Can We See A Bubble If We're Inside The Bubble?

Authored by Charles Hugh Smith via OfTwoMinds blog,

We want this time to be different so badly, we can almost taste it.

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.

This boom is not overly surprising, given the centrality of San Francisco and the S.F. Bay Area in the Hipster-Techie Mental Map which I have sketched here for those who may still suffer from delusions that Washington D.C. and New York matter--(hint: they don't.)

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 the East Bay as workers priced out of S.F. move east across the Bay, driving up rents to near-S.F. levels.

Yes, rents and home prices are starting to soften, but this hasn't changed the general view that this is only a moderation of a long-term uptrend with no end in sight.

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 skyrocket in price.

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 last longer than the others.

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 Motorola booth), and dozens of other consumer technologies that never quite caught on--kits to turn your PC into a TV, etc.

Now we see the same euphoria in the FAANG stocks, Big Data, A.I., crypto-currency Initial Coin Offerings (ICOs) and so on.

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 parody in which Hitler tries to rent a flat in S.F.

Across the Bay in Oakland, new relatively large 1-bedroom flats with Bay views 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 laundry room 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 after $20K in taxes and deductions have been subtracted from their annual wage.

The current Gold Rush will collapse, and as the newly fired marginalized workers pack up and leave, nobody will be renting the 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 losing money and close.

The bubbles in Seattle and Portland that so many view as permanent features of their rising wealth will also succumb to gravity.

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, moves to cheaper and far less exciting locales, busted dreams and all 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, we can almost taste it. But this time is only different on the margins; the flavor of the bust remains the taste of ashes.


VK Fri, 06/16/2017 - 08:37 Permalink

As I had mentioned in an earlier post, US compounded growth during GD1 in the 30's was 0.97% per annum over the 30's. Since GD2 in the US, compounded growth after "adjusting" for inflation has been 1.31% per annum last 10 years, the EU has fared even worse with a growth rate of 0.52% per annum compounded and Germany the "best" performer has clocked in a 1.01% compounded growth rate since the crisis began.

The markets don't indicate anything more than central bank injections for the elite. The effects of this depression are playing out for the man on the street and in the political arena where people are being gamed out of the system and want to lash out. We're in a stagflationary period where people's incomes simply haven't kept pace with asset price rises, house price increases, healthcare costs and education costs. People are going deeper and deeper into debt just to keep up appearances.

LoneStarHog Fri, 06/16/2017 - 08:48 Permalink

Yes!...If you are IN the bubble, everything OUTSIDE the bubble looks DISTORTED...All it takes is to be OBJECTIVE rather than SUBJECTIVE (i.e. Fooling Yourself).

Overleveraged_… Fri, 06/16/2017 - 09:20 Permalink

Is there a bubble? Probably. Is it going to pop? ABSOLUTELY NOT.You see, when freshly created dollars are constantly being injected into the markets they will only continue to go up. Things are truly different this time because:1) Central bank balance sheets havE NEVER BEEN HIGHER2) There is NEVER been in history this much coordinated CB buying3) We are created $300+ Billion dollars per month and funnelling it into the market.These phenomena did not exist in 1929, 1987, 2000 and 2008. Now it exists so thats why its different.Is a "bubble" a bubble if it never explodes? You don't know whats a bubble and whats not a bubble until it explodes. This market has 0% chance of exploding due to all the new money going on.This is why I gave up my shorts late last year and have been piling on 3x Leveraged Long S&P 500. I am up $48,000 on the year and will be quitting my job soon.

Jessica6 moman Fri, 06/16/2017 - 09:36 Permalink

I suspect that is the main reason the markets began getting reinflated in 2009. They realized with all these baby-boomer offspring just hitting thirty that they had a whole new generation's potential wealth to steal. Now the oldest of them are hitting 40, the decade which is usually a person's peak earning years.

In reply to by moman

Jessica6 Fri, 06/16/2017 - 09:32 Permalink

I do a fair number of road trips in the US and the differences are staggering. In the areas where tech or government employees live (such as Virginia/Maryland around the DC area) subdivisons, strip malls, new roads and so on are going up like crazy.Drive north a few hours to upstate New York or to Ohio and so many cities seem to be emptying out. For instance I was shocked at how dead Albany was. And a few blocks out of the downtown core, all third world ghetto. There really are two (or more) different countries in the US nowadays.

JailBanksters Fri, 06/16/2017 - 09:50 Permalink

One day Jews will rule the World ...Imagine how bad the US will get when the Jews will control the News Media, the Military, the Banking System, the Government, the Education System, the Entertainment Industry, the Energy Supply, the Water Supply, the Natural Resources 

Sudden Debt Fri, 06/16/2017 - 11:11 Permalink

anybody who wants to drive 45 minutes can buy something descent for that money.Why are people so lazy and willing to pay so much for it? But nobody is forcing anybody and supply and demand is normal.Don't like it, move away. 

rf80412 Sudden Debt Fri, 06/16/2017 - 12:46 Permalink

They're convinced that 45 minutes away from downtown is the sticks where there's nothing to do but sit on ratty old porches, clutch your guns and Bibles, and watch corn grow.These are suburban kids who've never walked anywhere in their lives - and still can't since so much of the Bay Area is still car-based suburbia - and they're used to a 5 minute drive being already out of sight and out of mind.  They don't have a real city dweller's sense of space and time, in part because they don't actually live in real cities, so they think that the only way to partake of the "scene" is to literally be in the camera's view: live upstairs or right next door.So they all try to crowd into a few square blocks where they can literally see the shops they want to shop at, the restaurants they want to eat at, and the clubs they want to be awkward and sexless at ... and will pay $4000 a month for a broom closet to do it.  But they secretly dream of a 3 bedroom 2 bath flat or rowhouse like they've seen in lifestyle magazines - not to mention the house they lived in as a kid in the suburbs - and this gets turned into "lack of affordable housing", which needs to be solved by the state since the developers are only building things that "I" either don't aspire to or can't afford.

In reply to by Sudden Debt

brushhog Fri, 06/16/2017 - 12:17 Permalink

Seems like an obvious bubble to me. Most of our society runs on pure debt which cant go on forever, and must grow exponentially to keep from collapsing. Its like being on a jet plane with a finite fuel tank and no place to land. You're going down sooner or later.

any_mouse Fri, 06/16/2017 - 12:18 Permalink

Inside the Bubble you would notice the Bubble is expanding away from you.

You would think that the Bubble can expand forever.

There would be speculation about parallel bubbles and alternate bubbles.

Bubble Bath.

Silver Savior Fri, 06/16/2017 - 12:54 Permalink

San Francisco is manure fresh and deep. On the river ferry before even getting there from Larkspur I thought for sure I was going to see a floating dead body. The prisoners in San Quinten took off their shirts and gave us the bird. When I arrived at fisherman's wharf all I seen was a bunch of weirdos everywhere and the stench of sewer. Standing up on the Muni train was like I was in India. Hot and cramped. I did not have a good time in that City. The rich hippies can have it.

eltxamo Fri, 06/16/2017 - 14:59 Permalink

Ha ha stupid prices. Can't they work from home? telecommuting. I rent a old town house for 400$ per month in a small town in Spain. lol. Selling for 40,000$

malek Fri, 06/16/2017 - 16:38 Permalink

Great post, Charles.

But on
"The current Gold Rush will collapse, and as the newly fired marginalized workers pack up and leave, nobody will be renting the 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"
I wonder did you not get the message?

There will never be another serious bust /nominally/ allowed - which will end up destroying the currency as the final result.