How home prices helped kill the first tech boom
The late 1990s was a wild time in Silicon Valley. The NASDAQ was soaring, and seemingly anyone could start a company, stick a .com at the end of its name, put together an IPO and retire a millionaire. The great boom ultimately took on a speculative character that led to wasted investments and the collapse of many poorly-grounded operations. But it was rooted in a surge of not-unrealistic optimism about the potential of the internet to change the world of business.
Among the striking features of the era, one of the most startling is this: the rate of high-tech entrepreneurship in Silicon Valley seems to have been below the national average from 1996 to 2000, according to a recent analysis of business creation during the tech boom. And from the late 1990s to the early 2000s — after the bust — Silicon Valley’s rate of high-tech entrepreneurship actually increased. How can this be? How is it that during the first great boom of the internet era, Silicon Valley was less of a hotbed for new firm formation than the country as a whole?
Economists Robert Fairlie and Aaron Chatterji suggest that the answer lies in the extremely tight labor market conditions that prevailed at the time. The tech boom was remarkably good for Silicon Valley workers. Average earnings rose by nearly 40% from 1997 to 2000 — more than twice as fast as the increase for the country as a whole. Non-salary compensation also soared, thanks to the popularity of stock options and the skyrocketing value of equity in tech firms. These generous pay increases made it unattractive for workers to leave established companies to strike out on their own. Entrepreneurship fell because life on salary was too lucrative to risk self-employment.
Why was pay so high? Rising productivity was a big reason, as were expectations (some more reasonable than others) of high and rising profitability across the tech sector. But these factors could just as easily have driven an increase in new firm formation and employment as a rise in salaries. Silicon Valley experienced more of the latter than the former because workers were scarce. During the late 1990s, the unemployment rate across Silicon Valley dropped well under 3%, eventually sinking to nearly half the national level. There was essentially no surplus labor in the whole of the region. Firms therefore had to bargain hard to hire qualified workers, and this meant giving up a substantial share of firm surplus in the form of salary, benefits, and profit-sharing. That, in turn, made it more attractive to be a worker than an entrepreneur.
And this brings us to the crux of the matter: why was the Silicon Valley labour market so tight? If the unemployment rate was so much lower than it was elsewhere in the country, and if compensation was rising so much more rapidly than elsewhere in the country, why weren’t people pouring into Silicon Valley from elsewhere in the country? More remarkably, why were people moving in the opposite direction?
If you can believe it, Silicon Valley’s main metropolitan centers were losing residents to other parts of the country during the Dot Com boom. From 1998 to 1999, for instance, San Francisco and San Mateo counties each lost a net of about 10,000 residents to other parts of the country. Santa Clara County, the heart of the Valley, lost a net of 30,000 residents. For the decade as a whole, the losses were even more substantial; roughly 176,000 more residents of Santa Clara county moved out than moved in during the 1990s. The Silicon Valley labor market was tight because even as wages were soaring, residents were decamping for other locations.
These departures weren’t simply workers without the skills to benefit from the rise of Dot Coms. The tech industry was flourishing around the country. The problem wasn’t an absolute shortage of talent. The problem was that the talent couldn’t be attracted to the heart of the boom.
from Reuters Money:
Retirement investors suffer as economy catches up to Wall Street
Retirement investors have struggled with a Jekyll and Hyde economy these past two years, where Dr. Jekyll lives very well on Wall Street while Mr. Hyde runs roughshod over a terrified Main Street.
On Main Street, the jobless rate tops 9 percent and 14 million residential mortgages are underwater – a figure Deutsche Bank thinks will hit 25 million, or 48 percent of all home loans, before the housing bust ends.
On Main Street, the economy hasn't respond to ultra-accommodative monetary policy. Near-zero interest rates don't matter because because there's so little demand for credit to hire people or to buy post-bubble real estate.
Meanwhile, free money has been great for Wall Street. The companies that created Main Street's problems through the reckless behavior that led to the financial crisis barely missed a beat, and they went right back onto the gravy train.
Now, the Jekyll and Hyde economies demand to be reconciled. The markets finally realize what Main Street has known all along: we're stuck in a grinding, recessionary economy with no end in sight. You can't even call what's coming now a double-dip, because the first downturn never ended.
Monetary policy is of limited use. Interest rates already are at rock-bottom; we'll probably see more easing soon, even though QE2 hasn't helped much. Meanwhile, fiscal policy has been focused in exactly the wrong area — deficit reduction rather than job creation and direct stimulation of the economy.
Of course, most Americans have a stake in both the Jekyll and Hyde economies – we live on Main Street, but our retirement money is invested on Wall Street. So the obvious question: what now? I'll be blogging about strategies for retirement investing all week, but here's my opening comment to those of us living in the Mr. Hyde economy, don't create a self-inflicted wound by selling out of panic during this plunge.
from Commentaries:
Goldman’s real estate gambit
Is history repeating itself at Goldman Sachs?
In late 2006, Goldman shrewdly began backing away from the residential mortgage market. With little fanfare, the firm began aggressively hedging its exposure to home loans, in particular mortgages to borrowers with shaky credit histories.
This savvy and somewhat stealthy strategy enabled Goldman to pawn off lots of its soon-to-be toxic mortgages and mortgage-backed securities on other institutions -- forcing those foolhardy speculators to pay the price when the subprime market blew up.
And much to everyone else's chagrin, Goldman even made money off the housing meltdown when some of its hedges -- specifically a bet that a subprime mortgage index would plunge -- paid off handsomely.
It appears Goldman is following a similar script with U.S. commercial real estate, the next big asset class that many believe is on the verge of disaster.
Goldman recently reported owning $6.4 billion in commercial mortgage loans. It also is holding some $1.6 billion in commercial mortgage-backed securities, or CMBS. That's a big retreat from where it was just two years ago.
And in a sure sign that Goldman expects a good number of commercial real estate borrowers to default, the firm says it marked down the overall value of its commercial mortgages portfolio by nearly 50 percent.
PLEASE, PLEASE don’t say “haircut”. It’s just a stupid thing to say. In fact, I always feel depressed when I hear it. That’s because it reminds me of a particulalry stupid man who says many stupid things – and our liberal media, who hang adoringly on his every stupid word.
from Commentaries:
Goldman still puzzles
Investing in Goldman Sachs still requires a leap of faith in the investment firm's ability to out-trade, out-wit and out-muscle everyone else on Wall Street.
Sure, the bulls will say that with fewer competitors and with the Federal Reserve keeping bank borrowing costs near zero, Goldman's traders should be able to print money. But here's the thing: The post-federal bailout version of Goldman is as much of an investing riddle as the pre-crisis Goldman that many critics called a giant hedge fund or an inscrutable black box.
Even after becoming a bank holding company last fall, Goldman still doesn't make it easy for investors to get their arms around all the firm's many moving pieces. Trying to get a clear picture of how Goldman makes all that money and where the risks to its profitability may be lurking is like embarking on a treasure hunt with a ripped map.
Here's an example. Go to the section of Goldman's most recent 10-K where there is a list of the firm's "significant subsidiaries." There you'll find the names of some 115 companies and where each was incorporated.
That may sound like a lot, but that figure just scratches the surface. In all, Goldman has more than 800 subsidiaries operating around the globe. But Goldman never discloses the identities of the vast majority of those subsidiaries anywhere in its annual report.
Now technically, Goldman, which declined to comment, doesn't have to disclose information about so-called insignificant subsidiaries. Securities and Exchange Commission regulations, relying on a complicated formula, only require companies to disclose the identities of subsidiaries that account for a "significant" percentage of a company's income. But not all financial firms play it so close to the vest. Morgan Stanley, for instance, lists the names of every single one of its 1,300 subsidiaries in its 10-K. The list is so long it takes up 26 pages.
Actually, there is a place to find a more detailed list of all of Goldman's subsidiaries and that's in the regulatory filings for its small insurance firm, Commonwealth Annuity and Life Insurance Company.
Having read about Goldman, it leads me to wonder about the reliance investors (and thus everyone) have on the morality of corporations. What accountability measures could police the complex modern mega corporation? Perhaps only laws barring complexity and the vastness of firms.
But back to the morality issue, Maddoff has copped 150 years but it is really likely he is just the the sacrificial lamb, is the reality that Madoff’s fraud reflects the more conventionalfraud yet to surface while the stimulus papers over the cracks on Wall St.
Fishing for the housing bottom in San Diego
– James Saft is a Reuters columnist. The opinions expressed are his own – When prophetic long time bears turn a bit cuddly, it is usually best to take notice. A real estate maven who rejoices in the “nom-de-blog” of Professor Piggington has now, after five years of correctly shouting bubble, labelled San Diego housing prices “reasonable” based on the latest available housing data.
Remember, San Diego has been, along with Phoenix, Las Vegas and parts of Florida, among the most bubbleicious markets in the U.S., and the massive busts there still represent a huge problem for bank balance sheets, for employment and for the U.S. economy generally.
So a bottoming, if that is what we are seeing, would be very significant. Housing is usually among the first sectors to recover in the aftermath of a recession and many economists argue that it actually drives the economic cycle.
Piggington, whose mother knows him as Rich Toscano, is making more modest claims; that prices are reasonable historically, but his arguments have some merit and fair value is a necessary but not sufficient precondition for a bottom and a turn.
He argues that, based on the historical relationship between San Diego county house prices and both incomes and rents, prices are now not so bad. The ratio of home prices to per capita income in December was below eight (remember San Diego housing has always been expensive!) as opposed to a bubble peak above 14. And buying the average single family home now costs the equivalent of just about 200 months of the average rent, as against well over 350 at the peak.
I think it’s fair to say that we are getting ever closer to a bottom in some of the bombed out markets, not just San Diego, but I don’t think we are there yet. On the plus side, in many of these markets transactions are now well above last year’s extremely low levels, driven by banks selling foreclosed properties at aggressive prices. And many of the buyers in places like Florida appear to be investors who are happy to take the quite positive cash flow from renting, a real sign of health, as opposed to 2006′s flippers.
But be cautious: we are in the midst of an awful recession and the employment effects will last long into 2010. Prices also are liable to overshoot on the way down, as they have in the past, including in California.
I do not see the sense in high property tax as a deterrent to speculation. Only a speculation tax can affect speculation, otherwise, the rest of homeowners would be subsidizing speculative activities. My complain with property tax is that it is too high, and gets annual increases even though home prices are falling. A person is required to individually sue for adjustment and bear the burden to prove that home value is less, which of course requires new appraisals and also money wasted on legal fees. The price fluctuations are widespread, not individual, so across the board adjustments would be appropriate. The property owners are being victimized by the greed of local government in the present system.