Summary: There is an exception to Saturday’s post, which said that a stock market crash would have only minor economic effects on America. Just as an oil crash hurts oil producing regions, such as Texas, a stock market crash hurts areas that produce stock certificates. Printing this “paper” is the most profitable part of the San Francisco Bay economy, putting it in the cross-hairs for the inevitable crash.
Sector crashes often harshly affect industries and regions even when the national impact is minor or even beneficial. An oil bust hurts not just oil exploration and production companies, but also regions focused on that industry (e.g., Texas) — while helping everybody else. Similarly a stock market crash will hurt companies that trade stocks (brokerage firms) and those that print stock certificates (Tesla Motors (NASDAQ:TSLA)) — and areas that manufacture stock certificates, like the San Francisco Bay Area.
Silicon Valley and the entire Bay area form a 21st century version of a gold rush. Money floods in and fortunes are made — but instead of exporting pretty rocks it exports papers promising future riches. This should be obvious by now. I walk through the details in these posts here and here…
These industries will not disappear, any more than finance did after the 1970s crashes, or the oil industry did after the 1980s bust. But the people in these industries and the areas in which they cluster will suffer from the fall to Earth (except those people at the top, and those who got in early).
The fall can be quite far. Here’s the price graph of the iShares Nasdaq Biotechnology (NASDAQ:IBB), as it rose from $80 to $340 in five years. Try not to see the bubble when you look at it (that requires an investment professional’s eye). Do not ask how many of its 145 constituent stocks are profitable. The ETF’s profile is here.
What will happen after the crash?
The venture capital industry will evaporate, except for its long-experience super-competent core. The bursting bubble will thin the herds of biotechs, social media companies, and other bubble industries. Bankruptcies for the unprofitable while the survivors reorganize to produce cash flow and profits instead of glitzy investor presentations and clickbait headlines. That means layoffs, and wage freezes for the rest — which slowly ratchet real wages back to normal.
It will force evolution of the cultures at some corporations. The New York Time’s expose about Amazon (NASDAQ:AMZN) reveals how the management squeezes its white collar workers (it doesn’t mention the sweatshop working conditions in its warehouses). Only its insanely hot stock price makes that possible, as workers toil for the chance to profit from investors’ greed — more so than their wages. Amazon’s price to earnings ratio crashing to 30 (after it’s forced to generate consistent profits) will end that game — and reintroduce the 40 hour workweek.
When a regional economy breaks, its real estate prices usually crash as well. San Francisco has been one of two great beneficiaries of the debt supercycle since 1982. The result of its field of dreams burning will not be pretty. For its history see “Recessions, Recoveries & Bubbles: 30 Years of Housing Market Cycles in San Francisco” by Paragon Real Estate Group (click to enlarge graph).
A real estate crash in a hot property market begins a second wave of decline for the affected region. Since this is America, people walk away from their mortgages (“jingle mail” for the banks) and seek new opportunities elsewhere. Prices will drop far. Not to those of Buffalo or Iowa City, but to those of a premium urban center (much like Oz, the Emerald City, after people take off their green glasses).
Conclusion
This is a cycle, not the apocalypse. Boom-bust cycles are an inherent aspect of free market systems. Sometimes government policy restrains them. Sometimes — like now — it magnifies them. By 2115 it will be a footnote in the history books.
The important matters are helping people affected (minimizing the pain), not making the downturn worse (e.g., the Fed NOT raising interest rates), and learning to better manage these cycles. Investors being less gullible is a good first step. Only fools allow insiders to blow two bubbles in 20 years.