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[nimblebear]

From Bill Gross 27 years ago. "The Plankton Theory, like life itself, begins and ends in the ocean. Plankton, of course, are almost microscopic organisms that serve as food for higher life forms. Without plankton almost every fish and mammal in the sea could not survive, since most species depend upon other fish for their existence and plankton are the initial building blocks of the entire process. Logic would suggest, therefore, that in attempting to forecast the well being of the Great White Whale, Jaws, or even Jaws II, that one of the factors to consider would be the status and future outlook of the plankton. That, in one hundred words or less, is the Plankton Theory. Now fast forward... Now, what possible significance could this have for the investment world? Plenty. Take for example, the area of real estate, especially that of single family housing. We're all familiar with the rapid escalation of home prices over the last 10 years. For most Americans, their homes have been the best and in many cases the only investment that they have made in their entire lives. Some have gone so far as to invest in several homes and have endured 'negative carry' on the cash flow in anticipation of leveraged capital gains a few years down the road. But where does it stop? Can housing continue to increase at twice the Consumer Price Index for the next 10 years? One way to measure might be via the Plankton Theory. In the case of real estate, the plankton would be the first-time buyer (perhaps a young married couple) with a desire to own their own home but with very little capital to carry it off. When the time comes that they can't pull it off - either through an inability to come up with a down payment, or to service the monthly mortgage - then the 'plankton' would disappear and the rapid escalation in housing prices would ease as well. For, unless the current homeowner has someone to sell his house to, he'll be unable to afford the house with the view or that extra bedroom, and the process would continue into the echelons of Beverly Hills and Shaker Heights. In the end, the entire market would wither on the investment vine and home prices would stop increasing at the same rapid rate. So to gauge the health of the housing market, look first at the plankton. Without their presence and financial vitality, the market's not going to repeat the experience of the past 10 years." (kind of interesting if you think the subprime buyers are some of the "Plankton." Even many other potential first time buyers are facing tighter lending standards. Hits the first time buyers harder. Rates have been so low for so long, many would be buyers have probably bought by now. Prices have appreciated so much, and now rates are starting to rise, so would be first timers, keep putting off until they have saved a higher down payment, and/or decide to sit for awhile hoping home prices will begin to drop. Meanwhile rates rise further, and the home becomes even less affordable. )

Edited by nimblebear, 13 March 2007 - 09:23 PM.

[jawndissedi]

Kinda like asking "Who's the fish?" when you sit down at the poker table . . .