bostonbubble.com

[leaving boston]

If you've been tracking the stock market lately, you've noticed it's been getting HAMMERED. It's not just the banks and financial sectors, but retail, tech - golly, you name it! I think we're starting to see the long anticipated investment shift that started in the early 90's and is starting to reverse.

My theory - and you'll be hard pressed to find an economist (especially one who's employed by a bank), to admit, that the BOOMERs, are starting to take their money out of the stock market.

The magnitude of this is profound. If you were to look at the basic trend of the stock market: like the S&P 500, DJ ind avr; you would see that the indexes POPPED in 94 - they just took off! I think the reason for this was well executed marketing by banks and brokerages to offer: mutual funds, 401K's, index funds, exchange traded funds, REITs and all sorts of exciting INVESTMENT PRODUCTS that folks could pump money into.

The banks were well aware that the boomers were (in '94) at their peak earning and savings years, and they would be looking for investments. Now the boomers are reaching their 60's and the alarms are ringing, that they need to re-balance their portfolios. My theory is this is a slow process that will MIRROR the 15 year market rise - but instead of a rise, it will be a long and gradual drop.

Banks and the economists employed by banks know the risk of a dropping stock market, and their shifting their marketing to attract younger investors, and also build up the NEXT exciting economic trend, which is overseas growth (China and India). The overseas growth is still tied to the US, and when the market drops in the US, it drops twice as bad in India and China. All you have to do is look at the overseas index the next day (see the Wall Street Journal website).

This is all my theory - and unfortunately all those smart economists on TV are employed by banks and not going to blurt out that the sky is falling, but what goes up, must come down - like Martin Zweig would say, "all markets revert to the mean."

So cause and effect is this: investment drops, market drops, free cash (money banks can loan) starts to dry up (all those folks who borrowed money and can't pay off the loans - no just for houses, but factories, equipment, trucks, ships...), jobs growth tapers off and begins to drop, then the biggest POP you'll ever hear will sound off in BOSTON.

So my theory, and this is the theory I call: BE CAREFUL WHAT YOU WISH FOR. When things slow down, and folks start loosing their jobs, it won't be just those OTHER folks, it will be EVERYBODY. Imagine all the irony, you waited all this time to buy a house, and when the market drops with a thud, you buy the house of your dreams. Then you get fired from your job.

I don't know how many arm-chair economists are out there, but I'm curious to hear: are the baby-boomers going to impact the economy? If there's a slow down in the financial sectors, how will Boston be affected? How resilient is the Boston economy to withstand a slow-down? Does a slow down help or hurt some of Boston's major employers: heathcare, colleges, tech?
_________________
every day there's a bubble waiting to pop
every day there's a bubble waiting to form
all you have to do is find where it is

[john p]

Think about the supply of money.

Think about if a couple wants to buy a house; they don't have $400k in their pockets. That $400k is created in debt and the couple is bonded to that $400k for 30 years. The banks are free to lend out money that doesn't exist provided that they keep a reserve amount relative to the amount they lend. For instance, if the FED lowers the reserve rate, the banks can lend out a greater amount of money; increasing the amount of money in the economy. If the FED raises the reserve rate, banks need to have more cash on hand (reserve) so the amount they can lend out is limited to the amount of cash they have in reserve. When you track the recent turbulence in the equities (stock) market you'll find that it correlates to the FED's position to lower the reserve rate and increase the amount of lendable funds, making the market more liquid.

A healthy economy has structural properties. It needs to be liquid, but if there is no grit it has no substance. Like concrete you need liquid and sand and portland cement. You need the right mixture. It seems that when the FED adds liquid the Dow jumps 250 points, but shortly thereafter it slides downward once that amount gets absorbed by the drying up market. To check the soil capacity for septic systems for a house lot they do a perculation "perk" test. What they do essentially is dig a hole, fill it with water and see how long it takes for the soil to absorb the water. If the water sits in the hole and never gets absorbed it is not suitable because if you flushed your toilet it wouldn't sink into the soil it would be out and about for you to smell and enjoy. Anything positive to add structural strength helps the absorption. Recently, we had a positive jobs report and that has helped the Dow rise. The FED is standing over the hole and is waiting to see how the soil reacts, how much it absorbs. If they had a better sense of the properties of the soil they wouldn't be so much trial and error; but what do you expect from Ivy Leaguers; they don't get their hands dirty, they just push to get power so they can roll the dice; ask Deval Patrick.

Now think practically about the supply of money. If we get casinos and all the old folks take bus trips to the casinos the day the social security checks get issued, most of them will lose and they will be eating dog food until the next social security check comes out.

You're right, the babyboomers peak earning years preceded the stock market boom. That was like the bubble that manifested itself in stocks. In order to deflate the stock market, the FED lowered interest rates which ended up driving up house prices. What proves to me that these Ivy Leaguers are clueless is that they didn't have the foresight to implement lending regulations PRIOR to the obvious surge of refinances that would obviously happen. Alan Greenspan says stuff like how was I supposed to know? He operated in a trial and error manner. He made the babyboomers very happy because their stocks pumped up and then their house values pumped up. When their kid's college tuitions skyrocketed they weren't as happy.

Some of the other forces are that the Dow Jones Industrial Average is having a weird behavior. Because they are industrials, lots of the companies in the Average are exporting products to India and China. The weaker dollar is ramping up their exports as well as the trade deficit which is inflating their markets. So the Dow really isn't entirely reflective of the health of the USA. If Caterpillar is making backhoes for China, the local town has to pay a premium for their DPW, increasing local property taxes...

I do think that academic institutions have gotten fluffy and the leaders they produce are dillusional lightweights. The Ivy Leaguers tend to focus on a few key things in their selection of candidates: good scores and GPA obviously, but connections, your stage presence, and your command of the english language. They realize that if you can be a good showman you'll get the power, and getting the power is the pinnacle goal. Competence is secondary, you can outsource that. I'm not trying to trash these institutions entirely, it is just that because their leaders don't seem to have much in respect to professional practice and they live in the academic world, they are taking the "best of the best" and transforming them into fluffy lightweights like Deval Patrick who end up not having street smarts and they end up being played by rapists like Ben Leguere, Glen Marshall, and sleazebags from Ameriquest etc. People voted for this guy because he carried himself like the polished politician template. Then people complain about politicians and how stupid they are despite how well they speak. Robert Frost told John F. Kennedy to be more Irish than Harvard. Until our society starts to pick winners we will be always reactive to problems and never get out in front of them, which guess what: costs much more.

We need smart leaders right now because as we globalize, if our leaders are morons, it speaks to the constitution of our society. If we have competent Ben Franklins who are razor sharp, it speaks about the United States (that we are smart and have good judgement). Guess what, more people will invest in us if they think we have our heads on straight.

The next five years are critical and if we don't put out a strong leadership team, lots of retired babyboomers will not have a pot to piss in and might be eating dog food when they get older.

[TrumpofDoom]

Read this.

http://www.house.gov/budget/hearings/smettersstmnt021705.htm

I'm reminded of the end of The Iron Giant when the nuclear missile is headed straight for the town and the vapid fed says "Can we duck and cover?"

"There's no surviving this, Manly!"

There's over 65 TRILLION in unfunded liabilities in Medicare and Social Security. Most of the late boomers will be eating dog food or worse no matter what we do.

And no, the giant Obama/Clinton/Giuliani/Romney/Huckabee isn't going to save us at the last moment for the happy ending.

[krishnarama]

John

I agree that FED is going to destroy whatever the remaining value of $ to bail out their buddies on Wall Street at the cost of main street folks. It is clearly visible that SP500 made new bear market low in terms of hard assets(Gold for sure). Everybody says that markets are making new all time highs.Yet they are making new bear market lows. Nobody has a clue what is happening. Nobody talks about the inflation that is raging in the country. It is unbelievable to imagine that US can void the contracts . Well now it is done with mortgage rates freeze. These are things that happen in emerging worlds.Now it is totally opposite. Emerging markets are using the West's successful models and West(especially US) is following the economic models of old emerging countries like voiding the contracts,raising the protective barriers for foreign investments. Please read this interview by Lee Kuan Yew intreview a while ago.It is an excellent read.

http://www.asiamedia.ucla.edu/print.asp?parentid=79541

[Guest]

Folks, don't be so adamant about the fall of the dollar. It's still the primary currency on the world forex and as long as gold/silver aren't the primary units of exchange (i.e. e-gold becomes a worldwide currency), it'll bounce along with the Euro, Sterling, Yen, Swiss Fr, Loonie, and Aussie because all central banks play the competitive devaluation game from time to time and then institutional holders play hop, skip, and jump to follow suit.

Realize, a strong currency for any exporting economy, whether it be our so-called allies (Canada, Australia) or our trade rivals (Japan, China) hurts and the less export driven countries like Britain or continental Europe become too expensive to conduct business within. All and all, I see the USD being range bound for extent periods of time.

Now, with the above in mind, the holdings of various asset classes, RE being one, doesn't have to stay in some range bound trading zone. This we've seen with Tokyo real estate since '92, HK during the handover from Britain, as well as Houston after the oil patch bust of the 80s. These phenomena goes through various boom/bust, expansion/contraction modes and you don't want to be caught during a contraction phase. The way I see it, our RE is in some sort of historic bubble but alongside declining industries, tech being one of them in the late great state of Massachusetts. Now, with this macroecon perspective, I say, for the next few generations, meaning Xs and Ys, it's probably better to buy let's say a retirement home near a college town cerca Boulder CO, Amherst MA, Burlington VT, etc, but apartment hop, from city to city, while one is in one's working mode. That way, a change of job doesn't mean carrying a mortgage in one city while renting a studio in another. Instead, financing a retirement home will set one up so that one won't be in a rental during retirement and thereby, the main living expenses during that time will be food, property taxes, and maintenance and being not to far from a college town, one can take classes and learn things instead of stagnating.

[Boston ITer]

Sorry forgot to add my username above.

Here's an example of the near college town retirement...

http://tinyurl.com/2t8lvz

This is in Belchertown near Amherst MA and costs some $125K which comes down to ~$700/month for a low cost mortgage. Since mortgages in Boston, NY, DC, Chic, etc range from $2000 to $5000, paying for this place while renting an apartment for let's say $1400 per month, in a city with work, is palatable. That allows one to travel from state to state, while earning a respectable compensation and you really only have to show up once every other month for maintenance, etc, and if you're a daring individual, you can even rent to a graduate student couple (for nearly free) provided they perform the base maintenance on the place.

[john p]

I think the fundamental basis for many of your points is that there is an emerging segment of our employment base that almost needs to be portable in some ways and a 30 year mortgage doesn't lend itself to that. This segment is for those in the feast/famine cycle, the quicker product lifecycle natured industries, and for those in industries that treat their employees like disposable dixie cups (commodities). This is why I see you folks like professional bikers and nomads that chase the sun like in the movie "The Endless Summer".

I think that even a biker needs a home. I think that renting until prices come within 3 or 3.5 times the regional salary could be the best bet and a sizeable emergency fund to cover for the inevitable famine phase...

[Boston ITer]

[john p]

I'd like you to comment on this:

Think abot game speed. I played lacrosse in college and the difference between a good team and a bad team was their ability to make something happen within a fraction of time. To some, their abilities limited them to an opening or opportunity in the game where someone would have to fall over and lie in the fetal position for them to be able to run through a hole. Others could cut through a tiny hole that opened and shut in a fraction of a second. What separated the men from the boys was their ability to operate in a very small window. That being said, I remained mostly on the bench for my tenure in college.

Do you think the pace of industry requires high level professionals and that the junior varsity teams just can't keep up?

[Boston ITer]

Yes, it's a lot like the lacrosse metaphor, however, there are also some politics involved.

You see, the average top tier professional still isn't an executive VP or CEO/President so he can't make facilities decisions and such, however, by being nationally mobile, he can affect change at the director levels which then keeps a certain measure of value-added work in and around certain project centers or client base.

Hence, a semi-national development center may stay in let's say Lexington KY, with its low cost of doing business, etc, because it's cheap to gather US residents there, run an office, and service customers on the eastern seaboard-to-midwest centers while not having to move sensitive work to Beijing, since Asian offices tend to have more turnover and loss of sensitive client information to competitors.

All and all, as mergers and spin offs occur, these locations switch from Lex KY to let's say St Louis, Atlanta, Omaha, etc. All and all, the ones who remain a/o are retained, tend to be the ones who're willing to move with the changing corporate landscapes. Otherwise, if one specifically waits for a layoff/package, then the next gig may not compensate as much as when one moves laterally between divisions or even companies.

[john p]

The key word tell sign for me is the word "gig".

[Boston ITer]

Yeah, I think you got the idea.

The place to then setup you might say "roots" would be in the radius of a college town (Amherst MA, Burlington VT, Chapel Hill NC, Boulder CO) where there's a certain concentration of locals who work specifically for the school and its affiliated businesses like the bookstores, restaurant/bars, motels, etc. Then, you have a place where taking classes, attending plays, being a part of a "journal", etc is normal as oppose to let's say being near a strip mall/office park in South Jersey. That's where one can buy that retirement unit and basically, prepare to settle there during one's 50s or 60s.

Also, this might also be a post-modern way for a couple to raise a child where one party is a rambling man and the other, a librarian for the university. I know of too many couples who'd raised kids in cultural dead zones, like South Jersey, and lived to regret it since those sectors have people basically isolated between the malls and offices and kids only get together to take drugs and do little else unless it's a parent sponsored activity. But then since those parents spend all their time either working or commuting, they only get those precious 8PM to 11PM slots to talk to their kids.

[john p]

I hope the economists are paying attention to your real world observations.

Essentially what you're saying is that if a couple is working as a team, if one is going to be a hunter and go through feast and famine cycles, the other needs to be a farmer and have stability, health care, etc.

Hanging out by a university provides culture and an institution for that stable job. Interesting, I like it and it makes sense.

Funny thing was that I went to a neighborhood party (my neighborhood) over the summer in a very quiet suburb about 35 miles from Boston, and I have to admit, I had a hell of a time. What a bender, what cool people; I was totally surprised. On Friday nights in the summer, I go down the street and can see about 600 classic cars and their owners all chilled out, totally cool people. Then, I head down to the dog park and meet some really cool people. I'm now on the finance committe in this little town and I'm finding out that these little yocals who operate on a shoestring budget ought to be giving lectures to people at State Street. I'm finding that "my people" are the ones that work hard and pay the freight. The University folks seem a little too far removed from reality for me. I'm not into brands whether they are big company names or universities; I think quality people can come from anywhere and live everywhere. Most people don't agree with me, which is why some towns are much more expensive than others.

I'm sure there is a lot I don't know about your business, as there might be a link between the Universities and large private companies like MIT to Draper Laboratories.

[Boston ITer]

When I say university town, I tend to exclude places like metro Boston, Philly's mainline (plus W. Philly), Berkeley CA, and even Palo Alto. These places have a bit of a non-involvement or even antipathy with the town so essentially, it becomes a gown -> to -> corporate feeder type of environment.

For a New Englander, that might be Burlington VT or Northampton/Amherst MA though I like the Burlington area a bit more despite the winters.

For midwestern/heartlanders, maybe Madison WI or Boulder CO?

And for the south, perhaps Chapel Hill NC or Austin TX?

All and all, it's about being around a place which has a rooted foundation like a sprawling university as oppose to a company town persona like a Pittsfield or Albany.

[Boston ITer]

Also John, that university doesn't have to pay the mortgage, just the food/utilities and the use of the university health clinic for emergency sakes.

So what this does is make any work over there of value including being the assistant who handles the paperwork for the financial aid office.