Bubble in the Sun book: even those with the best information can’t predict a crash

Bubble in the Sun: The Florida Boom of the 1920s and How It Brought on the Great Depression (Christopher Knowlton) explains how Miami Beach was essentially the vision of a single individual, Carl Fisher (a pioneer in automobile headlights, highway development, and co-founder of the Indy 500).

Jane believed the project would be an expensive mistake. When Fisher took her to inspect the property by boat, they entered from the bay side, rowing up a channel lined with dense mangroves. “Mosquitos blackened our clothing,” she wrote. “Jungle flies, as large as horse flies, waited for our blood.… Other creatures that made me shudder were lying in wait in the slimy paths or on the branches of overhanging trees. The jungle itself was as hot and steamy as a conservatory.… What on earth could Carl possibly see in such a place?” But Fisher insisted that he knew what he was doing. Standing with her on the soft sand on the ocean side of the long neck, the surf breaking toward them in slow, white rollers, he sketched out his vision for the area. It would be half beach resort and half playground. “In that moment, Carl’s imagination saw Miami Beach in its entirety, blazing like a jewel with hibiscus, oleander, poinsettia, bougainvillea, and orchids, feathered with palms and lifting proud white towers against the sky,” Jane recalled. “But I looked at that rooted and evil-smelling morass and had nothing to say. There was nothing a devoted wife could say.”

As 1919 unfolded, Carl Fisher made two final and critical changes to his business strategy. The first was to switch his target audience, which had always been the elderly and the retired rich, most of whom still favored Palm Beach over Miami, and always would. As he told Business magazine a few years later, “I was on the wrong track. I had been trying to reach the dead ones. I had been going after the old folks. I saw that what I needed to do was go after the live wires. And the live wires don’t want to rest.” He would concede the superrich and the old money to Palm Beach. Instead, Miami Beach would be for the nouveau riche; for men like Fisher himself, especially those from the industrial Midwest; men who were younger, still making their fortunes, and looking for fun ways to spend their new wealth. He would appeal to them with the sort of activities that appealed to him: contests, races, and other events that featured sports celebrities. Henceforth, Miami Beach would become “a youthful city of indeterminate social standing,” in the words of social historian Charlotte Curtis. Fisher’s second change in tactics was equally radical: he raised his land prices by 10 percent, in part to give the appearance that his lots were appreciating rapidly in value. And to further promote that perception, he offered a return guarantee of 6 percent “to any customer in Miami or elsewhere who purchased lots from us and are not well pleased with their investment.” He assured his buyers that, from then on, he would be raising prices by 10 percent every year. Ten percent was an exceptionally attractive rate of return; 10 percent that seemed virtually guaranteed was even more attractive. Fisher, in trying to stoke a small fire, was about to fuel a conflagration. Behind the scenes, other factors had contributed to the marked improvement in sales. Chief among these was the wide proliferation of the automobile. The machines that Fisher had raced, sold, and promoted back in Indiana had evolved into bona fide consumer products, viable and cost-effective substitutes for the horse and buggy. The automobile, more than the railroad, the streetcar, or any other factor, turned the American landscape from raw land into real estate. It did so by making the land accessible and thus developable: its value could be easily established, enhanced, and commodified. Land then became a far more salable product, one that benefited landlords, lenders, contractors, and real estate agents, to say nothing of the purchasers and renters of that property. Nowhere was this truer than in Florida. And nowhere in Florida was it truer than in Miami Beach, where the road built over the Collins Bridge and the new County Causeway (renamed MacArthur Causeway in 1942) at last made the resort developments there commercially viable—by making them accessible to cars. Miami Beach was on its way to becoming the most widely publicized and most famous resort destination in the country. Fisher was now forty-three years old but still full of vitality. “This is only the beginning,” he announced presciently in an ad that appeared in the Miami Metropolis newspaper late in 1919, adding that he planned to further enhance Alton Beach the following year with “a polo club house, a church, theater, schoolhouse, six store buildings, and ten Italian villas ranging from $10,000 to $35,000 each.”

By the mid-1920s, Fisher’s vision was more or less realized:

In her memoirs, Fabulous Hoosier, Carl’s first wife, Jane, captures the surreal nature of the late boom years and how the clientele of their once sleepy resort town had changed: “Pouring into Miami Beach they came, fantastic visitors to a fantastic city. The gold diggers and the sugar daddies, the gigolos, the ‘butter and egg men,’ the playboys and the gilded heiresses, the professional huntresses, the tired businessmen who never grew tired, the gentlemen who preferred blonds. Miami Beach was the playground of millionaires and the happy hunting ground of predatory women.”

Then he tried to do it all over again in Montauk, Long Island and, due to leverage, blew up. The book chronicles the fate of other folks who became billionaires (in today’s debased money) from their efforts in Florida real estate, e.g., George E. Merrick who planned and built Coral Gables and Addison Mizner who is responsible for the Spanish-style architecture that we now see all over Florida. Essentially all of them went bust after staking their fabulous riches on yet more expansion.

What’s the worst that can happen in our current real estate and stock market boom? A retired hedge fund manager friend says that he wouldn’t be shocked to see a 90 percent crash. I think that this is excessive given that Manhattan real estate crashed by only 67 percent from 1929 to 1932 (HBS) and this was much steeper than the nationwide decline.

The book should be an inspiration for more diversification, though 2008 showed how tough that can be to achieve. Here are some $5-12 million houses (Jupiter Inlet Colony) to enjoy while the good times last…


8 thoughts on “Bubble in the Sun book: even those with the best information can’t predict a crash

  1. The current boom doesn’t even show up as a boom in a long term plot of stonk prices. According to FRED, the fed stopped printing money back in February, but the stonk market hasn’t done anything. The mane unknown is whether interest rates are really going anywhere.

    The mane concern is the Dave Ramsey plan becoming the norm in the last 3 years: 100% index funds & no cash. Higher stonk weighting as you get older. If anything goes wrong, there aren’t going to be any dip buyers besides the government.

    • Wonder what would happen to the stock market if Biden and US “Democrats” tax unrealized gains of the “rich” (proposed $100,000,000 threshold will soon not be enough to buy a house in place where business activity takes place). If rich will have to regularly sell stocks to pay taxes everyone will try artificially lower value of underlying enterprise, similarly to how private equity reacts to death tax now. I would say value investing would return, if in fact America survived Biden and “Democrats” who do not like demos they are supposedly representing.

    • I’m wondering how this $100M threshold is going to be calculated (will it require full asset disclosures? Doing 409A valuations for privately held companies every year?) What about holdings outside of US (financial assets need to be reported with FATCA, but how about shares in private companies?)

      Methinks Biden & Co are total idiots.

  2. The rule of thumb is that real estate prices drop 10 percent for every 1 percent increase in mortgage rates. The rate bottomed out at 2.5 percent. Can you picture an 11.5 percent mortgage? Pretty easily. Of course, the rule of thumb is inaccurate somewhat…

  3. Apropos of the brainy hedge fund manager, the S&P is trading at a YE earnings yield of over 5% with short term treasuries yielding around 1% and ten years around 2.5%. That sounds about right, doesn’t it — especially given that say a third of that will be paid out and the rest retained and will compound? The last time i looked, NYC real estate has been marked down around a third as compared to pre-Covid levels if you look at publicly traded NYC real estate. That sounds about right, doesn’t it? The next time one of your brainy friends makes a judgment on stock prices you might try to ask him what it is he thinks he knows that the market doesn’t? He will probably say something like the market is not properly pricing risk, for example higher interest rates or the war in Ukraine or Joe Biden’s senility or the bull market is “long in the tooth” or whatever. You could then ask what exactly it is that he thinks he knows about these issues that the market doesn’t — like maybe he has a direct line with Dr. Jill because he is in a “relationship” with her. You probably won’t get much of an answer, he’ll probably repeat himself or tell you what he feels in his “gut” or whatever– but if you do you could share it with your friends here so we could all live in Jupiter. He should be glad to share the facts he knows since if he is long something or other he would love the yokels to rush in so he can dump whatever he is holding on them. You might also ask your brainy friend whether he is net short the market or is even leveraged on the short end. Now that would be someone worth paying attention to — at least until he filed for bankruptcy and is then identified as a “former” hedge fund manager.

  4. If we’re going to Save the Planet, we have to stop investing and developing real estate. We need to invest in and develop Fake Estate – which is what Metaverse is. There’s a GooTube advertisement going around now talking about where the *real money* is – it’s not stocks, or crypto – it’s “online properties.”

    Now, from what I’ve seen so far from the Metaverse, it looks like the old days of VR with some cheesy Roblox-type graphics elements. But it’s clear that Mark Zuckerberg thinks everyone is going to live there eventually. They will lay about their real world hovels with IVs in their arms, pulling their puds whilst living in the fabulous and valuable world of the Metaverse. If he can make it happen, it’ll be an even bigger accomplishment than Fisher had with Miami Beach, but it’s clear he thinks that’s what’s next – and his Chinese wife evidently knows not to contradict her hubby in public.

    • In the Metaverse there’s lots of oceanfront property in Arizona to be sold.

      What’s the argument for any price structuring in a virtually limitless virtual world?

  5. @Alex
    Zuck may have it right. We are here enjoying the cyber Florida Free State with @philg while our grass grows long and our muscles atrophy, so just imagine the Metaverse!

Comments are closed.