Fin de cycle

The edible gold indicator (II)

Early in 2006, I decided that the world was in a real estate finance bubble. I could detect a faint odor of euphoric greed—the smell that in 1999 concentrated in Silicon Valley into a stench of insanity.

I spent most of my time during the rest of the year learning about mortgage finance. By August, I was confident enough in my understanding of what was going on that I took large short positions in various banks, mortgage-related stocks, and mortgage debt derivatives. (A “short position” is an inverse investment: you make money if the value of something goes down, and lose money if it goes up.)

My calculations showed that the market had to crash by early 2007 at the latest. The money was going to run out. In one way, my timing was exactly right: August 2006 was the actual peak for US housing.

The financial market crash came two years later, though. What I had failed to take into account was that the late stage of a bubble is driven by fraud. The same was true in the late 90s, so I had a warning that I failed to heed. Then, WorldCom’s lies about its growth rate drove a trillion dollars of malinvestment. In 2006–2007, lying was systematically routinized at every stage of the mortgage finance process, resulting in several trillion dollars of malinvestment.

I was in Britain in summer and fall 2006, and Britain was plainly in its own housing bubble. I met many lower-middle-class people who owned several houses, “as investments.” However, as a US resident, the SEC helpfully “protected” me from the UK market. I could mostly only short US securities. From across the ocean, all I could do was read accounting statements. They sure made it look like the US mortgage finance system was toast, but I had to see for myself.

The housing bubble was a social and cultural movement. You can only understand those by being there and talking to people and taking in the feel of it. In late 2006 and in 2007, I spent a month in Southern California, a month in Las Vegas, and three months in South Florida. The madness was epic, and everywhere obvious.

Driving across the California desert, tens of miles from nowhere, the highway was lined with huge billboards advertising housing investment opportunities. They were spaced so tightly and regularly that they must have been placed as close together as the law allowed.

The desert around Las Vegas had been converted into a half-mile grid. Each half-mile-square box had a housing subdivision going up on it, and each one was in a uniform stage of development. One box would be all foundations; the next was all frames; the next finished houses on bare desert without landscaping; and then a completed, entirely empty suburb. It was an assembly line—but no one was home.

South Florida specialized in McMansions.

I wrote this to my girlfriend in England:

Subject: Fin de cycle
Date: 2 Dec 2006

Do you remember my “fin de siecle decadence” message, about an absurd dinner I had with Rasheed at the height of the dot com bubble? In which the dessert was flocculated with gold leaf?

Well, I just saw gold leaf on a menu for the first time since then.

I walked into a random sushi bar in Santa Barbara. They had a “special nigiri” that was toro with osetra caviar and gold leaf. I don’t remember if you’ve ever had toro – it is certainly the best (and most expensive) form of fish there is. It’s the fatty belly flesh of the bluefin tuna.

Well, naturally I had to get this, purely so I could tell you about it, of course.

It was probably the best toro I’ve ever had.

I don’t think the gold leaf added anything. (It’s there to impress your date, presumably.)

I’m taking this as evidence that we are very close to the end of this business cycle.

Recession next year—increasingly likely.

The start of the Great Recession was officially dated to December, 2007; so I just barely got it right.

Author: David Chapman

Author of the book Meaningness and several Buddhist sites.

4 thoughts on “Fin de cycle”

  1. I haven’t seen gold leaf on a restaurant menu since 2008. Has anyone else? I haven’t been in the sorts of restaurants that might, in the past few years.

    Yesterday I read an article in Vanity Fair, “Is Silicon Valley in another bubble?,” which reminded me strongly of my 1999 bubble story.

    I actually wrote this follow-up about the 2006-8 bubble in 2010, but only got around to posting it now, prompted by that. Also because, it happens, I was writing about Veblen yesterday as part of an upcoming series on Buddhist ethics.

    When I wrote this post and “The edible gold indicator,” I intended to tell some more stories about the madness of the (last) tech bubble. But I never got around to writing them, and since many people are apparently living through the same thing now, maybe there’s no point in telling them!

    My vague guess is that “this fine intro” leads us to the current bubble popping soonish. But I’m much less confident of that now than I was in 1999 and 2006. Partly that’s because I’m no longer living in the middle of the bubble, so I don’t have a finger on the pulse. And partly because some of the arguments that Silicon Valley “really is different this time” are somewhat plausible.

  2. What about those short positions you took? Did you manage to recoup your investment despite the mistiming of the end of the bubble?

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