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Observations From The Heart Of Silicon Valley

The calm before the storm?
Thursday, May 19, 2016, 8:11 PM

Yesterday I made the 2-hour drive back to Silicon Valley, where I lived for 15 years before moving out to the country.

I rarely go back, as I miss very little about the hyper-elite scene there. When I do, though, I feel I have a useful 'insider-now-outsider' perspective that allows me to see things there more accurately than those who live in that fishbowl 24/7.

It's Still Fantasy-Land

What hit me most strongly upon arriving back in the Menlo Park/Palo Alto area, is how little of the craziness has changed since I left 4 years ago. I don't mean 'unchanged' though; rather that the same craziness is there, just more extreme than ever.

The streets still bustle with hipster techies, fashionista spouses, the shiny Stanford students and the less-shiny venture capitalists. Every time I visit, I'm amazed by the latest generation of specialized stores that have sprung up to attend to every want and whim of this trend-driven population.

Here's a not-uncommon way a lunch break is spent in Palo Alto. First, zip over to Town & Country and drop $65 for a 3-minute cryotheraphy session at The Performist. Then warm up with one of your 3-times-per-week visits to Drybar for a $45 "blowout"  -- no hair cut or treatment, mind you; just the styling touch-up needed to maintain your 'fabulous' look for the next 48 hours. Next, grab yourself lunch at Sushiritto (you guessed it: burrito-styled sushi) - but get there early, as you'll be waiting in a long line as this ultra-hip restaurant is only open for a few hours each day. Then for dessert, nab an ice cream sandwich at CREAM (yes, an entire store dedicated to high-end ice cream sandwiches), but be prepared for an even longer line than Sushiritto's...

The belief in the area's bulletproof and never-ending prosperity is as alive and well as I've seen it.

And housing is still the most visible example of this. Prices were insane when I lived there, and they're substantially more insane-r now: 

(Source)

Looking at this chart, I'm reminded that I first arrived in Palo Alto in the fall of 1997 (for grad school). So the data series pretty much encompasses the span of my personal experience watching home prices shoot the moon here -- and then set their sights on Mars. It's been nuts to watch. And even more nuts when noting how the pace of increase only accelerated in the years following the credit crisis -- perfectly timed, I might add, with the onset of the quantitative easing programs of the Federal Reserve and the other major world central banks. Flood the world with trillions of newly-printed thin-air money and it has to go somewhere... 

In 1997, I remember clearly driving down University Avenue on my way to orientation for grad school and being shocked by a 'For Sale' sign listing a home for $500,000. Who in their right mind would pay half a million dollars for a house? I recall wondering. Well, not quite 2 decades later, that same house is worth 7x (!) more according to the chart above.

Yesterday, driving through the neighborhood I used to live in, it seems every 4th or 5th house has either been substantially renovated by a recent buyer, or completely razed and replaced with a multi-$million McMansion.

My main point here is that, despite recent headlines that the Silicon Valley housing bubble may have popped, there aren't visible signs of it yet.

Trust me, I wish there were. You'll have a hard time finding somebody who has hated the housing scene there more than I have (and still do). Remember, this is the guy who ranted how this $2mil piece of garbage in my old 'hood epitomizes everything wrong with Bay Area housing:

Add that anecdote to the hard data released this week about the skyrocketing cost of renting in the Bay Area:

How Much Should You Make to Afford Rent in San Francisco?

For the squeamish, it might be best to look away. For the those with stronger reserve, another data compilation was released today by SmartAsset with arguably bad news. You will need to make $216,219 annually to rent a two-bedroom in San Francisco.

This comes on the heels of news that college grads can expect to pay upward of 79 percent of their income to rent in Baghdad by the Bay.

"While rental rates have increased in recent years, wages haven’t kept up," says SmartAsset. "The median household income in the city is only $78,378."
 
This is a 7.4 percent bump up from 2015, which showed that one needed $201,171 annually for a fair market two-bedroom in San Francisco.
 

That is a truly staggering and stupid requirement. And while rising rents are occurring across the country (again: Thank you, Federal Reserve!), the San Francisco Bay Area remains a far outlier when compared to the other major metros across the country:

(Source)

So, I'm sorry to report from the trenches that Silicon Valley's famous "reality-distortion field" is not flickering out.

At least, not yet.

Signs Of A Top

Now, while there aren't yet signs of a correction there, there are plenty of symptoms indicative of a top.

Housing and tech company performance are the ubiquitous topics of conversation in Silicon Valley. That's nothing new. But the tone in which those conversations are being had is.

Homeowners are not oblivious to the dizzying heights house prices have now reached. While they remain smug about the equity gains they're sitting on, they privately admit that the rocket ride can't last forever. Most now predict a period of 'cooling off' will need to happen at some point, though very few have the stomach to consider that prices might actually correct lower. The point is, the ingrained belief that "housing prices always go higher" -- which, trust me, is a universal religion out here -- is beginning to moderate. Which is sort of akin to the Pope wondering aloud "Maybe those atheists are on to something..."

Of similar momentousness, the all-encompassing faith in the Tech sector to churn out ever more millionaires and billionaires is similarly experiencing a challenge of confidence. It's getting harder for start ups to access investor capital:

Forbes: Tech CEO Shares Difficulties of Raising Seed Funding in Tight VC Market

According to a recently released report from PricewaterhouseCoopers and the National Venture Capital Association, funding in Silicon Valley startups fell 19.5% in the first quarter of 2016 compared to a year earlier, and is down 10% for seed stage companies in the first quarter 2016, amidst fears over the global economy and the run-up in startups’ valuations.
 

For more established companies, they're having trouble cashing out. The IPO window for Tech stocks is abysmal this year:

Why 2016 has been a terrible year for tech IPOs

Only 11 U.S. companies have gone public in 2016, making it the worst start to a year for initial public offerings since 2009, when only four companies made it out of the gate by April 20.

At this time last year, 43 companies had gone public, according to Renaissance Capital, which runs IPO-focused exchange traded funds.

(Source)

And the largest perennial powerhouses -- companies like Apple, Netflix, Yahoo!, Google, LinkedIn, Twitter -- have seen their stock prices flatline or (gasp!) drop over the past year (Facebook is the only notable exception). In fact, many are announcing mass layoffs, both public and stealthy, as I've been chronicling closely since the start of the year.

The world is slowly beginning to wake up to the fact that the Tech industry's track record of birthing world-changing enhancements looks better in past decades than in this one. As I've railed about loudly, Silicon Valley has become a too-cozy partner with Wall Street -- a partnership that has resulted in a lot more huckersterism than actual value

Life in Silicon Valley has evolved around a dependence on the next wave of boom-time money flooding in from the NEXT BIG THING. But right now, the current "big thing" is losing momentum, and there's no obvious fleeter-footed successor poised to take the baton anytime soon.

What happens when a system designed to sell to the "greater fool" runs out of fools?

Theranos: Portent Of A Coming Fall From Grace?

This morning, Tech darling and soon-to-be-slain unicorn Theranos announced that it was voiding all test results performed on its proprietary Edison machines over the past 2 years, effectively admitting there is no real value underlying its business. As a result, its private market valuation of $9 billion is now on an express-ride to somewhere much closer to $0.

Here again, I have a personal connection to the story from my time in Palo Alto. Theranos CEO Elizabeth Holmes went to Stanford: I'm socially familiar with a close advisor of hers, and a grad school classmate is one of the VC investors in the company. To be clear: I haven't talked with these folks much directly about their involvement with Theranos, but I have an understanding of some of the players involved.

To my eye, the fall of Theranos is a quintessentially Silicon Valley story. A big, brash idea that feeds into the valley's self-adulation as a place where miracles happen. Silicon Valley wants Cinderella-stories like this to succeed. In fact, to support the real estate and Tech funding industries there -- it needs them to. Without the influx of new capital and new dream-chasing professionals, the party ends pretty quick -- as nobody can afford to live or operate there for very long without a windfall.

Because of this strategy of hope, those involved with Theranos deluded themselves. They clearly didn't conduct their due diligence with sufficient rigor and -- based on the folks I know personally (who possess much more brainpower than I, I'll readily admit) -- didn't seem willing to admit to themselves how bad things might actually be, even as the evidence mounted month after month. There's nothing terribly unique in this; as Dan Ariely reminds us, we humans are champion rationalizers. Our monkey-brain often derails us with its preference for the soothing lie over the inconvenient truth.

And now, Theranos' dream is dead. Even if there's worthwhile intellectual property to be salvaged, the company's brand (as well as its founder) is now toxic.

I see a lot of similarity in the demise of Theranos and the likely future trajectory for Silicon Valley at large. Loose money enabled valuations to balloon way out of proportion with fundamentals, massive self-delusion fanned by media adulation have kept the system from challenging itself, and yet the farce continued far longer than anyone imagined possible.

Theranos' day of reckoning has just arrived. By itself, it's a single added blemish to the Silicon Valley 'miracle'. But how few more can be sustained before the 'miracle' starts to look more like a 'debacle'?

Answer: fewer and fewer the higher home prices and rents rise, and the prospects of being on the receiving end of a Tech windfall diminish. At some level, there's just no more greater fools left willing to contribute their money or their time given the high cost and cooling upside.

And then like Theranos, Silicon Valley's impenetrable reality distortion field will fizzle, and possibly flicker out. When that happens, like Theranos, the downdraft will be sudden, shocking, and brutal.

~ Adam Taggart

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34 Comments

Jbarney's picture
Jbarney
Status: Silver Member (Offline)
Joined: Nov 26 2010
Posts: 233
Crash vs Slow Decline

Adam,

Thanks for the writing.  The main point I take away from this is thinking about the probability of a rapid shock or if the future is going to be marked with a series of 2008 type events in the coming years.  I have often wondered how bad the next down leg will be and how much it will hurt.   While thinking of these things, the world continues to chug along....

We all only have control over the things around us.  Working on the garden.  Getting bees, trying our hand at harvesting mushrooms.  Still working on the orchard.  Buying physical silver when possible.

Just want to continue to prep for when the next shoe drops.

 

Jason

davefairtex's picture
davefairtex
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Posts: 5587
great update

Adam-

I always enjoy your silicon valley updates.  I lived there too, a long time ago, and I remember being appalled at home prices even back then.  But I don't recall any hipster things.  It was a simpler time: I remember eating a lot of super burritos.  But then again, this was at the dawn of the Internet age, and from what I recall no hipster would be caught dead in the valley back then.

A friend of mine who still works in the area occasionally posts on FB: "Winter is Coming", referencing the latest news on the drying-up of funding and/or valley layoff news.  Not everyone is unaware.

 

 

CleanEnergyFan's picture
CleanEnergyFan
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Posts: 108
$3.5 Mill Average Home Price vs 78.3K median household income?

Wow, that is an amazing statistic!  How do I short that?  Maybe a better question is, instead of shorting the S&P500 (as I am currently doing), how best to short Silicon Valley in general?  Thanks for the update Adam...it is interesting to hear how these bubbles exist seemingly impervious to the economy at large.  Glad you are where you are! 

charleshughsmith's picture
charleshughsmith
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extremes become more extreme

Great post, Adam. You've made me hungry for a $40 sushi burrito and a $10 ice cream sandwich :-) 

What really pops out of that housing chart is the extremes only become more extreme as the central banks and states do (as I am fond of saying) *more of what has failed spectacularly.*  The US and global economies are clearly weakening, yet look at how housing is still soaring. This is extraordinarily dissonant.

One of my good friend's brother owned a house for 30 years a few blocks from University Ave. he sold it a couple years ago for $2+M. Looking at your chart, he left $1 million on the table in those two years. That is 20 years of the average household's annual earnings (around $50K/yr).

Snydeman's picture
Snydeman
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Posts: 532
Wait.

People actually freeze themselves for 3 minutes just so they can get a "high" and then burn calories as their bodies desperately try to warm their core temperature back up to normal levels?  Does anyone else find that premise absolutely insane?

 

We're doomed. Doomed, I tell you!

Gratidude's picture
Gratidude
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Posts: 19
This hits the lowest incomes the hardest

The SF Bay Area rental cost problem isn't isolated to people who want to live in Palo Alto. Last year I had a front row seat to this dynamic when I lived in a low-rent old trailer park in inexpensive Pacifica (about 30 miles north). It's very inexpensive relative to the rest of the Bay Area because of the notorious weather and difficulty of access. The new trailer park owner decided to evict the 90 families living there, raze the land and build nicer homes to support 3x higher rent. All the residents were given the option of paying the new rent when the project was done but none of them could afford it. In fact dozens of them were fixed income retirees that couldn't find anything anywhere in the Bay Area.

These retirees were forced to move far away from where they have lived for their whole lives. Several of the still working age, about six families that I personally know, had no choice but to buy a travel trailer or a RV as their full-time residence and bounce between parking lots and side streets as they continued to commute to their jobs. Even though they are often hassled, I predict this style of living will get much more common as people are forced to find alternative housing.

Things are very tough out here if you don't make more than twice the median income. The very definition of unsustainable.  

When the trailer park was bought: http://www.bizjournals.com/sanjose/news/2015/09/22/exclusive-carlyle-gro...  

When the tenants got the eviction notices (btw, the estimated rent amounts for the new homes in this article are about $1k lower than the numbers I was told): http://www.smdailyjournal.com/articles/lnews/2015-08-11/mobile-home-park...

Adam Taggart's picture
Adam Taggart
Status: Peak Prosperity Co-founder (Offline)
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Posts: 3151
Fear & Loathing

A few things to add to the article above about my recent trip:

China

I stopped by my bullion dealer, Robert Mish, whom we've interviewed on our weekly podcast a few times in the past (first in 2012, then again in 2013).

We spoke about gold's prospects. And while he sees prices languishing or even softening into the summer, he believes (as Chris and I do) that the secular downward trend of the past several years has reversed, setting up a new bull market for the precious metals. After his predicted summer doldrums, he expects PMs to power higher as the year ends. Of course, this is just two guys casually spit-balling; so don't place an undue weight on this forecast.

More interestingly, though, we spoke about his sales to buyers in Asia (mostly China), which remain robust. Yet despite the continued demand, he confirms he also continues to see escalating restrictions being placed on 1) options for Chinese buyers to pay for his products, and 2) foreign bullion dealers being able to get their product into the region.

China is definitely tightening its capital controls -- which as I've written about before, is an important milestone I've been waiting for. I've long held it as a marker that, when the hot Asia money gets turned off, asset prices in the US -- most notably real estate and stock prices -- will be in danger of a major downward correction. For the past 7 years, this money fleeing China (over $110 billion into the US housing market in just the past 5 years alone) has set the marginal price for many assets. Once the top-dollar Chinese buyer disappears, who is the next-in-line marginal buyer? And more important: how much below the Chinese buyer will the new marginal price be? We don't yet, but my strong expectation is that it will be in excess of 25%+ less for many assets, such as Bay Area real estate.

That said, Robert warns not to expect too much from today's capital controls. From his vantage point, he sees the capital controls as only applying to the average Chinese person -- not the politically-connected, who are the folks with all the money. And of course, it's those very insiders who are expatriating their wealth abroad in case things home in China take a nasty turn. So, Robert doesn't see the capital flow from Asia diminishing materially in the near term.

Fear & Loathing

I also met with a buddy whom I worked with during my days in the Tech scene. He's a regular guy: he's been working for Tech companies for 20 years, but hasn't has a "made it big" windfall yet. His wife works in health care. With his six-figure 2-income household, he's pretty representative of the 'middle class' living in Silicon Valley these days.

Which means he's basically hanging on by his fingernails.

We talked about a neighbor of his who moved in recently. The house next door was purchased by someone who works at LinkedIn, and whose spouse works at another respected Tech company. Purchase price: nearly $2mil, for a house built in the 1970s with nothing done to it since. It's about as plain-vanilla a 'starter home' as you can find these days in Silicon Valley. And the house was purchased nearly two years ago; meaning it's now easily worth over $2mil, and more likely closer to $2.5mil.

I remarked that I was a little surprised that two rank-and-file salary earners could afford the house. My friend replied that the buyer not only worked for LinkedIn, but had joined because the company acquired the startup he founded. 

Meaning: home prices prices have pretty much risen to the level that, to purchase the most basic of houses, you either have to have received bags of cash for selling your Tech company or be a ranking member of the Chinese Communist Party politburo. Otherwise, you pay your $5k (or more) in rent each month, hoping that the housing market eventually corrects here some day by enough to give you an entry point.

Understandably, the 'middle class' here like my friend (who would be in the top 2% by income nearly anywhere else in the country) is full of resentment and fear. Silicon Valley in all but name has become a 2-class system: the hyper-elite and everyone else.

Everyone who doesn't have $5mil+ to their name lives nearly hand-to-mouth, while having the bling-ridden lifestyle of those who do constantly shoved in their faces. Multimillion-dollar custom mansions, Teslas and Maybachs, and $30k-per-year private elementary schools are more common there than not. 

And the non-rich live in constant fear of being laid off, as they've had little opportunity to build the kind of capital reserves that could withstand being unemployed in this extremely costly area for longer than a month or two.

It's little surprise to learn that the average person in Silicon Valley is rooting for its come-uppance. These folks are pretty much priced out of housing, and the valuations of most of the companies are so inflated that they don't appear to be able to grow at anything like past rates. Many of today's professionals there are increasingly feeling that the train to Tech riches has passed them by. So the most probable way they see for them of having a chance to ever get on it is for the valley to suffer a pretty major correction -- like in the 40-50% range.

It's a strange thing to see so many people living in so privileged a place wish so hard for it to falter.

Bankers Slave's picture
Bankers Slave
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Posts: 523
David Rovics on those real estate investments!

jtwalsh's picture
jtwalsh
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Posts: 268
Bankers Slave

I love it! Reminds me of the music at some anti-war protests a very long time ago.

Pete Seeger must be smiling in folk heaven.



JT 

Edwardelinski's picture
Edwardelinski
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Posts: 331
Dear Dave

I have always loved your insight.I decided to look you up.You have lived a very worthwhile life.The content of you character speaks for itself.Be proud Dave...You have taught your daughter well....

sand_puppy's picture
sand_puppy
Status: Diamond Member (Online)
Joined: Apr 13 2011
Posts: 1981
My old home in San Jose

We moved to San Jose, CA in 1960 and purchased this 1600 sq foot house for $17,000.  It sits on a 6,000 sq foot lot (about 1/6 acre).   In 1960, it sat by itself in the middle of endless prune orchards.  Over the next decade, suburbs sprang up around it.

My parents sold this for $90,000 in the the 1970s.

Zillow lists its most recent sale as $485,000 in 2002.

reflector's picture
reflector
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Posts: 270
san jose
sand_puppy wrote:

We moved to San Jose, CA in 1960 and purchased this 1600 sq foot house for $17,000.  It sits on a 6,000 sq foot lot (about 1/6 acre).   In 1960, it sat by itself in the middle of endless prune orchards.  Over the next decade, suburbs sprang up around it.

My parents sold this for $90,000 in the the 1970s.

Zillow lists its most recent sale as $485,000 in 2002.

that sounds reasonable, SP, after all, back then prices were lower because we didn't realize that homeowners are paying themselves an imputed (assumed) rent, which adds to the value of the house and to GDP, of course.

we bought in san jose in 2009, right after the last crash, at just under $400k, for a 3bed/1bath house on a 5600 sq ft lot.

the price is just now breaking $700k, zillow estimate.

i am working this weekend on getting it fixed up so we can sell it very soon, before real estate crashes again, will try for next month.

i will be sad to leave the apricot, avocado, lime, and orange trees i planted 2 years ago, the apricot has just started producing copious amounts of fruit, i picked 3 gallons yesterday, am having to give the apricots away now.

oh well, time to start looking for a new place, plant a new garden.

 

sand_puppy's picture
sand_puppy
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Posts: 1981
Silicon Valley's Next Project: Stopping "Extremist Ideologies"

UN Security Counsel Seeks to Establish Internet Controls to Stop Extremist Ideologies.

The United Nations Security Council wants a global “framework” for censoring the Internet, as well as for using government propaganda to “counter” ... “online propaganda,” “hateful ideologies,” and “digital terrorism.” To that end, the UN Security Council .... agreed that it was time for a UN-led crackdown on freedom of speech and thought online — all under the guise of fighting the transparently bogus terror war.

The UN, ridiculed by American critics as the “dictators club,” will reportedly be partnering with some of the world's largest Internet and technology companies in the plot. Among the firms involved in the scheme is Microsoft, which, in a speech before the Security Council on May 11, called for “public-private partnerships” between Big Business and Big Government to battle online propaganda. As this magazine has documented, Google, Microsoft, Yahoo, and other top tech giants have all publicly embraced the UN and its agenda for humanity. Many of the more than 70 speakers also said it was past time to censor the Internet, with help from the “private sector.”

The Global War On Terror is quite a useful conceptual structure for TPTB.  Dissent can be framed as extremist ideology, the predecessor of overt terrorism, and the apparatus of the state can be brought in to crush it -- all in the name of public safety.

 

climber99's picture
climber99
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Posts: 188
Possible scenarios

The home price to household income ratio is at a historical high.  This will revert to the mean at some time in the future.   Possible scenarios.

1. Home prices will crash

2. Incomes will increase (value of money/debt decreases)

3. Both 1 and 2 will happen

4. The Ponzi scheme is sustained for a little longer.

My gut instinct is 4 will happen first by lowering interest rates even further, followed by 1 when the economy goes into recession, followed by 2 when the FED finally resorts to 'helicopter' money and therefore ending up with 3.  

Winners?  Losers?  How do you position yourself?       Discuss.

cmartenson's picture
cmartenson
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Posts: 5829
Why humans do stupid things

Somehow this post and resulting discussion reminded me of this article by Mark Manson (a great if sometimes profane writer) I came across recently that neatly encapsulates why humans do the things we do.

Here’s the short list:

1. YOU ARE BIASED AND SELFISH WITHOUT REALIZING IT

2. YOU DON’T HAVE A CLUE ABOUT WHAT MAKES YOU HAPPY (OR MISERABLE)

3. YOU ARE EASILY MANIPULATED INTO MAKING BAD DECISIONS

4. YOU GENERALLY ONLY USE LOGIC AND REASON TO SUPPORT YOUR PREEXISTING BELIEFS

5. YOUR EMOTIONS CHANGE YOUR PERCEPTIONS WAY MORE THAN YOU REALIZE

6. YOUR MEMORY SUCKS

7. ‘YOU’ AREN’T WHO YOU THINK YOU ARE

8. YOUR PHYSICAL EXPERIENCE OF THE WORLD ISN’T EVEN THAT REAL

The article draws upon the works of Dan Ariely and a host of other psychologists and neurological research that increasingly paints a rather unflattering picture of the human as a rational actor.

Here’s just one example from the article:

6. YOUR MEMORY SUCKS

Elizabeth Loftus is one of the world’s foremost researchers in memory, and she’ll be the first to tell you that your memory sucks.

Basically, she’s found that our memories of past events are easily altered by other past experiences and/or with new, incorrect information. She was the one who made everyone realize that eyewitness testimony isn’t really the gold standard people thought it was in courtrooms.

Loftus and other researchers have found that:

  • Not only do our memories of events fade with time, they also become more susceptible to false information as time passes.
  • Warning people that their memories might contain false information doesn’t always help eliminate the false information.
  • The more empathetic you are, the more likely you are to incorporate false information into your memories.
  • Not only is it possible for memories to be altered with false information, it’s possible for entire memories to be planted. We’re especially susceptible to this when family members or other people we trust are the ones planting the memories.

Our memories, therefore, aren’t nearly as reliable as we might think — even the ones we think we know are right, that we know are true.

In fact, neuroscientists can predict whether or not you will misremember an event based on your pattern of brain activity when you’re experiencing it. Your shitty memory seems to be built right into your brain’s software in some cases. But why?

At first, this might seem like Mother Nature screwed up when it comes to human memory. After all, you wouldn’t use a computer that consistently lost or changed your files after you stopped working on them.

But your brain isn’t storing spreadsheets and text files and cat GIFs. Yes, our memories help us learn from past events which theoretically helps us make better decisions in the future. But memory actually has another function that we rarely think about, and it’s a much more important and much more complex function than simply storing information.

As humans, we need an identity, a sense of ‘who’ we are, in order to navigate complex social situations and, really, just to get shit done most of the time. Our memories help us create our identities by giving us a story of our past.

In this way, it doesn’t really matter how accurate our memories are. All that matters is that we have a story of our past in our heads that creates that part of the sense of who we are, our sense of self. And rather than using 100% accurate versions of our memories to do this, it’s actually easier to use fuzzy memories and fill in the details on the fly in one way or another to fit the version of our ‘selves’ that we’ve created and come to accept.

Maybe you remember that your brother and his friends used to pick on you a lot and it really hurt sometimes. To you, this explains why you’re a bit neurotic and anxious and self-conscious. But maybe it didn’t hurt you as much you think it did. Maybe when you remember when your brother picked on you, you take the emotions you’re feeling now and pile them on to those memories — emotions that are neurotic and anxious and self-conscious — even though those emotions might not have much to do with your brother picking on you.

Only now, this memory of your brother being mean and making you feel bad all the time, whether true or not, fits with your identity of a slightly neurotic, anxious person which, in turn, keeps you from doing things that might cause embarrassment and more pain in your life. Essentially, it justifies the strategies you use to get through the day.

And so you might be asking, “Well, Mark, are you saying that ‘who I think I am’ is just a bunch of made up ideas between my ears?”

Yes. Yes I am.

(Source)

There. I hope I’ve piqued your interest to go and read more of this excellent article.

If we really understand how humans are wired, then we can easily explain Silicon Valley and why we are so susceptible to bubble after bubble while seemingly not learning from the last one. Our memories suck and we are not just prone to confirmation bias but hard wired for it.

That makes this crowd here at PP rather unique. Yes we are susceptible to all these weird quirks and evolutionary shortfalls but we are also capable of thinking and living outside of these limitations more than the average monkey.

That is, we can change via insight as well as pain. Many only change via the pain route, and many not even then. They’ll keep touching the stove over and over, or buying into the next real estate bubble with the same fervor as last time.

It's helpful to remember (or realize) that such behaviors are not moments of temporary insanity, they are baseline for most folks.

 

WedgeHead's picture
WedgeHead
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Posts: 14
The Cranes-to-Bubble Ratio

In early March I made the trip from Reno to San Francisco for the funeral of a college friend's father. The occasion brought together a group of us who worked together straight out of college but hadn't all been together in probably 15 years. A few of this group are presumably doing fantastically well financially since they got on the Salesforce rocket ship early on. The rest are likely more like Adam's friend -- dual income, top 2% earners hanging on by their fingernails.

My wife and I were the only "outsiders" by virtue of our move from the Bay Area in 1995 -- our route taking us to Colorado then San Diego and now Reno. All the others have lived continuously in the Bay Area.

In the short 15 minutes of post-funeral conversation on the street (prior to everyone having to scurry back to their offices since it was a weekday) a friend commented on the number of cranes topping the skyline of San Francisco and how "doesn't this feel like 1999 again?" 

Of course, being the Peak Prosperity "doom and gloom" guy, I was fully ready to launch into a "yeah, it does and it should and don't you all see how fucking crazy this all is!?!" discussion.

But, being of a veteran of these situations, I knew better. His question was merely rhetorical and was not an invitation for a substantive discussion.

I simply used it as a data point. Yes, they sense it and see it, but can't quite bring themselves to admit it. 

davefairtex's picture
davefairtex
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before I came here

Before I came here, and largely before I (economically) woke up, I remember drifting vaguely along a tide of prices that moved up and down largely without me having any real understanding of why they did so.

Sure, I knew about earnings, and about supply & demand - during wars oil went up (everyone knew that) and when the wars ended the price dropped again, but that was about the extent of my understanding.  Home prices always went up (it was a law - never trusted the law, but it was always true, at least during my lifetime) and so did the prices of everything else.  Because of inflation, which was another law.  Something about too many dollars chasing the same number of goods.  Or something.

Recessions happened (I was never sure why) but they never affected me much because I was in tech, and tech has been growing from before I went to university, so I was insulated from having to figure any of that out.

Thinking back to me back then, I can see why "economic stuff" just seems to happen to most people.  It is a dimly perceived situation by people who are otherwise smart, but have no training, little interest, and who are far more focused on their own life far removed from the matters of the Fed, the markets and all the rest of the shenanigans we all take for granted and to whom we delegate complicated stuff like economic management.

So people in that circumstance move largely by instinct - by where the herd tells them they should go, more or less anyway.  Small wonder we are subject to ponzi schemes right and left, buying the top and selling the bottom and then forgetting about it 7 years later because its all pretty much of a fog anyway since we're focusing on the far more important details of our lives.

Anyhow, that's where I used to be.

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climber99
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In reply to my previous

In reply to my previous post.  We can all think of the losers so I'll just talk about possible winners here.

1. If you own rental property without debt.  You don't care if property prices crash because it is rental income that is important to you.   

2.If you hold cash or cash equivalent.  You wait until after the crash to buy property and/or equity at rock bottom prices to generate income.

Uncletommy's picture
Uncletommy
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A concept whose time has come?

From Wikipedia:

In Judaism and Christianity, the concept of the Jubilee is a special year of remission of sins and universal pardon. In the Book of Leviticus, a Jubilee year (Hebrewיובל‎ yūḇāl) is mentioned to occur every fiftieth year, during which slaves and prisoners would be freed, debts would be forgiven and the mercies of God would be particularly manifest.

In Western Christianity, the tradition dates to 1300, when Pope Boniface VIII convoked a holy year, following which ordinary jubilees have generally been celebrated every 25 or 50 years; with extraordinary jubilees in addition depending on need. Christian Jubilees, particularly in the Latin Church, generally involve pilgrimage to a sacred site, normally the city of Rome. The Catholic Church has declared the Extraordinary Jubilee of Mercy for 2015–2016.

Or is this an example of another "extremist ideology". Just a thought.

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thc0655
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Old Testament Jubilee

It's a fantastic idea and would involve wiping out all financial debts and releasing all people who became enslaved for financial reasons since the last Jubilee.  It would be a planned and predictable reset to the system.  Alas, human nature hasn't changed since Old Testament times.  There is no evidence the Jews practiced the Jubilee even one time since the commandment was handed down.  I don't think any sizable group of people (i.e., not a small, idealistic group of true believers) would ever practice this today either.  I'm afraid we're going to have to settle for the usual kind of reset mechanisms: war, pestilence, starvation and economic collapse.  sad

Mark_BC's picture
Mark_BC
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Here in Vancouver the

Here in Vancouver the situation is similar, almost as ridiculous. A few months ago I'd say you couldn't buy a single detached house in North Vancouver for under a million. Today I'd say you can't buy one for under 1.5 million. It seems to go up about $100k per month lately.

Too bad, my parents had a really nice house in N Van and sold it in 2003 for $438k. Now I wouldn't be surprised to see that house for close to 2 million. I didn't buy at that time because I couldn't carry a mortgage and since then I haven't been able to justify it because I always said "it's a bubble, why would I buy near the top?" Then the next year would be even higher. year after year.

It's all the Chinese buying up here as well. Anyone who specifically protests it is labeled a racist. There is a lot of political corruption up here between the provincial government and real estate developers. They largely control the media so they mostly get away with it. They simply don't care how it will end because they're making hand over fist right now.

How long will it last? I am always amazed at how far this whole bubble has been extended. I think it will continue until the monetary system gets reset. It seems more likely that we'll get the reset in 2018 like the Economist predicted way back when. I was also reading that China is probably in with the Rothschilds since they bought the gold vault in London and wouldn't be doing that if they truly were adversarial with the West. This means that we will be getting the One World Government.

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kaimu
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WHY NOT CALI?

Aloha! Rising real estate prices have been a hallmark of California ever since I first moved to the State in 1965. I also spent time in Silicone Valley working on a project at Menlo College with Cisco Systems as a partner in 1999-2000. I recall listening to the radio on my way to work and hearing about a two bedroom house selling for $2mil and the buyer never saw the house, just put in a bid from NYC.

Now I still have ties to California only in LA where housing prices are crazy high also. The CEO of the company I am with now has a house in Studio City near CBS Studios that is worth $2mil on the market. The next door neighbor sold their house a year ago for $1.6mil to a developer from Israel who tore it down and built a new house that sold for $2.2mil within days. The new McMansion is practically the same size as the lot.

It comes down to "parking money". Whether you are a rich foreigner or a rich banker or a NYC transplant you gotta park your cash somewhere. In Europe you gotta pay the bank to park so why not park somewhere that pays you to park? People I know with $500k in the bank get paid $36 a month interest. The effective Fed Rate is 0%! Why save? The stock market has been on the rise since 2008. Besides everyone knows it is rigged so "tangible assets" outside the markets makes sense to many. Why not Cali?

The problem is the downside. Cut off foreign investors influences and real estate takes a hit. Add in government raising property taxes to buy prosperity for their agendas and more hits to the market happen. Imagine if Congress got desperate and got rid of the mortgage deduction and then got rid of the sale exemption on your personal residence. Image no tax breaks on the State level either. Huge hit! Kind of like finding out all of a sudden that FDIC is gone!

You can sell stocks with a mouse click but sell a house in a bubble market and there is no mouse click. Suddenly prices drop substantially just to get out. That human nature thingy works just as fast and just as crazy on the down side as it does on the up side. Maybe even faster and MORE crazy!!! Just go back a mere nine years to 2007! Bear Sterns then Lehman then AIG on the block ... WHAM-M-M!! Every asset took a hit. The US Middle Class never recovered and neither has small business. Cash was King!

 

charleshughsmith's picture
charleshughsmith
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debt jubilees are not as simple a solution as they appear

I don't think the many proponents of debt jubilees have thought through the mechanics:

1. Banks don't hold the credit instruments they create (such as mortgage-backed securities)-- they sell them to insurance companies, mutual funds, pension funds, etc.  

2. So who gets wiped out when debt-based assets (i.e. what a debt jubilee reprices to zero) are repriced at zero? Not the banks--it's Main Street-Mom and Pop whose pensions are suddenly worthless, 401Ks and IRAs are now worth a lot less, insurance companies, university trust funds, etc.

You don't kill "the bad guys" when you wipe out debt-based assets--in general, the "bad guys" simply create the debt instruments and pass them along to passive investors. So a debt jubilee simply takes money out of the pockets of savers and institutions that own "safe" assets to fund their businesses and burns it to benefit debtors.

If you wipe out $20 trillion in debt, you also wipe out $20 trillion in assets people were counting on. Wiping out debt necessarily bankrupts everyone and every entity that bought debt-based assets.

3. Who benefits from a  debt jubilee? The "bad guys"--the banks that create new debt instruments.  The losers: everyone who bought a debt-based asset, As noted above, this isn't the bank. 

The banks get to generate trillions in highly profitable new debt for all those suddenly free-to-borrow debtors.

In effect, a debt jubilee robs my 85-year old Mother to write down debt that should never have been extended or borrowed in the first place.

Debt jubilees are a classic 'sounds good on the surface" but completely disastrous when actually implemented.  Once again, the big winners in a debt jubilee are the banks, who would be free to generate trillions more in new debt and pocket the profits. The happy-story is that it relieves debtors, but they will soon be in debt again, and the banks will be even richer as a result.

What we need is to cram down all losses on those who originated the debts. That would cause lending to dry up and the banks that make imprudent/risky loans would all go broke. That would be a step in the right direction.

Adam Taggart's picture
Adam Taggart
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Posts: 3151
Sign Of A Blow-off Top?

Here's another chart that further shows the insanity of Palo Alto home prices, yet may also offer hope. If this doesn't look like a blow-off top, I don't know what does:

(Source)

An outlying spike like this in price paid per square foot as transaction volume drops to near 0 is what you'd expect to see when the last sucker jumps into the pool.

If this is indeed the moment of the PA market's blow-off top, expect transaction volume to remain depressed, but for price-per-square foot to start dropping. Sales volume should stay low for a prolonged period of time, as homeowners attempt to wait out the market "softness". If the weakness continues to persist, though, there will come a moment where transactions spike as a rush of sellers attempt to get out before prices drop further. This pressure, of course, in turn would push prices down at a faster rate.

Are we at this watershed moment? Too soon to tell; but the next few updates to the chart above will be very interesting to track. 

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thatchmo
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Yeah, but.....

Thanks for the comments on Debt Jubilees, Charles.  

What we need is to cram down all losses on those who originated the debts. That would cause lending to dry up and the banks that make imprudent/risky loans would all go broke. That would be a step in the right direction.

But who holds ownership in all the (TBTF) banks that would go broke?  Mom & Pop and the Pension funds?  Would the end product be different than a Jubilee?  Wouldn't mind seeing the big financials and Wall Street getting some comeuppance....Commenting WAY outside my pay grade here....Aloha, Steve.

Uncletommy's picture
Uncletommy
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How much is enough, exactly?

Excellent points, Charles, and well put. It looks like its either death by a thousand cuts (economic repression) or stoking the boiler until it blows (rapid deflation and resulting issues). I guess we're all complicit in thinking we are entitled to live off of someone else's labour and innovation.

 https://www.youtube.com/watch?v=IJOnWchglQA

davefairtex's picture
davefairtex
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debt jubilee mechanics

I agree that a standard jubilee would be problematic, and I think Charles has it half right.  Pension funds and other non-bank debt owners would suffer massive losses.

But banks retain a significant amount of debt on their books - amounts are in the trillions.  A quick glance at FRED will reveal the details: overall LOANS: 8.8 trillion, of which REALLN: 3.9 trillion, BUSLOANS: 2.0 trillion, CONSUMER: 1.3 trillion.  Table here:  https://research.stlouisfed.org/fred2/release/tables?rid=22&eid=5168.  These are assets on the books of the commercial banks in the US - i.e. they have not been securitized or resold.  An old-style jubilee would completely wipe out the banking system, because existing bank capital couldn't come close to handling the 8.8 trillion in losses that the jubilee would inflict.

Before you cheer - you might ask who will end up paying the costs of the FDIC protecting the 8+ trillion in deposits that will also vaporize along with the banking system.  Either depositors suffer massive losses, or the taxpayer ponies up the money for FDIC - and anyone who imagines Treasury can successfully float 8 trillion in bonds after the US banking system had just been destroyed is a master at wishful thinking.

Steve Keen is a proponent of a "modern debt jubilee" which I've mentioned before - it envisions a "rebate" payable to every citizen (say, over 18) of a fixed amount of money (say, $50,000), which must be used to pay down debt.  If you don't have debt, you keep the cash.  This ensures holders of debt suffer no capital loss from the jubilee, and there is no penalty for anyone who happened to be debt-free.

What about the mechanics of that?

Pensions that own securitized MBS would have their debt assets paid off early.  They stop receiving interest payments, but they don't take a capital loss.  They end up having a lot of cash on the books instead of interest-bearing securities.

Banks with consumer loans and home mortgages would receive the payout from the consumer and end up having to zero out the loan.  Say half their loan portfolio vanishes, along with the related interest income.

Consumers with no debt end up either depositing the cash in the bank account or spending it  Likely, the new cash has a fairly high velocity since a lot of only semi-indebted poor people will probably run out and spend it.  That's very inflationary.

Once everything settles down, the new non-debt jubilee cash ends up increasing the amount of base money in the system, which probably goes to rest in Excess Reserves.

Banks end up with at least half their loan book vaporized, along with the interest income.  Pensions end up with a bunch of cash they need to redeploy.  Nobody takes actual losses, but the bank operating structure is severely compromised.  Again - half of the bank's income just goes away.

Steve Keen suggests that in tandem with the "modern debt jubilee" we rewrite lending rules that states "no secured mortgage loan can be written for more than (80% of) 10x market rental income for comparable properties in that area."  This is true for both commercial and consumer mortgages.  This stops ponzi lending from re-forming.  You can still have crazy cash buyers, but the ponzi from borrowed money won't happen any more.  (After all - its our money system, right?  We get to write the rules.  Why are we allowing money to be created to support ponzi lending?)

That's Steve Keen's idea anyway.  I think its interesting, but I'm a little concerned with what will happen with all that new base money.

 

Michael_Rudmin's picture
Michael_Rudmin
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It seems clear that it cannot only be a debt jubilee.

The bible never mentions a debt jubilee. It mentions a jubilee: freedom of debt,slaves, and a return of real property each to its own ancestral family.

I don't think one could succeed in having a debt jubilee without the rest of the package. In line with that, though, it also would require a dissolution of all companies, and an empowerment of those who actually DO stuff.

But that is also disasterous for those who do not, or cannot do.

So I don't see that happening unless there is an enormous amount of charity to those who cannot do.

The alternative, of course, is to continue empowering those who consume only. We can always choose to forget the jubilee, and empower the takers and eaters. We've done it for almost three thousand years now... what could it hurt to continue another two hundred like that?

Right?

charleshughsmith's picture
charleshughsmith
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Posts: 718
size of losses

Excellent point, Thatchmo, and I'm above my pay grade here too.  Dave's numbers show that bank losses would be huge (although I doubt business loans would be included in a jubilee) so I think the point is any significant debt jubilee would take money out of the pockets of institutional holders that are the foundation of Mom and Pop wealth--pensions, insurance, mutual funds, etc.

I like Keen's proposal a lot more than a flat jubilee, but I still think a debt jubilee--even Keen's--is just a mechanism to reload the debt-profit machine under the guise of "helping the poor debtor.". 

Practically speaking, the TBTF banks and other financial heavyweights would love to get paid early and have 100 million newly debt-free people to lend more money to. So the banks would lobby for the free $50K per household but eviscerate the part about eliminating risky loans and ponzis.

The other problem I have is the 100 million households will still have the same stagnating income and the same low base of assets, and thus they will quickly become debt serfs again. Nothing's changed except a pre-pay of debts. That fixes nothing.  It's another financial game being offered a solution to problems that are far deeper than debt. In a way, debt is a symptom, not the problem per se.

KugsCheese's picture
KugsCheese
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Posts: 1464
Adam Taggart
Adam Taggart wrote:

(Source)

This graph should be posted around Palo Alto!   Panic Lying Stage now. 

californiawoman's picture
californiawoman
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Posts: 10
45 min from silicon valley

I live about 45 min from silicon valley and a local real estate agent has noted a slowdown in this area just recently (danville, ca)  .   

Adam Taggart's picture
Adam Taggart
Status: Peak Prosperity Co-founder (Offline)
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Posts: 3151
China Capital Controls

An informative interview from Yahoo! Finance:

Key points:

  1. money is leaving China, looking for higher return/less currency risk/safer haven
  2. China authorities are imposing increasing capital controls, but trying not to be so heavy-handed that the money "leaks out" through more illegal channels
  3. US cities, especially depressed ones, should be courting Chinese capital as a solution for both parties -- the cities get money for infrastructure projects/social programs/debt service, and the Chinese investors get their offshore assets

Personally, I'm skeptical of the benefits of that 3rd one. Sounds like a modern day cargo cult model, with all the associated drawbacks.

Lastly, there was one part of the interview that particularly caught my ear. In China, citizens use the UnionPay national bank card to make all sorts of purchases -- from goods, to cars, to homes, etc. Pickering, the interviewee, stated that the Chinese government likes the ubiquitous use of bank cards because “The government likes to see where the money’s going and to know exactly what you’re spending on”. I believe this is one of the underlying motives of the current "war on cash" being waged in the US and in other western countries, and why we may find ourselves forced to relinquish paper cash and transact only in "digital dollars" within the next decade.

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1464
Re: China Capital Controls

Importing more bubble foam.  Will end badly if done.

Mark_BC's picture
Mark_BC
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Joined: Apr 30 2010
Posts: 508
Being in North Vancouver, the

Being in North Vancouver, the heart of the Canadian real estate bubble, we are constantly bombarded with real estate material. The side of every bus is an ad for an agent. Every day multiple flyers in the mail. A recent flyer brags about a house that listed for 1.5 and sold for 1.8. That seems to me to be about a 50% increase over last year's prices. 

Next door, the renter was kicked out because the house sold. Now it sits empty after some renos were done. During renos I saw a Chinese lady walking around. Seems like an offshore buyer wanting to park their money. 

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