Bend Oregon: Real Estates New "Britney"

OK, here's a chart of 3 data points. Imagine it's the sales for 3 different stores. Which store would you rather be?

USA (yellow), Oregon (red), and Bend MSA area (blue) unemployment rates from 1990 to Now. (y-axis inverted)

Welp, it's actually the unemployment rate for Deschutes County (blue line), Oregon (red line), and the US (yellow line), going clear back to 1990, the first year all three stats are available.

A few things become obvious right away.

First, and by far the most important, is the wild cyclicality of Bend. Some of those years in the 90's swung from about 11% on the bad side, to 5.75% to the good. You see Oregon doesn't swing nearly as much as Bend. And the US as a whole does not swing nearly as wild as Oregon.

This goes to the point I made repeatedly on this blog, and way back on BEM's: Bend is extremely "high beta". When things are going poorly, or even if they are going so-so, Bend is in the shitter. Look at that initial 4 year plunge starting in 1990: From just about 4% unemployment, and then a series of lower lows & lower highs, culminating in 11.1% unemployment in Feb 1994.

Now look at the Good Times: In 2000, unemployment reached a low of 4.5% in September, before beginning a relatively brief "2 cycle" ratchet lower to 9.6% unemployment in Feb 2002. Notice also that when unemployment is relatively low, it "compresses"; the swings from high to low have less amplitude.

The beginning of the graph is more indicative of the severe drops that have been experienced by the Old Timers (aka Duncan). That 1994 swing appears to be the largest in the past 17 years, although I'll bet there were times in the 80's when the swings were wilder, and the figures got far bleaker.

The reason I ask if you could choose one, and act as if it's a store, is to bring out that point that The Severity of the swings, is probably going to be more important than the absolute levels.

This is what I find interesting about Duncan's store in particular vs Bend: He runs an almost pure fad business (at least as faddish as you'll find alive around here), but he has diversified into several fads. He's employed a "portfolio management" approach to managing his store. You can sense it in his yearly updates & store rules:

• Carry all the classics, cult, personal interest/and/or books you like.
• If you've ever been in my store, you know what my focus is on -- inventory, inventory, inventory.
• But what I carry, and how much? Totally under my control, baby.

Same goes for managing a stock portfolio: Buy a little of everything, and all the little wild swings of the individual components cancel each other out. Which leads to Paul-doh's rule of running a town, a store, or a stock portfolio:

DIVERSIFY

If you do not diversify your "stock", be it shares in a company, comic books, ski resort, an entire downtown area, or what have you, they will ultimately carry you out.

That's why I was sort of surprised that Anime Mountain lasted so long: They took a "1 stock" approach to a fad business. And realize that MOST BUSINESSES ARE FAD BUSINESSES. There are exceptions like GE and Johnson & Johnson. But most successful businesses have a definitive End Date.

And you can measure the Faddishness of Bend by looking at it's wild swings in unemployment. And being fad-based is EXTREMELY EXPENSIVE. Every year, you MUST layoff Good People, suffer thru the Hard Times, and then ATTEMPT to hire back the good ones again, usually unsuccessfully. All that mind share just goes away every year, and you have to hire a new crew.

In some industries, like Hospitality & Restaurants, this is less important. They expect high turnover. But in Real Live Businesses, it's INCREDIBLY EXPENSIVE. Look at Pegasus itself: Retail isn't exactly an industry breaking down the doors with Intellectual Property, but you can already tell that Dunc is getting used to living the "Pat Lifestyle", and losing him would be hell. Although it's clear much of the hard-won experience of running Dunc's business is embodied in Duncan himself.

How do you think it'd be in other industries like accounting, software, law, and other higher level intellectual property-based businesses. In the most extreme circumstances like real estate, the people ARE THE BUSINESS. You should never, EVER buy a business like that when 100% of the intellectual property walks out the doors at 5:00.

And therein lies Bend's Biggest Liability: We are wildly high beta, which means we are wildly expensive in an area that is probably more important than just cost inflation: The most valuable asset in many businesses are forcibly blown out the hatch each year, and we then start ALL OVER the next Summer, all training & knowledge-based experience, LOST.

But WAIT. Look at the graph! We're having some sort of Bend Renaissance! Our unemployment actually went BELOW the national average for the first time EVER, in recent history! That's gotta count for something, right?

Maybe. Maybe it would had we followed Paul-doh's single rule for running a store, town or stock portfolio. What's that rule again? Oh right:

DIVERSIFY, DAMMIT!

Unfortunately, we did not follow this rule, and we in fact did the opposite: We doubled down on our winner with each and every bonanza. And we did it to hella good effect, too. Bend probably actually is a far more vibrant town that it would otherwise be, had we plowed money back into industries with lower interim returns than RE. So our doubled-own mentality has worked.

Until now. We made a bargain with the Devil that we'd give our souls to be the bleeding edge, top of the heap town for 3 years, and now it's time to pay. Check the graph: Our "high" on this recent cycle was lower. We will make a new low next month, we always do. And December is already lower, so the cycle of lower highs & lower lows has begun. The devil wants his money, NOW.

Poor Bend, we are not only stricken with vicious yearly cycles, but "long-wave" cycles; waves within waves. Just draw a line thru the middle of our yearly cycles. You can see that the 90's were a giant bowl shaped cycle. The swings get hella wild (ie EXPENSIVE) on the lows, and when things turn up as they have in the past 6 years, the swings become tempered, and we approach, dare I say it, normalcy. There's a feeling of an Economic Renaissance, where the vicious cyclicality of the past is banished forever, and Bend becomes a Real Town, not a giant T-shirt shop.

A town where people's intellectual capital survives The Yearly Cycle. A town where workers are valuable ALL YEAR, not just when it's warm. A town where half the businesses owners DO NOT consider closing up shop. A town where you can actually pay your bills in January. A town where half the Winter income is not paid in Bachelor barter exchange.

Then apply this yearly swing, to the longer waves. There is a periodic purge of Bend on longer time scales, where entire industries are blown away. Timber first. Now we have a behemoth RE industry, built on the premise of DOUBLING DOWN NEVER LOSES. Unfortunately, this is wrong. Doubling down ALWAYS loses, it's just a matter of when. Well, it's now.

I think some people think we'll do a short cycle down, and pop right back up the New Highs. Well, maybe if we'd had Duncan running the show -- maybe. But we are The New Britney. Or should I say, we are the older, dumpier, lip-synching, snatch-flashing, coked-up Britney.

We are past our prime, unfortunately. The Old Britney, dead-smokin hot in a Catholic schoolgirl out fit, just isn't coming back.

We're on The Long Wave down, I'm afraid. Lower yearly lows, and lower highs. Wasted human capital, a condition that just gets more severe every year.

And not to rub salt in the wounds of the True Believers, but do you recall Paul-doh saying that the imploding RE market would infect every corner of our economy to a degree not seen in modern history? And I don't want to remind everyone that I don't think it'll stop at a mild recession, then we're on to bigger & better things. I think that the US itself will be supplanted as The World Superpower. Time to learn Chinese...

Look at the frantic Fear In Their Eyes:

• George Bush reschedules an economic press conference forward 10 days, because it CANNOT WAIT 10 DAYS.
• Citigroup (and others) goes begging in the Middle East for capital TO KEEP THE DOORS OPEN.
• Not just banks, but ALL financially leveraged companies are imploding towards bankruptcy.
• Stock market plummeting
  

Look at this chart of MBIA, bond insurer extraordinaire:


From $70/sh to damn near $7 in 3 months. These guys are in the perilous business of paying off debts when others default. I won't bore you with another CACB chart showing a 67% loss in the past year.

So what's the Bad News? Well, we've started a Long Wave down in Bend, which is simply lower lows & lower highs. And I say again: There is NO INDUSTRY IN BEND immune from it's deleterious effects. A rising tide carries all boats, but a falling tide grounds them all too. Mark my words, we'll see 12% unemployment one of these next 5 Winters. We doubled down, and now they'll carry us out.

The Good News? Bend's yearly cyclicality ends in February, mercifully. Things are about to do their yearly upturn.

But we WILL NOT hit the recent peaks again. FOR YEARS. If you are having troubles now, you ain't seen nut'n yet. If you own a business with a lease coming up for renewal, and you're doing some major 401K-to-payroll transfers, you'd better think hard about whether you want to squander your retirement on a Dream. Look at the Unemployment Chart ONE MORE TIME. It's gets DAMN BAD HERE WHEN IT GETS BAD.

Can you survive, is the question. I know a LOT of people who watched the money pile up over the past 3-4 years, and have a decent slug in the bank, and are plenty comfortable waiting out this "temporary slowdown", having enough to easily make it 2-3 years. But what about a long, protracted Depression, lasting WELL OVER 10 years?

This is Bend's specialty: Running your 401K down to NOTHING, while you wait for the Sun to Come Out Tomorrow. If you want Real Advice, FUCK THIS BLOG, go talk to someone who hasn't just survived 1 or 2 LONG WAVE tsunami's, but damn near all of them.

In response to Buster, Duncan say:

My dear boy,

This is nothing. If you had walked up to me on the sidewalk in 1992 and blown in my face I would've fallen over.

15 years ago, I was operating with no assets, huge debt, and sales dropping in half. Half, I tell you! It was a near business death experience, which it seemed I fought my way back from one inch at a time.

Not to mention the wasteland that was downtown Bend from 1982 - 1987.

Or the second time sales dropped in half from 1995-1997.

No. This is like having been on the Russian front for a few years, and coming back to the National Guard for storm duty.

I'm only worried that I won't make the profits I was hoping for. Profits that would make me feel much more secure about my next lease negotiation.

January 18, 2008 8:48:00 PM PST

BUSINESS TURNS DOWN IN BEND. Always has, always will. Try to divorce from your mind that BendBust or I are trying to Scare You Outta Bend. Is Duncan trying to? I'm not trying to scare anyone, but I'm trying to ask people to reassess their own financial situation: Can you & your business (and by extension, your job) survive an Extended Long wave DOWN?

Assess whether you will take the tsunami head on (RE, development, mortgage, etc), or get pounded by the far less severe secondary waves (upscale restaurants & "boutiques"), or the far less damaging tertiary waves (basic necessity providers, medical, and must-have business supplies).

Here's my advice:

If you are in the Tsunami Head On group, Get Out. Or you will end up like the people who thought they could "beat" St Helens exploding and hunkered down. You can't "beat" this thing. It is an overwhelming force. It will carry you out, no matter your resources. It will scour the ground clean, and your corpse will simply be floating in the ocean in a year or two. Get Out Now.

If you are in the second group, look at your personal finances. How many years (months?) can you survive at a permanently lower level of sales, with constant or possibly HIGHER expenses? How bad do you REALLY want to dissipate your savings to wait for a Long Wave top that may be 15 years away?

The third group should simply hunker down. Some will not feel much of a beating, medical being the biggie. Entertainment is another. But they WILL feel something. EVERYTHING will. This thing is country wide. It's just going to be extraordinarily severe here.

DIVERSIFY

Deep? You're Dead.

Bend Medical Center? You'll live.

Downtown Art Gallery? Dead.

Dandy's Drive In? Alive.

Sisters? Dead.

Regal Cinema? Alive.

Half the retail at The Old Mill? Dead.

Overly targeted faddish bullshit retail? Dead, bigtime.

Pegasus? Bruised, but alive.

Downtown Redmond? Dead.

Grocery Stores? Alive.

Upscale Shoe Stores? All dead.

Normal people shoe stores? Alive.

You can survive, but you'd better realize that NOW is the time to HUNKER DOWN. Eternal Optimism will leave you DEAD ON THE SLOPES OF EVEREST. Even if you are hunkering down, The Largest Threat to your survival is the Delusional Perceptions Of Your Landlord. Some are pricing downtown like it's The Ginza in downtown Tokyo. Of course, most will DIE ON THE SLOPES OF EVEREST by doing this. In the process they'll simply kill half of downtown.

We're in the long wave down folks. We're the New Britney. How many Britney albums would you buy if they cut the price in half? That's just a weird question, as it assumes dropping price will have some ability to put Britney back on top. It won't. She is over, and you could give away her shit, and there'd be few who'd ever expend the money to drive to the store to pick it up for free. Here's how BEM put it:

With the number of houses on the market today, sales of 74 houses in December means that BUYERS ARE WISE that you'd have to be a fool to pay anywhere NEAR asking price for ANY home in Bend. 74 houses sold out of 1500+ offered means that very, very few people are saying "let's just buy this place. Sure it's a bit more expensive than we'd like, but we love it."

Realtors like to describe this situation as "buyers on the sidelines" or "vultures circling." That's actually optimistic, I think. I think that there's no one on the sidelines and no vultures anywhere near. I think if you lopped 50% off of the price of all real estate in Bend, it would still take MONTHS to sell. People (including lenders) have caught on to the notion that we're in the early stages of a MULTI-YEAR downturn.

This exactly our situation. Cut price 50%, and almost nothing would happen. And I've put it out there, that due to The Cult of Bend, and the Kool-Aid factor that No One Will Lower Their Price. This is only half the picture.

There is the even worse circumstance of MANY in Bend who CANNOT lower their price. They do not have the assets to cover a short sale, and going BK means 10 years of FICO bad luck. F'd if they do, and F'd if they don't. I believe I've heard this mantra before. Who was it? Oh right, Buster:

Bend is FUCKED

I know, it's easy to dismiss this as the ravings of a lunatic. Maybe that's because that's sort of what it is. But that don't mean it's wrong. He's dead right. Dammit. There is no better way to summarize the plight of this town. Half WILL NOT do what has to be done to jumpstart our economic engine. The other half CANNOT do it. Hence, we're headed for the WORST OF ALL WORLDS: Stagflation. The stagflation the US will suffer will PALE in comparison to what will happen to Bend.

Our city coffers are damn near bare. We are FIRING COPS because we wanted homes, and to hell with REALISTIC SDC charges. We can't patch the potholes. Our vast unfinished developments are damn near 100% VACANT. We are on the hook for millions in improvements, mainly in the JR area. Jump starting that are will take a MINIMUM $200 MILLION. We ain't got $2 million. "Bend is fucked", is dead right.

We're the New Britney. We're Flint, MI. Marking down price won't do shit. We're headed for the tsunami hit. Not lasting for a year or two. Decades. Your ENTIRE ADULT LIFE. It's time to REALLY REASSESS if you are willing to sacrifice IT ALL to stay here, because you will have to.

Ask yourself: Where are you in the path of the tsunami? If it'll hit you head on, are you going to uproot everything, move on, and survive, or will you take the hit, and watch EVERYTHING get stripped away?



What does a bursted has-been bubble look like 10 years hence? Well, kinda like this.