Thanks, Ken, for the attached graph from Bill Gross’s commentary. Some of us have already seen his commentary, but the graph must be very sobering for people who are in denial about the impending bursting of the Housing Bubble.

Let me make few comments on the graph before I begin my rant on why Silly.con Valley’s economy is doomed.

1. If one eyeballs the graph one will notice that the prices at the low, during the depression, are less than 40% of the current prices, i.e., down more than 60%.

2. I believe that the graph is for a median house in the US. If such a graph were available for California, we would see the adjusted prices at least 5 times the lows during the depression.

3. I doubt that any adjustment has been made for the lot sizes. I believe that the lot sizes now are much smaller for median priced homes. Since, the lot is a higher percent of total price now than in the past, the real adjusted prices today may be even higher than what the graph suggests.

In all my predictions of Doom and Gloom I am guided strictly by history. One of the signatories to the American Declaration of Independence cautioned the attendees by saying that we must be guided by experience because the reason may mislead us. What the gentleman meant by experience was historical experience of other nations. I regret to note that most so-called educated Americans have a faith in human reason, or rationality, that is devoid of any “experience.” Greeks were the most rational people and we know how Greece and the Greek democracy ended.

What Does the Experience Have to Teach Us

Booms create economic imbalances and then politicians, including the Federal Reserve, create more, or add to, imbalances to keep the boom going artificially. On both counts, we are at a worse juncture in term of imbalances than during late 1920s and early 1930s. The most important quantifier of the imbalances is Debt to GDP ratio. As most of you have seen the graph of this ratio, also popularized by Bill Gross in one of his commentaries last year, we can easily guess where the things are going when this ratio corrects to historical trend, first, and then to new historical lows for the private debt, as we can say confidently from experience that things that overshoot undershoot to even a higher proportion. Needless to point out that these imbalances are greater in Silly.con valley than in California as a whole and in the US.

Let us take a simple example of how things might pan out in Silly.con Valley and I will take my friend’s home, which he owns under a dead-hand (mort-gage, in French), as an example. The current market price is $700-800K. In a depression that I foresee, such a home would rent for $700 a month. Using the golden rule of buying a residential rental I would not pay more than $700*12*7 = $58,800. If we loosen the requirements, the house will not fetch more than $84K. So, you can see the reality during a depression could be very depressing (that is why it is called depression!). The most wishful thought that many Americans entertain is that Greenspan, or “powers that be,” would not allow a depression that I am forecasting. Does the economic reality take its orders from Greenspan or “powers that be?” The only thing that Greenspan and “powers that be” can do is to make the depression worse by self-serving intervention. And that they have done already.

The renters in Silly.con Valley during the depression might be a rude bunch.

So, even buying a home like my friend’s for $50,000 may not be worth the trouble. And people shouldn’t laugh at this. My friend Ken’s grandfather bought a home in LA for $2,000 during the Great Depression. I doubt that the future prospects for Silly.con Valley, following the coming depression, are going to be better than that of LA in 1930s.

The “big one” that Californians have been expecting would not be the natural earthquake but a gigantic economic destruction led by CRASH in the housing prices, 60-90%, based on the locale. At least 30% of the residences in Silly.con Valley will be unoccupied at some point. No jobs, no money, so people will double up or leave the area for the lowest cost of living. One bad thing about most of the homes is that you can’t take them with you! Nice weather does not buy groceries, or pay sickness-care bills. Believe it or not, I know people in Silly.con Valley who don't understand such things. I know other people who believe that weather is the most important determinant of housing prices in the area. Hmmmm, let me check the weather in Boston, New York, Moscow, and Zurich.

Jas

PS: What is it that Cisco does in Silly.con Valley that it can't get done in China and India? A true capitalist is cosmopolitan, not parochial.

© 2005 Jas Jain
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Jas Jain
Tehachapi, CA USA
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