Bend & Columbia Air -- Redux

Damn it, damn it, damn it.

I had a nice little post concept comparing Bend and Columbia Air ready for this week, complete with prescient predictions of doom for both. I know, maybe too similar to last weeks Popeil Pocket Fisherman post, but Columbia and Bend are an even more appropriate comparison, and the problems and fate of both seem inexorably connected. Bend and Columbia Air share so many characteristics.

First, both are what I can only describe as "high quality". Or are at least perceived as "high quality". In this particular comparison, I think Columbia has a clear premium over most other plane makers. It's hard to compare Bend As A Product, but it is difficult to live in a place for purely voluntary reasons, and say that it sucks. Bend appeals to me quite a bit, and I still think that despite increasing deficiencies, it's still a pretty nice place to live. Both Columbia & Bend as "products" have definite appeal.

But they both also share a insidious "profitless prosperity", something quite widespread during the NASDAQ bubble. Companies with absolutely no hope of EVER making money came out of the woodwork. Some were even located in Bend, if you can believe that. Highspeed Networks was designed for the sole and specific purpose of going public and making its founders rich. Highspeed got a ton of private funding which it proceeded to burn through with breathtaking rapidity. They turned down repeated offers for many millions. They were holding out for The Big Score -- $100 million each. Alas they missed the top, and by 2003 were wiped out, the scraps were picked up by vultures for next to nothing.

Columbia Air was not built for the specific purpose of capitalizing on a bubble, per se, but it suffered much the same fate as Highspeed. Chronically high costs in an industry with astronomical capital needs. Columbia tried to cure the condition by positioning itself as a "Premium" manufacturer, and charging quite a bit more than others in it's space. This is often a good move for low-unit makers. Like Aston Martin, you become a manufacturer of choice for those who are willing to max out their spending for The Best. This was probably a good choice for Columbia.

But like Aston, you have to accept your marginal niche role. You can be abnormally hurt by cyclicality. This did not happen to Columbia though. "Small aerospace" has been inordinately strong for years. 9/11 actually helped this sector as many chose to forgo long lines and either go with small planes or "timeshare" like outfits like Netjets. Columbia Air was built from baby to adolescent in the best of times.

But even this was not enough to keep Columbia afloat, and it was almost entirely bought by the Malaysian government. Now, I can tell you that the Absentee Owner Funding My Company From Afar, And They Happen To Be A Sovereign Government model of running a business is fraught with financial & moral hazard. "Loans" quickly become "Income" to be spent, instead of invested at an internal ROI to cover the payments. And as the Sovereign Sugar Daddy loans become "income", there comes to exist a persistent condition of Profitless Prosperity. The company NEVER makes money, and is actually plagued with HUGE LOSSES, but nevertheless continues to survive, and curiously enough, thrives like never before. From all appearances, things seem to be going swimmingly, when in fact the income statement and balance sheet are rotting from the inside. This is Columbia Air: All spit & polish & prosperity with great product... but an insidious financial condition guarantees the implosion of the financial Ponzi scheme.

This is Bend. Apparent prosperity of almost unknown magnitude. Upgrades here, there, everywhere. Expansion in all corners, and the Engine of the Local Economy experiencing so many years of asset inflation, that the balance sheet looks positively glorious. Income IS HIGHER. ASSETS are at all-time highs. Everything looks positive, and regressing back to The Bad Old Days really seems mathematically impossible.

But Columbia Air & Bend will almost certainly share the same fate. If you haven't heard, the vultures are circling Columbia, with Textron (parent company of Cessna) having made an offer to purchase the company. And it wasn't due to "independent interest", it was due to the Malay's circulating a memo to anyone and everyone that Columbia is available for bid in whatever form bidders saw fit, whether carved up carcass or on-going operation, because otherwise Columbia is going bankrupt. The Malays pulled the plug.

Yes, Columbia Air, like all Ponzi schemes is finally collapsing. Taking in a dollar, and selling it for 80 cents will ultimately implode whether backed by governments or little old ladies. The Malays just delayed the inevitable by buying a majority interest several years back. It probably cost them tens of millions.

The same will happen to Bend. Doesn't seem like it should, but it will. And figuring it out is pathologically simple. LOOK AT OUR INCOME STATEMENT. We've doubled income since 1990. Gravy. Great. But our assets are up 5 fold. Lots of people make the argument that virtually all Bend homes are 100% equity financed. Ummm.. if you believe that, I have an aircraft maker & a bridge to sell you. Bend is income has been funded by the liability side of it's balance sheet for at least 10 years. To some extent this has always been true.

But in the past 5 years, the practice of borrowing money to actually refi loans, and then begin paying those loans until the next refi has basically been a way of life. EVERYONE in Bend does this. Look at any business downtown, and look at it's income: trace those dollars back to their "Source" and you'll find they originated from the liability side of some companies or individuals balance sheet. NOT income. This place is, like Columbia Air, experiencing liability-fueled prosperity, aka Ponzi Scheme.

Columbia Air. Bend. Same thing. Prosperity. Ever rising employment. Premium high quality products. Wondrous untold good fortune. All fueled by Ponzi financing, and doomed to self-destruct.

STATUS REPORT: Columbia Air was sold Friday. They had to accept an offer, or declare BK. From Aero-news.net:

Sources involved in the negotiation tell ANN the company "ran out of time" in negotiations... and had to accept an offer, from an as-yet-unreported entity, that had a late-Friday deadline.

What that means for Columbia Aircraft Company... current and future customers... and the company's employees in Bend, OR... remains to be seen.

ANN confirmed earlier this week the identity of Textron, the parent organization overseeing the mighty GA manufacturer Cessna, as one of the interested parties for Columbia's assets.

It is not known whether Textron was the winning bidder.

A bidder, almost certainly Cessna, had a Friday deadline, which was probably accepted. This Whitelaw guy had ZERO CHANCE of doing this thing. LBO financing is bye-bye for this cycle. Be a decade or so before it's a viable scam. "What it means for Columbia Air" is as PLANE (ya like that?) as the nose on my face: it'll be dismantled, and every employee will be unceremoniously fired. Or possibly offered a min wage call center job in Kansas. Columbia Air is NO MORE. Like all Ponzi Schemes, it collapsed of it's own weight.

Similarly, Bend will also go down. In a strange twist of perverse logic, since the numbers required to keep Ponzi schemes alive must by definition escalate geometrically, the marginal largess of the process makes it seem like everyone is getting richer & richer right up until Judgment Day. But it will end. It's ending RIGHT NOW. The first hints of distress have begun. And don't be "tricked" by "linear thinking". If someone owns 20 homes, with equity of a million dollars and asset values of 20 million, the liquidation of 19 homes to pay off the debts is virtually NEVER possible. Not only that, the forced liquidation phase itself makes the valuations almost entirely fictional. Read Duncans blog about the sport card bubble, the pogs bubble... once it bursts, the liquidation itself cascades values to losses that simply defy rational analysis.

We're in the midst of the forced liquidation of the Bend RE Ponzi Scheme. "The Dealers" (aka Builders) are no longer engaged in the "retail" end of the business, and are liquidating WHOLESALE. Like Columbia, who used to sell individual planes, the business facility itself must be liquidated. Bend home selling is a process that is evolving into a completely untenable business model. As I noted in previous comments, if builders don't drink the Kool-Aid and stick to cost-plus work, shutting down is no problem. But an awful lot of Kool-Aid was consumed, and the vast majority of builders got into the land-spec business, which was enormously lucrative. So lucrative in fact, that many builders were really stealth land speculators -- building homes was really a marginal & unpleasant sideline. And in the fantasy World of easy money, many borrowed without end to buy The Dream. THIS is what will lead to forced liquidation around here. There IS a HUGE amount of borrowed money that is being called due, and one need only look around to see that we are awash in "product", but there are no buyers. None. None at any price. This is what happens when the bottom drops out.

Ye Olde BendBubble2 has apparently been "rediscovered" by what I thought to be a near-extinct species: The True Believer. Yup, Life Is Good and his ilk seem to come out of hibernation to give me and others a good swipe. Welp, it's all good, I hope I give as good as I get. LIG and others post their prophesies of Eternal Optimism, and it's probably good, because sometimes I and others (you know who you are) seem to dwell excessively on the negative.

But unlike others, I am really not the slightest bit interested in driving out the Amenity Locusts, or conducting a one-man assault on Bend home prices; I don't even really think such a thing is possible. I'm a REALIST. I want to know WHAT IS REAL. I want to plan, and have the best shot at planning a viable if not prosperous future. One look at Columbia Air should tell you why: Every single employee there is in an uncomfortable place right now. Virtually ALL stand to lose their jobs. ALL OF THEM. I posted what I hope was a "realist" view of the Columbia Air situation several times on this blog, given the limited information I have. And that "prediction" was "Marketing the upside of a Ponzi Scheme is FUTILE, and you'd better start looking for alternative employment... NOW!". Predictably, I was shouted down, although I remember a fairly honest & heartfelt appeal by someone who obviously worked at Columbia to stop cutting them off at the knees. Of course I never did, and never could cut Columbia off at the knees; a realist knows this. It was really an appeal to prolong the life of a totally unsustainable Ponzi scheme.

This is what we are hearing in large measure regarding Bend RE by Perma-Optimists. And in one regard, I respect this ebullient life-view. You've got to have Believers, otherwise we're all still cavemen. Seeing past the problems & obstacles to a truly innovative end is a great advance in the human condition. People like this make the World go round.

Unfortunately, in certain circumstances, people like this die. Every year, Perma-Optimists die on Everest. They ignore their own mortality, they become blind to the truly insurmountable nature of the obstacles that face them. They refuse to acknowledge the "Wake Up Call" that reality is sending them. And they die. Columbia Air probably sent the Malay government signals that All Is Not Well, every quarter. But it strong human nature not to admit you're wrong, and Perma-Optimists have One Unified Response To Peril:

THIS TOO SHALL PASS.

Sometimes it does pass. But when it's a Ponzi Scheme, it CANNOT PASS. Mathematically impossible. It MUST IMPLODE. The Optimist never sees this, and usually perishes. The realist also many times perishes, because they underestimate the true severity of the problem. Understand this: Bend RE is doomed to implode. If you are an eternal optimist, that funny feeling you have in the pit of your stomach is your body trying to tell you that Things Have Gone Decidedly WRONG. Good, happy attitudes are NOT ENOUGH to save you. MORE MARKETING is NOT A SURVIVAL TECHNIQUE.

HOMESELLERS: Do you want to survive? Check PPSF comps on BendBB, find THE LOWEST in your neighborhood, and price your home(s) 10-20% below that. NWX has already fallen from a low PPSF of $164/sf in Feburary, to $130/sf now. NWX and EVERY SINGLE NEIGHBORHOOD in Cent OR will make NEW LOWS. And the losses that have been largely mild so far, will become geometric. Marginal half-measures will simply ensure YOU NEVER SELL. OK, and this is NOT A PREDICTION. It's already happening. Any straight-shooter Realtor not experiencing Perma-Optimist Kool-Aid poisoning will tell you the same. You can see in BendBB data that several Realtors are having heart-to-hearts with their non-discretionary sellers (95% of the population -- not 0% as rumored), about dropping price to neighborhood rock-bottom PPSF lows to get'er done. And THEY ARE SELLING.

Unfortunately, thus begins the geometric cascade lower. You must continually cut price, because like lemmings running off a cliff, price cutting becomes the Only Known Way To Liquidate Product. Ask Duncan. It's straight cutthroat competition on price only. Anyone who used to sell product out the front door, starts going wholesale and shipping product on pallets out the back door. AND NO PRICE IS TOO LOW IN THE END. Bubbles attract lemmings like old people attract stink. And as Duncans shop illustrates, you can do OK surfing bubbles, but by God you gotta know when to bail, and bail like hell when the time comes.

I really feel bad for Columbia Air employees. A lot of people made commitments and moved here to build this company, bought into & drank the local Kool-Aid, made huge personal financial commitments, and will now have to unwind them in a market that has simply died. It really is a disaster. And it WAS NOT the point of this blog to cut off Columbia at the knees (as I said, a Ponzi scheme collapses of its own weight... ALWAYS), but to give people a REALIST view of Bend, and what you can really expect from this place. I think prior to BEM's kick-ass blog, there was nothing but 100% UPSIDE MARKETING, PERMA OPTIMIST MARKETING of all things Bend. And that type of thing DOES serve some sort of purpose; there needs to be vision and hope in many situations. But like climbers on Everest who don't survive the journey, there also needs to be some "grounding". Some rubber-meets-the-road real facts, free of spin and bullshit. THAT is what I have always hoped to achieve with this blog. To be the yin to the yang of Kool-Aid poisoned Bend media.

And maybe NOW, many Columbia Air employees (and probably MANY MANY OTHERS IN THE FUTURE) will see why I and others are more than a LITTLE UPSET by Bend medias "EVERYBODY HAPPY" party line. It's perma-optimist. It "feels good". But it's a phantom, and if you make a large scale life-change based on it, you will be financially destroyed. And they DO NOT CARE if you go bust. You are the grist of the Bend media mill that grinds people like you up. And if you read this blog, and think "NOT ME!", well then do as you will. Nothing and no amount of evidence will convince you of ANYTHING.

Just remember though, when you're SUFFOCATING financially having drank the Bend Kool-Aid till your mouth is permanently discolored, that you were warned. As goes Columbia Air, so goes Bend. The parallels are so numerous it's almost comical. Incompetent management, liability funded prosperity, and on and on. We will go down, we ARE going down. Bend is the Ultimate Ponzi Scheme, and it must end. This blog has pointed out the roadsigns on the path to complete destruction ad nauseum. If you think this blog is The Cause, you are deluded and are a slave to the idea that Marketing Solves All, and by extension Negative Marketing Destroys All. I repeat, this blog IS NOT NEGATIVE MARKETING, it's REALISM. Maybe I am equally deluded into thinking that True Believers can be convinced to TAKE RESPONSIBILITY FOR WHAT THEY HAVE CREATED. But like most 5 years old children, convincing them of something they do not want to believe is impossible.

WHAT TO DO?

1) FIND LOWEST PRICE PER SQUARE FOOT IN YOUR NEIGHBORHOOD
2) PRICE YOUR HOUSE 10-20% BELOW THAT
3) SELL YOUR HOUSE

WANT ABSOLUTELY GUARANTEED DISASTER?

1) INCREMENTALLY LOWER YOUR PRICE TO KEEP IT "MIDDLE OF THE ROAD"

2) GO BROKE