprise that the bounce was ending, I've been pretty good at pre-empting the course of the economy, of making sure that my base of spending was below what was actually happening. So I've had a bit of a wake-up call to continue to be careful.

So far, I'm attributing about 70% of the current downturn to the economy, about 20% to the fact that most of my product lines are on down cycles, and about 10% to the fact that I've taken a whole lot of time off.

All predicted in advance, but temporarily forgotten in the heat of battle.

So I'm still feeling pretty good about my navigating the course of this recession, and I just need to keep reminding myself of my original predictions.

32 comments:

RDC said...

You have uncovered the most critical fiscal truth. Being saddled with debt makes everything much much more difficult. Being debt free greatly reduces stress and makes dealing with anything, including major business down turns much easier.

Buying on credit is just not worth it. You just do not need things that bad to go into debt for it.


If you look at real estate markets that have historically had boom/bust cycles (Various markets in California are good examples) the normal time from peak to trough (in normal cycles) is 6-7 years. I doubt this boom/bust cycle, of epic proportions, is going to really bottom any faster.

The recession is a deleveraging event. Normal time to really hit bottom in such an event has historically been about 5 years.

This still has a while to run. The governments actions to minimize the impact has probably only pushed out the duration.

Duncan McGeary said...

Yeah, that's what I was estimating going in -- so,we're not even halfway there.

Duncan McGeary said...

I originally thought that Bend, being a later and larger bubble, would have a delayed recovery as well, but I'm thinking now that the relative strengths of Bend -- the fact that we continue to pull people into the lifestyle -- might just cancel that out.

(Heh...this is where I find out of Homer or Buster are still reading...)

H. Bruce Miller said...

Four years sounds about right for Bend real estate prices to rebound to a "normal" level, which will still be far below the bubble level. I don't think it will take four more years to start to turn around, however.

RDC: "If you look at real estate markets that have historically had boom/bust cycles ... the normal time from peak to trough (in normal cycles) is 6-7 years."

So if the peak was 2006, the trough should be 2012-2013. Yeah, sounds about right.

Dunc: "I'm thinking now that the relative strengths of Bend -- the fact that we continue to pull people into the lifestyle -- might just cancel that out."

But the relative WEAKNESSES of Bend -- the isolation, the lack of good jobs and economic opportunity, the third-rate public schools, the cold (especially to Californians) climate -- might cancel out the relative strengths.

Duncan McGeary said...

When they talk about these 7 year cycles, I've never been completely clear how much is down, how much is bouncing along the bottom, and how much is catching up the previous levels....

Duncan McGeary said...

I would argue that, while it may have been below the peak, the bubble extended into August, 2007, (Bear Sterns), and really took a dive in Sept, 2008, (Lehman, McCain...)

Duncan McGeary said...

By being forthright, here, I'm asking for comments by Buster, Homer and BEM and Marge and the old crowd.

What say you?

Anonymous said...

More importantly:
http://www.burststudio.com/kitten.html

RDC said...

It pretty much follows a sine wave pattern. Figure the first quarter of the drop is when it first rolls over at the top. Prices stay pretty sticky. Then the next half is when you have pretty fast drops. Then the last quarter of the period the drops slow significantly as you start approaching the bottom.

RDC said...

The 6-7 years is peak to trough.

Peak to peak is 12-14 years

Duncan McGeary said...

Ouch....that seems too much.

How about, as Bruce says, rebounding to normal (non-bubble) levels?

RDC said...

I just took a look at the latest OFHEO Data. I find it to be very good for looking at trends. According to that data Bend peaked Q4 2006. It has not bottomed yet but it appears from a graph to be entering the bottoming portion of the curve, I would not be surprised if we are another 1.5-2 years from bottom. (it took about 5 quarters from the peak to the steep part of the down turn. We are 9 quarters after that if it continues to round off. that would fit the 25%, 50%, 25% pattern that is normal for peak to trough.

I also ran a trend line from the start of data of 1985 through 1998 and entended it through today (Real estate more then any other investment always returns to it trend line. Sometimes it overshoots one way or antoehr but it always returns to the trend. I chose that preiod because Bend experienced pretty consistent behavior during that period. I stop just before you started to see fairly dramatic increases around the time of the changes in the tax laws (exclude the first 250k of gains from primary home sale). Now Q4 of 2009 was the first time the current value has dropped below that long term trend line. The value now sits 8.4% below the trend line. Now additional over shoot is likely.
Especially considering that at the peak the then current price was 73.65% over trend line.

So my projection is that the bottom wont be reached for another 1.5 to 2 years with the overshoot to reach atleast 30%.

The good news is since the value is below trend a long term buyer can probably expect better then average (for the Bend area appreciation) in the long term as the prices return to trend onces the bottom is reached.

RDC said...

Oh one other thing.

The long term trend line does not reach the 2006 Q4 peak for another 17.25 years.


Now one can try this exercise trying other periods for the trendline and get some different results.

The data set is

Metropolitan Statistical Areas and Divisions through 2010Q2 (Not Seasonally Adjusted) [CSV]

From

http://www.fhfa.gov/Default.aspx?Page=87


Have fun.

Anonymous said...

"This still has a while to run. The governments actions to minimize the impact has probably only pushed out the duration."

Agree that this stuff has a VERY long time to run out, but disagree about the govt. actions to minimize the impact.

Right now we have excess factory capacity and millions of people who want to work.

Every day, more factories have more downtime and more workers are laid off. They buy less stuff and more businesses have to close. It's a downward spiral.

There is an excess demand for "safe" assets, i.e., U.S. treasuries. Basically, savers/investors are pleading with the U.S. government to take their money, as they don't know where else to put it.

There needs to be a big shock to the system to get out of this downward spiral: either an inflation target of 4% (so people with cash will get rid of it and buy something already), or massive fiscal stimulous.

We've got David Broder in the Wash Post saying that we should invade Iran in order to provide the massive fiscal stimulous that's needed.

RDC said...

Every dollar you put into the economy today, which adds to the deficit, results in 1.5 dollars worth of drag in the future.

This is not a business cycle recession. This is a deleveraging recession. The only way you work your way out is to get rid of the debt. That does not mean transfer it from individual to government balance sheets, it means get rid of it.

The way the government chose to try and stimulate the economy did more to stimulate the Chinese economy then it did ours. It largely went into consumer spending. Since most of our consumer good tend to come from over seas, that is where the money ended up going.

To recover from this the US needs to do this that have a permanent impact. That means move away from the debt driven consumer economy. This means reduces the consumer impact on GDP by about 10 percent (from 70% to 60%). This is a far more defensable number.

We need to restructure the tax system to encourage manufacturing, and get companies to build new facilities here. Change taxes on manufacturing income from the current 30% corporate rate down to the 15% that China charges and you will get companies to come back. At that level you have enough benefits in reducing inflation and currency risk to offset the corresponding overseas labor cost savings.

Offset the manufacturing tax reduction with a VAT on all products consumed within the US. That excludes exports, but hits imports (same thing Europe does).

Give permananet residency and allow to work here to anyone that completes a BS, MS or PhD here. Our key scientists and techologists are getting educated here and then leaving. We are dramatically slipping in R&D.


Instead the government is heading down the path of Japan, which did lots of stimulus and quantitative easing. They hve been in their quagmire for pretty close to 20 years now. Their current situation, debt is higher then ever and population demographics worse then ever.

Anonymous said...

RDC responded so fast I'm thinking that he is an alternative personality of Duncan. Hmmmm....

*

Anyway, RDC, do you really want to get rid of all debt? That's what you appear to be saying.

Do you want to get rid of all savers too? Because that's what happens with all your savings and investments -- for the person at the other end it is a LOAN.

Sorry, but it's just too easy to say that "debt got us into this problem, so the solution is for everyone to pay off all the debt."

We might be just lucky if we end up doing as well as Japan has done -- they are still an incredibly rich, successful country. You see stagnation, but I see survival for a real estate bubble that maybe even dwarfed ours in relative scale.

We've got a situation in the U.S. where people with plenty of cash won't go out to a restaurant oron a vacation anymore. You know, it's out of style.

Dunc, it's even out of style to buy comic books anymore. I'm holding off buying comics until they drop the list price anymore.

This is the only rational thing to do when there's deflation, right?

Deflation only adds more people to the unemployment line, and makes things contract WAY more than they need to.

*

The logic that (a) all debt is the same, (b) the forgetting that Savings = Investment at the macroeconomic level, and (c) the idea that since debt got us into this mess, therefore there's no way that it can get us out, is clean, seductive, and actually quite wrong.

It's why there's a discipline called Depression Economics.

Everyone on the face of the earth trying to pay down all debt at the same time. It's deflation, deflation, deflation, until we end up with a 1932 economy all over again.

We way overshoot, running the economy into nothing while unemployment and excess capacity mushrooms.

Duncan McGeary said...

I don't believe the American consumer will turn Japanese anytime soon. Maybe with a few more severe shocks, but not now.

If I remember rightly, they were having a hard time getting the Japanese consumer to spend money even before they're boom.

Real estate, that's a whole nother nut.

But Americans are addicted to their dinners and yes, even comics. A lull maybe, but they'll be back.

RDC knows way too much to be me, even when he's wrong.....or something.

Duncan McGeary said...

Half the time I don't even understand the terms and jargon RDC is using....

Anonymous said...

"Half the time I don't even understand the terms and jargon RDC is using...."

Nice try, Dunc (I mean, RDC). ; )


On the topic of deflation, I'm sure there are people who salivate at the prospect of a massive crippling of the economy, so they can buy up assets on the cheap.

Isn't that how fortunes are made?

I'm sure that some will say that such a purging of the economy is good -- the "leave it alone liquidationists" who think that deflation purges the rotteness out of the system "so good men can pick up the wrecks of others."

But in this deflation, there is a lot of good companies and good people who are going to suffer, needlessly, simply because of political stagnation and a lack of will to act.

Duncan McGeary said...

Sigh, sorry RDC...

This seems to happen on a regular basis, probably because I write so much, so I'll say it again.

I only write as Duncan. Ever.

I don't even do anonymous.

RDC said...

Apparently Anonymous believes you can borrow your way to wealth.

There are plenty of investments that can be made without consumer debt.

Take the current situation. THe FEd is doing quantative easing to lower interest rates. However, the Federal government is adding to its debt level such that it is borrowing large sums. THe banks are playing arbitrage by borrowing from the FED at record low rates and then turning around and loaning the money back to the government by buying US treasuries and making safe money off the spread and increasing their capital position at the same time.

The government is a competitor to business when it comes to borrowing money. So for that matter a consumers. Banks would much rather get a safe return then loan to small business at a reasonable level. They would rather do credit card loans at high level then to small business.

Consumers cannot buy if they are up to their eyeballs in debt. Their stand of living suffers because of the debt levels. THe US needs to return to a saving pattern and debt level consistent with the late 50's and early 60's, instead of high debt levels and no savings.

Do that and you have reasonable interest rates without a crash. You have money at a reasonable rate for small business which happens to create most of the jobs. You actually have people increasing their income becasue of return on their savings/investments without having to artifically inflat bubbles.

The reason why Japan's currency has managed to stay strong is because they could buy their debt themselves do to the higher japanese savings rate and they had a positive balance of trade.

As far as the US is concerned you can add a large negative balance of trade and the need for outsiders to buy our debt. THat puts us in even worse shape then the Japanese long term even though their debt is higher as a percentage of GDP (though ours is catching up). WE are both in a demographic trap with increasing percentages of the population over 65. They are further along that path then we are, but we are heading down the same path.

RDC said...

Deflation is when you have too little money chasing after too many goods. Otherwise known as a liquidity trap.

One can start reducing debt without triggering deflation. Increasing consumer demand for Chinese products does nothing to solve our problems other then to increase the flow of money to China.


The key is to shift that money flow. Start up US rare earths production instead of buying it from China. Shift computer and other manufacturing back to the US. The key is to shift a higher percentage of every dollar spent to US sources.

If you do not do that then the economy is a death spiral with each generation facing more problem then the one before it.

Do you really think that the solution will be easier 10 years from now with a higher debt, an older population ...

The solution is that we have to restore our manufacturing competitiveness on an economic basis.

We have to get money flowing int other country not out of it.

Anonymous said...

"I only write as Duncan. Ever."

Dude, we get it. You're Duncan. No one else is. RDC is someone whom we can only guess.

*

By the way, everyone go buy some comics from Duncan. They're really good. Especially Ironman. My son wanted to be him for Halloween.

Duncan McGeary said...

Well, you know, you don't want to tangle with RDC....

Anonymous said...

Speaking of comics, a cute little webcomic here about someone running a comic book store:

http://www.allnewissuescomic.com/

Regarding Homer & Marge, I occasionally see Old Fart on the PDX bubble blog -- maybe once a quarter.

RDC said...

One clarification:

When I said 1.5 to 2 years, that is from the last available data Q2 2010, which would place the cycle bottom between Q4 2011 and Q2 2012.


The issue of spending vs savings is not a digital switch one or the other. It is a percentage shift. The US has clearly built up to much debt, and had too little savings. One statistic I saw the other day indicated that for baby boomers, the median amount of retirement savings was $20,000. The average amount was $50,000. That for a group in or close to retirement.

Anonymous said...

Life is great here in SE ASIA, best time NOT to be in Bend in 20 years.
Like I said before all assets are now being sold. Things that people need like oil and food will go up in value, things that people don't need like cars and homes will collapse.

Not much change in framework of time, who cares if the bottom for Bend housing is 2012-2014, when this depression is over there will be so many people out of the retirement cycle that this whole biz will go away.

Lets be honest it costs too much here to heat homes to attract massive elderly housing.

Sure a few with money will drift to Bend. But essentially homes will come back to 4x income, there around $160k, and stuff over $500ki will be essentially worthless, thereby wiping out financially all the middle age yuppies that moved to bend in the last ten years.
Who gives a fuck about RDC, he's too fucking dumb to be DUNC, I have always said hes the fuckhead from BENDBB bulletin board.
cheers from buster in singapore, cashed out and gone for good

H. Bruce Miller said...

RDC: "The key is to shift that money flow. Start up US rare earths production instead of buying it from China. Shift computer and other manufacturing back to the US. The key is to shift a higher percentage of every dollar spent to US sources. If you do not do that then the economy is a death spiral with each generation facing more problem then the one before it."

Glory Hallelujah, I agree with RDC!

Anonymous said...

"By being forthright, here, I'm asking for comments by Buster, Homer and BEM and Marge and the old crowd.

What say you?"

I say, I read here about twice a month. I too miss the old crowd. I sooo looked forward to the Sunday AM Bend Bash. I even enjoyed being the "Angry Bend Bitch". I think the blog is still up. HEHE

Butter, where are you?

So this recession thing is still in the works. CO has lost about 700 dead beat Reltards (no loss there). RE prices continue the downward spiral. Foreclosuregate and title insurance(or lack thereof) will beat the rest of the overvaluation out of RE prices.
I agree that 2014 may be the dead bottom of RE prices and our economy. I also think we then will wallow along the bottom rung for years after that.
I still hold Beans,Bullets and Bandaids as a good thing to take to heart and have added Gold, Guns and God to that list as a way to survive the coming days.
Cheers to the moldy guys,
Marge

Bend Economy Man said...

I think that the regular economy will recover before the real estate economy does. Both nationally and locally.

Nationally it's not as big a problem as locally. If RE lags behind the rest of the economy that's not such a bad thing as long as RE is a small part of the economy.

One thing that Bend will have to deal with is that the Baby Boom generation is in a difficult financial position. This is precisely the demographic that all of the gated resort communities and golf courses have been built to attract.

Bend has been focused on retirees, telecommuters, second home owners and other groups that spend locally but don't need to earn locally. Post-crisis, the goal of attracting these groups shouldn't be a serious part of local economic planning.

We've all been talking about what's "normal" for Bend. I've stopped thinking there is any "normal" in Bend economic growth. The town's only been around for 100 years. Way more than half the population's been around for less than 20 years.

To anyone who's moved to Bend since the '90s, "normal" for Bend means being an upscale resort community. Back in 2004-2006 it sounded perfectly appropriate to mention Bend in the same sentence as Aspen, Vail or Lake Tahoe. Of course, the working class was priced out, but Bend could count on attracting young, educated people with families, rich retirees and fly-in second home owners.

OK, well, the direct flights to L.A. have been cut back. Population growth is stagnant. Most people, including people with money, need a second home like they need a hole in the head. The telecommuters were the first to be laid off. Broken Top Golf Club, which when it first opened was the pinnacle of class, quality and exclusivity in Bend, is bankrupt. "Sagebrush subdivisions" like Pronghorn and Brasada Ranch are turning back to sagebrush.

Still, though, it hasn't sunk in. No one knows what will happen next in Bend or what "normal" is. No one seems to be thinking the unthinkable: Bend is unlikely to continue to be an "upscale" community,. This is America - the only way you can keep out "non-elites" is price. So what happens when the lower-middle-class white families living in East Side crapshacks are replaced by Hispanic families, and Laotian mushroom pickers find they can afford a house in Bend? This is a process that's happening right now (and, as I am a liberal, I think it's a beautiful process).

The many many hundreds of bank-owned homes in Bend will eventually need to either be bulldozed or sold at whatever price the market will bear. They're unlikely to be bought by elites. Government-owned Fannie Mae alone has hundreds of foreclosed homes in Bend and a mandate to offer them through public housing advocates first.

And once the demographics in Bend have changed, no one will be including Bend in the same list as Aspen and Lake Tahoe.

So if by asking when things will get back to "normal", people are wondering when Bend will continue along the path of being an upscale resort community, my answer is that we've left that path, we're now developing in a different direction, and it will be near-impossible to reverse.

Anonymous said...

Borrowed money is expensive money.

I run a business here in Bend and we're buried with work. Never really blinked over the last 4 years.

I have never once borrowed money to fund the business. Probably the best policy I ever stood by.

Duncan McGeary said...

There was a time early in my career where it made sense to borrow money. There were a couple times when I probably shouldn't have. And a couple of times when I HAD to....

So, the difference for me now is that I don't Have to, nor do I Want to....

I'm afraid in these kinds of downturns the temptation is to believe it's going to turn around and keep the store at previous levels, and then reacting too late to each downturn, and meanwhile using resources -- or worse, debt -- to cover the shortfalls thinking you'll repay it, but you never quite do, especially if you borrow from credit cards or such -- fees, and charges, and interest start to eat you up.

But still, you think it will turn around.

Eventually it did turn around for us, so I can't say it was a bad decision, but it was miserable at the time, and now that I don't have to, I'll do everything I can to avoid it.