NOTE 1: Please feel free to forward and post. Permission is granted to all for publication of the whole or parts.
NOTE 2: Please remember while reading that human stupidity is the best source of humor! (Misery being the second best). I bet comedians in Manhattan and Silly.con Valley have no problem with the material. Also, no wonder that certain groups are more talented in comedy! J
Those of us who focus on economic fundamentals and their long-term affects are not swayed by mood changes that are induced as a result of bubbles, produced by the mischief of bankers, and wishful thinking 0f the bubbleheads. I plead guilty to seeing problems and issuing the warnings early. In a rational world, seeing problems early is a positive quality, but in the world of speculators and wishful thinkers it is of no use, as they demand to know when would the stock prices and housing prices top and bottom. I admit to failures in that regard.
Most people in Californica, in general, and San Freakiness Bay Area (home to Silly.con Valley), in particular, learned nothing from the Tech Bubble of late the 1990s. They conveniently took shelter in another bubble that has trapped more people and would cause far greater damage to the economy. The real damage of the Tech Bubble, "hidden" in the data, has been covered up and the signs of the future trouble are being ignored by an economic reporting system led by promoters. The data suggest that the economic future of San Freakiness Bay Area is bleak and the adjustment to the downside is likely to be sudden and sharp because that is in the nature of the aftermaths of bubbles.
I maintain that it is incomes, employment, and population growth, or lack thereof, which determine the housing prices, long-term. A "location" enthusiast from Silly.con Valley disagrees. He taunts me with the great opportunities to windsurf in the South San Freakiness Bay and the "fog to keep you [him] cool," that will support very high housing prices in his area. I can do just fine without the fog, the pollution, and the toxic waters of the South Bay: "With or without water quality objectives, the Lower South Bay has been listed as an impaired water body under Section 303(d) of the Clean Water Act (CWA)." Hundreds of reports have been issued (could be close to a thousand) on the pollution in the South Bay (we can be certain that many are paid for by high tech businesses to downplay the harmful effects of the pollutants).
Silly.con Valley Has Been In an Employment DEPRESSION For Five Years
In late 1999, from my desk at Cisco headquarters in Con Jose, I made some dire predictions for the future of Silly.con Valley and Cisco's business, in addition to the earlier predictions of the bursting of the Tech Bubble, in e-mails to friends and e-friends:
1. Silly.con Valley unemployment would exceed 20% (matching the Great Depression era).
2. Cisco's future revenues, e.g., five years down the road, would be a tiny fraction of what the management is predicting. (Later in July 2000, after I retired, I pinpointed the date of decline in Cisco's business to be Jan'01).
3. Cisco will never build and occupy its proposed campus in newly acquired land (several hundred acres) in Coyote Valley.
4. CSCO will trade below $5 before the end of 2003.
My record on these predictions is not perfect but it is better than anyone else's. The prediction that I am most proud of is #1. As many people already know, the way that the unemployment rate is calculated in the US is misleading and is meant to cover up the bad employment situation: THOSE WHO STOP LOOKING FOR A JOB, OR DISCOURAGED WORKERS, ARE NOT COUNTED AS UNEMPLOYED. This situation is rampant in Silly.con Valley, as we shall shortly see from the data and anecdotal evidence. However, by looking at the growth in the population and the total number of the employed we can determine the increase in the unemployment rate.
The employment data is collected for Metropolitan Survey Areas (MSA), or districts, and the most relevant area for Silly.con Valley is the Greater San Jose MSA that contains Santa Clara County, the largest in the Bay Area, and some surrounding counties. The Tech Bubble driven employment, both in Silly.con Valley and Californica, peaked in March 2001 (just as the economy was entering recession). The employment in both areas kept declining into 2003, but the Californica employment has fully recovered and the Total Nonfarm employment, as of Jan'06, is up 1.4%. IN GREATER SAN JOSE AREA, ON THE OTHER HAND, THE TOTAL NONFARM EMPLOYMENT DECLINED BY 20.1%, DURING MAR'01-JAN'04, AND IS STILL DOWN 18.8%. Table 1 gives a snapshot.
|Table 1: Employment In Greater San Jose Area (Proxy for Silly.con Valley)|
|Bare Printed Circuit Board |
|Finance and Insurance||19,700||20,300||20,400||21,100||20,900||6.1%|
|Credit Intermediation and |
Before I discuss the employment situation in Californica and in Silly.con Valley I wish to dispel any idea of graying of the population (% of population above 65) in these areas over the past five, or ten, years, particularly, in Silly.con Valley, as suggested by a friend. The huge influx of immigrants in late 1990s in Silly.con Valley is projected to have a high concentration in the 45-65 age group by 2010. " In 2003, immigrants made up about 45% of the [ Santa Clara] county's workforce"!! This is up from 25% in 1990. Graying of Californica, especially, Silly.con Valley, would have to wait.
The REAL Unemployment Rates in Californica and Silly.con Valley
The Total Nonfarm employment in Californica grew by 1.4% during Mar'01-Jan'06 and the population is estimated to have grown by 8.5% for the five years ending in 2005 (Census estimate). THUS, THE REAL UNEMPLOYMENT RATE IN CALIFORNICA IS 7% HIGHER THAN IT WAS FIVE YEARS AGO. The situation is far grimmer for Silly.con Valley. There, the population has grown by 4% (data for Santa Clara County) and the employment has declined by 18.8% over the past five years. Hence, THE REAL UNEMPLOYMENT RATE FOR SILLY.CON VALLEY IS 22.5% HIGHER THAN IT WAS FIVE YEARS AGO!
It is safe to conclude that some 20% of the working-age population in Silly.con Valley has stopped looking for work after being discouraged. As it turns out I have met quite a few people who live in Silly.con Valley, or surrounding areas, in the 40-55 age group, who are not gainfully employed. Just last month, I was watching a tennis match at a big tournament in Palm Springs Area and I found myself sitting next to a couple, 45-55 age group, from Los Altos (a pricey neighborhood in Silly.con Valley). As we were talking in-between the games, the guy complained, "if I could find a f…ing job" and then he went on to complain about corporate executives. It was clear that he wasn't looking for a menial job (looked like an ex middle manager). It is my guess that the guy (I don't know if the woman was his wife or a girlfriend) owns a house in Los Altos that he bought years ago when he had a well-paying job. I was almost going to suggest that he sell the f…ing house and move to a cheaper area away from the valley, but I refrained and also we got busy watching a great match.
The unemployment rate reporting fraud in America notwithstanding, my pridiction#1 has already materialized, but it would be undeniable by anyone once the Housing Bubble bursts. Prediction#2 is a verifiable fact because the current revenue is only 15% of what was promised by Mr. Chambers, the "venerated" CEO of Cisco. It says a lot about the Corporate Crooks' control of American business that Mr. Chambers still has the job. Of course, of course, he was taken by surprise in 2001 by the "challenging conditions" that were "unforeseen." BTW, my forecast of Cisco's future revenue was based on available data and forecasts of Internet users, etc. Prediction#3 is also a fact by now. I took a walk in the area with friends two years ago and saw nothing but empty buildings and mostly un-built site. I don't know what happened to all the money that City of Con Jose was going to spend to help Cisco with the grand plans in Coyote Valley. As to prediction#4, CSCO did go down to $8.12 in 2002. I did better than anyone else as I don't know of anyone who forecasted a 90%+ decline in CSCO before the end of 2003. All in all, I feel more than vindicated about my "extreme" predictions, as one of my best friends in Silly.con Valley would warn others about me. It is true that some of my dire predictions didn't continue after 2002, as I would have thought, but we do understand the reason with the benefit of the hindsight – Saved by the Housing Bubble.
Cisco, the "enterprise," and CSCO, the Scam, are symptomatic of Silly.con Valley and the mindset of its inhabitants. The rosy forecasts and promises never materialized, did they? It would be worse for the housing in the whole of the Bay Area (as you shall see from the supporting facts below). I never make a forecast that is not rooted in historical precedence that is most relevant to the current conditions, or data, or both. When I have both is when I have greater confidence in my predictions.
First, the Fraud Money, Now the House Money, What Next for Silly.conmen?
When I first talked about the silly little accounting con game of not expensing stock options, later named Scam Options, that the management of tech companies were playing with the share buying public I was told that it is not a fraud as long as "it is allowed." The allowable part resulted from the pressure that the management of tech companies put on the accounting board (FASB) through the politicians in Washington, DC, and the SEC Chairman. What was not allowable was made allowable by dirty tactics. It was an outright fraud, but public was never told as to what went on. Warren Buffett's irrefutable arguments were railroaded, once again by dirty tricks. In 1995, the politicians and the SEC, who are supposed to protect the public's interests, put the American financial system firmly in the hands of Crooks and Fraudsters! It is amazing that a population that distrusts "the politicians" would trust Corporate Crooks who fully own and control these politicians. What is worse is that the same population supports the "democratic system" that necessarily puts the power in the hands of "the politicians"! I do feel clueless. It well may be that I am crazy. Or, crazy like a fox?
From denying the fraud, the Silly.conmen proceeded to defend the fraud by claiming that it is good for the innovation and the economy. These silly people believed that "everyone wins" from what I was calling fraud (because back then the prices of Tech Scams kept going up and up). I can tell you that many a Silly.conmen have lost good chunk of money as a result of this fraud but they are too smug to admit it now. They falsely tell themselves that it was merely a bad gamble, or just bad luck. They will never admit that they were victimized by a massive systemic fraud that turned the former stock market into the current Scam Market.
As a result of the Scam Options fraud, tremendous amount of what I call Fraud Money came into Silly.con Valley during 1996-2000. To a lesser extent, the Fraud Money is still flowing into Silly.con Valley. A question that arises from the fact that the real unemployment rate in Silly.con Valley is higher than 20% is: How have the Silly.conmen managed to stay in the expensive area and spend liberally?
I think that I can easily explain this from the facts known to me. The amount of Fraud Money that many a Silly.conmen made from Scam Options in the last two years of the Tech Bubble was enormous and it has sustained the expenditures of many who lost jobs and have not been able to find one. Most of these people had bought homes well before the bubble burst and quite a few paid all cash. So, there was a reserve of Fraud Money that is still being used. However, a far more fortuitous development took place that has made life-without-a-job quite easy to deal with for Silly.conmen.
The Housing Bubble was God-sent, or Greenscam sent?!, for Silly.conmen without jobs. The House Money, also called the Home ATM, took the slack created by drop in, or absence of, the Fraud Money. Many a Silly.conmen without gainful employment are having fun times speculating in residential real estate for the past 3-4 years. This despite the fact that many of them were stung badly by the Tech Bubble. First, they started to speculate locally, but the local success emboldened them to cast their net wider into other parts of Californica. However, the majority of Silly.conmen without gainful employment took the easier and safer route – using their homes as an ATM.
Now that it appears more and more likely that the House Money will soon stop, what is in store for Silly.conmen without jobs and, more importantly, for the new influx of Silly.conmen without jobs, if the Housing Bubble burst results in a recession, let alone a depression? In few words: Silly.con Valley will be an economic hellhole before 2008 is out. The well of Fraud Money will go totally dry, or no more than a trickle, the House Money will be shut out as the home prices drop and refinancing with cash out becomes a thing of the past. It would be one-two punches on the faces of Silly.conmen who never learned to watch for trouble and the meaning of the word – caution. Now, I address the most important question: Why will housing prices collapse in Silly.con Valley and in the whole of SF Bay Area?
Seismic Shift In the SF Bay Area Population
I have a definitive proof of the assertion that the price increases over the past five years in the SF Bay Area are a result of a speculative bubble and that the "location" myth is held by ignorant persons and fanned by shameless promoters (I have been informed that the "location, location, location" was first uttered by Conrad Hilton in connection with the hotels). Nice weather, or desirable place to live, doesn't pay the bills. You need incomes and jobs to support housing price in any large area. Take a look at Table 2. It is filled with "location" counties that have been losing population in droves. The Bay Area, comprising nine of the 58 CA counties, bottoms the list!
|Table 2: Net Domestic Migration, 2000-2005; |
% of population
The Bay Area also bottoms the list of Population Gains (as can be seen in Table 3)!!
|Table 3: Population Gain (CA, 8.5%), 2000-2005, |
Including "Illegal" Immigration
I can summarize the Bay Area situation as follows:
1. There are far fewer people employed than five years ago. In the Greater SF Area (San Francisco-San Mateo-Redwood City Metro. Div. Marin, San Francisco, San Mateo Counties), Total Nonfarm employment is down some 14%, for example. THE MOST DISTURBING PART IS THE HUGE LOSSES IN THE "SERVICE PROVIDING" EMPLOYMENT. I doubt that there are other large areas in the US where there is such loss of service employment.
2. People have been moving out in droves, or as never before to the best of my knowledge.
3. Per capita employment-income in 2005 was less than that in 1999-2000 because the big source of employment income, Scam Options, has been greatly reduced. BTW, the total CA tax revenue collection is still far below 1999.
4. New homes and condos have been built in all areas, though not as much as in other parts of Californica.
5. In late 1990s the biggest sources of people coming in were Chinese and Indian techies and they enjoyed very high income due to generous Scam Options.
6. My best guess is that since 2002 the biggest increase in people coming into the Bay Area are low-paid part of the workers in construction and in service industries like restaurants, etc. It very well could be that Mexicans have replaced the Chinese and the Indians as the dominant newcomers. It is safe to say that their employment incomes are lot lower.
7. The population increase during 2000-2005, including immigrants, of course, IS THE LOWEST EVER RECORDED SINCE 1860, INCLUDING DURING THE 1930s.
I think that high housing prices have contributed to the negative trends listed above and the poor employment has lot to do with it too. They bode ill for the future housing prices and the "location" enthusiasts are going to be in a shock when the housing prices plummet due to very poor fundamentals of supply-demand as well as employment.
What Is Happening To Californica Population Migration?
For the first time in history, to the best of my knowledge, in 2005 more people left for other states than those who came to Californica from other Unites States. But, this trend has been going on in most of the SF Bay Area counties for at least five years (more people leaving the county than coming in, excluding the foreign immigration). The data before 2000 is only available to me for the decades and not annually.
There is definite shift of population within Californica from the coastal areas to inland, i.e., from the choice locations to the god-awful places like 29 Palms. My heart goes out to people who have been forced to do that. Although, I suspect that lot more is in store.
The high-paying, high tech, immigrants of 1990s from the east have now been more and more replaced with low-paying immigrants from the south all throughout Californica.
Living in one of the most peaceful and pollution-free parts of California and away from the "location" enthusiasts,