The Fleeting Beauty of Bubbles and Bonds

by Charles Hugh Smith

Whatever painlessly masks the dysfunction and corruption of the Status Quo will be the policy of choice.

Here's the challenge the Status Quo monetary and fiscal authorities faced in the 2008 global financial meltdown: how do we maintain the power structure and keep the masses passive while masking the fact that the Status Quo is broken?

The solution: sell bonds to fund benefits to the masses, lower interest rates to zero to keep the explosive rise in fiscal deficits affordable, and rapidly inflate new bubbles in assets that painlessly enrich the top 25% of households who then increase their borrowing and spending, i.e. the "wealth effect."

Lowering interest rates to zero is a two-fer, as it not only enables the central state to borrow vast sums by selling low-yield bonds, it also drives everyone with financial assets into a desperate search for higher yields in risk assets such as stocks and housing. This herding of capital into risk assets helps inflate the bubbles needed to generate "growth."

Here's the beauty of asset bubbles. How do you get trillions of dollars into households without having to borrow the money? You inflate the assets owned by the households: stocks and houses. This magically creates money out of nothing, money that the households can borrow against or sell for cash.

Why not create and distribute cash directly? Two reasons: 1) spreading around trillions of dollars in cash could eventually spark inflation, which would kill the entire project by pushing bond yields higher, and 2) politically, the only cohort the authorities care about are the wealthy who fund the political Elite and the half of the adult populace who votes.

The political calculus is simple: the bottom half of households don't vote, don't contribute to political campaigns and don't have enough income to borrow huge sums of money to enrich the banks. They are thus non-entities in the fiscal-monetary project of maintaining the power structure of the Status Quo.

All the Status Quo needs to do is borrow enough money to fund social programs that keep the masses passive and silent: food stamps, Section 8 housing vouchers, Medicaid, Medicare, Social Security, SSI permanent disability, unemployment, etc.

Unfortunately for the Powers That Be, the cost of placating the rapidly increasing marginalized populace is rising much faster than tax revenues. Here are two charts of interest (source: Kleiner Perkins Caufield Byers 2013 Internet Trends)

The happy story of 2013 is that tax revenues are rising fast while government spending has stopped rising. This is risible, as the same agencies drawing these projections have never forecast a recession or downturn. Taxes rise in bubbles, so no wonder tax revenues are up--and of course, tax rates increased on the margins.

Longer term, Federal expenditures will inexorably rise as the social programs for the elderly absorb 10,000 retiring Baby Boomers a day.

Here's the problem with bubbles: they pop, despite the best efforts of the fiscal and monetary authorities to keep them inflating forever. And when bubbles pop, assets decline in value. Borrowing, spending and tax revenues all decline.

Near-zero interest rates have problems, too: One, they stripmine pension funds and savers seeking save yields on cash, forcing everyone into risk asset bubbles, where those seeking higher yields are crushed when the bubbles pop, and two, nothing stays low or high forever. Piling up debt at near-zero rates is affordable fun, but when rates rise, the costs of servicing the debt pile skyrocket.

At that point, a feedback loop is set in motion that will bring down the entire system: investors will see fiscal authorities struggling to fund their social programs and pay rapidly rising interest on the vast mountain of government debt, and start wondering if the government will be able to meet its rapidly rising commitments with stagnant tax revenues.

The prudent investor, money manager and pension fund manager will demand a higher risk premium to reflect the possibility that the bond will be repaid with depreciated currency.

That will drive up the interest rate on all future borrowing, which will further stress government obligations which will increase the risk of default or depreciation of the currency, and so on.

The only way to stop this feedback from starting is for the central bank to buy essentially all the bonds sold by the government. This is the path that Japan and the U.S. have taken; both the Bank of Japan and the Federal Reserve are buying government bonds, essentially removing them from the tidal forces of the market with instantly created money.

Are there any limits on the balance sheets of the central banks? Why not transfer $100 trillion to the balance sheet of the Fed? Indeed, this path appears absolutely painless to all involved, and that's why Japan and the U.S. have pursued this strategy with such gusto.

Whatever painlessly masks the dysfunction and corruption of the Status Quo will be the policy of choice. And right now, that policy is transferring government bonds to the central banks so the fiscal authorities can continue to borrow and blow trillions of dollars rather than restructure their broken financial systems and economies.

The problem with neutering the market to mask systemic dysfunction is that the return on the policy diminishes at the same time that risk is transferred to the entire system. Risk cannot be disappeared, it can only be transferred or hedged. Burying immense debts in the balance sheets of central banks doesn't make risks disappear, it simply transfers the risk to the entire system.

And when you do that, you get a chart like this:

Anyone who is paying attention to the peculiar gyrations and dislocations in the Japanese bond and currency markets has to wonder if Japan has finally succeeded in entering Phase III, when official credibility and the illusion of central control both crumble.

The beauty of bonds and bubbles is fleeting. The fiscal and monetary authorities are claiming the beauty of bonds and bubbles is ageless, thanks to their magic; but no amount of false data and trickery can possibly eliminate the systemic risk piling up behind the rickety facade of illusory control.

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The American Consumer is Not Okay

by Stephen S. Roach

NEW HAVEN – The spin-doctors are hard at work talking up America’s subpar economic recovery. All eyes are on households. Thanks to falling unemployment, rising home values, and record stock prices, an emerging consensus of forecasters, market participants, and policymakers has now concluded that the American consumer is finally back.

Illustration by Paul Lachine

Don’t believe it. First, consider the facts: Over the 21 quarters since the beginning of 2008, real (inflation-adjusted) personal consumption has risen at an average annual rate of just 0.9%. That is by far the most protracted period of weakness in real US consumer demand since the end of World War II – and a massive slowdown from the pre-crisis pace of 3.6% annual real consumption growth from 1996 to 2007.

With household consumption accounting for about 70% of the US economy, that 2.7-percentage-point gap between pre-crisis and post-crisis trends has been enough to knock 1.9 percentage points off the post-crisis trend in real GDP growth. Look no further for the cause of unacceptably high US unemployment.

To appreciate fully the unique character of this consumer-demand shortfall, trends over the past 21 quarters need to be broken down into two distinct sub-periods. First, there was a 2.2% annualized decline from the first quarter of 2008 through the second quarter of 2009. This was crisis-driven carnage, highlighted by a 4.5% annualized collapse in the final two quarters of 2008.

Second, this six-quarter plunge was followed, from mid-2009 through early 2013, by 15 quarters of annualized consumption growth averaging just 2% – an upturn that pales in comparison with what would have been expected based on past consumer-spending cycles.

That key point appears all but lost on the consumer-recovery crowd. In recent speeches and discussions with current and former central bankers, I have been criticized for focusing too much on the 0.9% trend of the past 21 quarters and paying too little attention to the 2% recovery phase of the post-crisis period. At least it’s a recovery, they claim, and a sign of healing that can be attributed mainly to the heroic, unconventional efforts of the US Federal Reserve.

This brings us to the second part of the argument against optimism: analytics. One of the first concepts to which an economics student is exposed in a basic macro course is “pent-up” consumer demand. Discretionary consumption is typically deferred during recessions, especially for long-lasting durable goods such as motor vehicles, furniture, and appliances. Once the recession ends and recovery begins, a “stock-adjustment” response takes hold, as households compensate for foregone replacement and update their aging durable goods.

Over most of the postwar period, this post-recession release of pent-up consumer demand has been a powerful source of support for economic recovery. In the eight recoveries since the early 1950’s (excluding the brief pop following the credit-controls-induced slump in the 1980’s), the stock-adjustment response lifted real consumption growth by 6.1%, on average, for five quarters following business-cycle downturns; spurts of 7-8% growth were not uncommon for a quarter or two.

By contrast, the release of pent-up demand in the current cycle amounted to just 3% annualized growth in the five quarters from early 2010 to early 2011. Moreover, the strongest quarterly gain was a 4.1% increase in the fourth quarter of 2010.

This is a stunning result. The worst consumer recession in modern history, featuring a record collapse in durable-goods expenditures in 2008-2009, should have triggered an outsize surge of pent-up demand. Yet it did anything but that. Instead, the release of pent-up consumer demand was literally half that of previous business cycles.

The third point is more diagnostic: The shockingly anemic pattern of post-crisis US consumer demand has resulted from a deep Japan-like balance-sheet recession. With the benefit of hindsight, we now know that the 12-year pre-crisis US consumer-spending binge was built on a precarious foundation of asset and credit bubbles. When those bubbles burst, consumers were left with a massive overhang of excess debt and subpar saving.

The post-bubble aversion to spending, and the related focus on balance-sheet repair, reflects what Nomura Research Institute economist Richard Koo has called a powerful “debt rejection” syndrome. While Koo applied this framework to Japanese firms in Japan’s first lost decade of the 1990’s, it rings true for America’s crisis-battered consumers, who are still struggling with the lingering pressures of excessive debt loads, underwater mortgages, and woefully inadequate personal saving.

Through its unconventional monetary easing, the Fed is attempting to create a shortcut around the imperative of household sector balance-sheet repair. This is where the wealth effects of now-rebounding housing prices and a surging stock market come into play. But are these newfound wealth effects really all that they are made out to be?

Yes, the stock market is now at an all-time high – but only in current dollars. In real terms, the S&P 500 is still 20% below its January 2000 peak. Similarly, while the Case-Shiller index of US home prices is now up 10.2% over the year ending March 2013, it remains 28% below its 2006 peak. Wealth creation matters, but not until it recoups the wealth destruction that preceded it. Sadly, most American households are still far from recovery on the asset side of their balance sheets.

Moreover, though the US unemployment rate has fallen, this largely reflects an alarming decline in labor-force participation, with more than 6.5 million Americans since 2006 having given up looking for work. At the same time, while consumer confidence is on the mend, it remains well below pre-crisis readings.

In short, the American consumer’s nightmare is far from over. Spin and frothy markets aside, the healing has only just begun.

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Ms. Watanabe’s Profession

by Yuriko Koike

TOKYO – Ms. Watanabe, age 40, is hesitant. Her mother, Mrs. Watanabe, is known for moving the world’s markets with the financial trading that occupies her breaks from housework.

Illustration by Paul Lachine

Mrs. Watanabe is the generic name for Japan’s housewife speculators, who have wielded significant influence on foreign exchange and other markets through their trading. After graduating from university, Mrs. Watanabe quit her job when she married Mr. Watanabe (who worked in the same office), became a housewife, and raised one daughter. She did this because, in Mrs. Watanabe’s day, marriage was the final workplace.

Times are different for her daughter, Ms. Watanabe, who majored in economics at a famous university and was hired by a well-known trading firm. But, though she outperformed the men in her recruitment class academically, she was unable to compete for promotion. She could not even have an official business card (which is more important than a passport in Japan); she had no choice but to make one on her computer.

She resolved to hone her skills by following her mother’s example. After work, she would attend night school to become an international accountant. She didn’t like going out drinking with colleagues to complain about their boss; communication through drinking neither improved one’s skills nor helped one to rise through the ranks.

Ms. Watanabe’s story helps to illustrate a remarkable disparity. While productivity in Japanese factories is the highest in the world, owing to robots and other types of automation, the productivity of Japan’s white-collar workers is the lowest among OECD countries.

In 1999, Japan’s Equal Employment Opportunity Act was amended to provide equal employment opportunities for men and women by prohibiting discriminatory labor practices. But the legislation has had little impact on the workplace atmosphere for women.

The other women who joined the company at the same time as Ms. Watanabe married colleagues and quit to devote their time to raising children. The only difference from her mother’s era was that today’s generation quit, married, and gave birth later. Women account for more than 80% of those who use childcare leave in Japan; in reality, more than 60% of Japanese women leave the workplace and don’t come back when they have children.

Before she knew it, Ms. Watanabe was in her thirties. Her mother, Mrs. Watanabe, used the money she had made through financial trading to fund her daughter’s study abroad. Companies pay for men to study abroad, but will not invest in female employees. Without other options, Ms. Watanabe took a long-term unpaid leave of absence (which her company typically does not grant to women) to study for an MBA in America. Although she returned with excellent grades, her position within the company worsened, because she did not have a boss who could use her skills.

One day, Ms. Watanabe received a call from a headhunting firm. She was recruited to work in the accounting department of a Japanese import-export company. Encouraged by her mother, Ms. Watanabe set her sights on new shores. It was a completely new working environment, but her English skills and MBA proved to be invaluable. Her work was interesting, and she played an important role. At times, though, she thought about marriage and children when planning for the future.

Last year, Japan’s government changed, with the Liberal Democratic Party’s return to power. Previously, the LDP had given barely a second thought to women’s issues, focusing only on the needs of business and dealing with an aging society. Now, to Ms. Watanabe’s surprise, it has made women’s policy one of the key aspects of its long-term strategy.

To top it off, exchange-listed companies must now appoint at least one female officer. Ms. Watanabe had heard that companies in Norway or France face delisting if their ratio of female officers falls below 40%, and she joked with her friends that Keidanren (the Japan Business Federation) would vanish under such a law. Nonetheless, with each public company in Japan to appoint at least one female officer, it might be her turn someday.

But she already is 40, and is thinking of marriage. Would maternity leave be possible if she were appointed as an officer? Prime Minister Shinzo Abe’s government says that it will establish daycare centers, but is this really true?

Ms. Watanabe is hesitant. Should she take up an important role at this stage? Or should she pursue happiness as a woman?

Mrs. Watanabe gives her daughter the nudge she needs. Mrs. Watanabe has a talent for seeing how the tide turns. Her advice is to grab the opportunity at work, and also find happiness in marriage and children.

According to an estimate by Kathy Matsui, Chief Japan Equity Strategist at Goldman Sachs, the country’s GDP could rise by 15%, and 8.2 million new jobs could be created, if Japanese women gain equality of opportunity at work. Abe has said that “womanomics” is the most important pillar of “Abenomics,” his government’s growth strategy. Mrs. Watanabe and her daughter have much at stake in its realization.

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After the Gold Rush

by Nouriel Roubini

VENICE – The run-up in gold prices in recent years – from $800 per ounce in early 2009 to above $1,900 in the fall of 2011 – had all the features of a bubble. And now, like all asset-price surges that are divorced from the fundamentals of supply and demand, the gold bubble is deflating.

Illustration by Barrie Maguire

At the peak, gold bugs – a combination of paranoid investors and others with a fear-based political agenda – were happily predicting gold prices going to $2,000, $3,000, and even to $5,000 in a matter of years. But prices have moved mostly downward since then. In April, gold was selling for close to $1,300 per ounce – and the price is still hovering below $1400, an almost 30% drop from the 2011 high.

There are many reasons why the bubble has burst, and why gold prices are likely to move much lower, toward $1,000 by 2015.

First, gold prices tend to spike when there are serious economic, financial, and geopolitical risks in the global economy. During the global financial crisis, even the safety of bank deposits and government bonds was in doubt for some investors. If you worry about financial Armageddon, it is indeed metaphorically the time to stock your bunker with guns, ammunition, canned food, and gold bars.

But, even in that dire scenario, gold might be a poor investment. Indeed, at the peak of the global financial crisis in 2008 and 2009, gold prices fell sharply a few times. In an extreme credit crunch, leveraged purchases of gold cause forced sales, because any price correction triggers margin calls. As a result, gold can be very volatile – upward and downward – at the peak of a crisis.

Second, gold performs best when there is a risk of high inflation, as its popularity as a store of value increases. But, despite very aggressive monetary policy by many central banks – successive rounds of “quantitative easing” have doubled, or even tripled, the money supply in most advanced economies – global inflation is actually low and falling further.

The reason is simple: while base money is soaring, the velocity of money has collapsed, with banks hoarding the liquidity in the form of excess reserves. Ongoing private and public debt deleveraging has kept global demand growth below that of supply.

Thus, firms have little pricing power, owing to excess capacity, while workers’ bargaining power is low, owing to high unemployment. Moreover, trade unions continue to weaken, while globalization has led to cheap production of labor-intensive goods in China and other emerging markets, depressing the wages and job prospects of unskilled workers in advanced economies.

With little wage inflation, high goods inflation is unlikely. If anything, inflation is now falling further globally as commodity prices adjust downward in response to weak global growth. And gold is following the fall in actual and expected inflation.

Third, unlike other assets, gold does not provide any income. Whereas equities have dividends, bonds have coupons, and homes provide rents, gold is solely a play on capital appreciation. Now that the global economy is recovering, other assets – equities or even revived real estate – thus provide higher returns. Indeed, US and global equities have vastly outperformed gold since the sharp rise in gold prices in early 2009.

Fourth, gold prices rose sharply when real (inflation-adjusted) interest rates became increasingly negative after successive rounds of quantitative easing. The time to buy gold is when the real returns on cash and bonds are negative and falling. But the more positive outlook about the US and the global economy implies that over time the Federal Reserve and other central banks will exit from quantitative easing and zero policy rates, which means that real rates will rise, rather than fall.

Fifth, some argued that highly indebted sovereigns would push investors into gold as government bonds became more risky. But the opposite is happening now. Many of these highly indebted governments have large stocks of gold, which they may decide to dump to reduce their debts. Indeed, a report that Cyprus might sell a small fraction – some €400 million ($520 million) – of its gold reserves triggered a 13% fall in gold prices in April. Countries like Italy, which has massive gold reserves (above $130 billion), could be similarly tempted, driving down prices further.

Sixth, some extreme political conservatives, especially in the United States, hyped gold in ways that ended up being counterproductive. For this far-right fringe, gold is the only hedge against the risk posed by the government’s conspiracy to expropriate private wealth. These fanatics also believe that a return to the gold standard is inevitable as hyperinflation ensues from central banks’ “debasement” of paper money. But, given the absence of any conspiracy, falling inflation, and the inability to use gold as a currency, such arguments cannot be sustained.

A currency serves three functions, providing a means of payment, a unit of account, and a store of value. Gold may be a store of value for wealth, but it is not a means of payment; you cannot pay for your groceries with it. Nor is it a unit of account; prices of goods and services, and of financial assets, are not denominated in gold terms.

So gold remains John Maynard Keynes’s “barbarous relic,” with no intrinsic value and used mainly as a hedge against mostly irrational fear and panic. Yes, all investors should have a very modest share of gold in their portfolios as a hedge against extreme tail risks. But other real assets can provide a similar hedge, and those tail risks – while not eliminated – are certainly lower today than at the peak of the global financial crisis.

While gold prices may temporarily move higher in the next few years, they will be very volatile and will trend lower over time as the global economy mends itself. The gold rush is over.

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The Multiple Personalities of Coffee [infographic]

Cash brews robust U.S. craft coffee market

By Lisa Baertlein, Marcy Nicholson and Martinne Geller

(Reuters) - For exotic coffee connoisseurs like Geoff Watts, the search for the perfect bean isn't the solitary quest it once was.

On a recent visit to Ethiopia's southern Yirgacheffe region eight hours from Addis Ababa, the buyer for Intelligentsia Coffee bumped into a familiar face.

"I saw a random white guy walking around in a field, and it turned out he was a friend and competitor," said Watts.

U.S. craft coffee purveyors are getting less lonely. The segment is a small but growing slice of the $27.9 billion U.S. coffee market, which has increased in recent years at an annual average rate of 5.6 percent and is expected to reach $33.7 billion by 2018, according to research firm IBISWorld, though it does not yet separate revenues for high-end purveyors.

Small bi-coastal chains Intelligentsia, Blue Bottle Coffee and Stumptown Coffee Roasters lead the so-called "third wave" or "slow coffee" movement, while industry behemoth Starbucks Corp shows off its craft roots selling limited-supply "reserve" coffees for up to $50 for a half-pound bag.

The new generation of upscale coffee shops and roasters includes dozens of operators around the country. They are in a race to find rare and distinctive beans and hope to elevate one of the world's oldest and most popular drinks in the same way that craft beer brewers, boutique wineries and olive oil makers won fans by focusing on high-quality ingredients and production.

During the last two years, private equity firms, venture capitalists and wealthy individuals such as former professional skateboarder Tony Hawk, and tech luminaries Instagram Chief Executive Kevin Systrom and Jack Dorsey, a co-founder of Twitter and Square, have poured in well over $55 million - including a large cash jolt for San Francisco-based Philz Coffee in May.

Not your typical retirement investors, they are often coffee connoisseurs themselves and are eager to capitalize on the new breed of enthusiasts who were raised on espressos and lattes popularized by Starbucks.

Customers are willing to pay dearly for their java habit - $80 for a half-pound of rare, roasted beans and $3 and up for a cup of individually prepared "pour over," high-tech "siphon" coffee, or old school espresso. Those prices are as much as triple the cost for an average cup of coffee and bean prices are at least 10 times more.

Sales are expected to climb as the U.S. job market improves and more Americans treat coffee as an experience rather than a utilitarian pick-me-up, said IBISWorld analyst Andrew Krabeepetcharat.

But experts also wonder if there will be enough demand beyond wealthy, urban enclaves to support meaningful growth and whether getting bigger would hurt the mystique that fueled the craft operators in the first place.

"I don't think the (exotic) market is that big," said Bonnie Riggs, restaurant analyst for the NPD Group's foodservice unit. While many people may try such coffees as a treat, winning the loyal, frequent users needed to support significant growth will be a challenge, she said.

Blue Bottle founder James Freeman and his peers say they do not aspire to Wall Street-style expansions, nor the pricey exclusivity of high-end wine.

For around $5, "you can have an incredible experience at a high-end coffee bar and get something impeccably sourced and roasted and made," said Freeman. "It's the democratization of luxury."

EXOTIC, EXCLUSIVE

The new movement is built on the success of Starbucks, whose founder and CEO Howard Schultz often speaks of the "romance" and "theater" of coffee and is credited with pioneering coffee's "second wave" by shifting the masses from cheap, hours-old brew to fresh-made drinks from premium beans.

With some 12,900 cafes in its U.S.-dominated Americas region, Starbucks holds the biggest share of the country's coffee market with 18.7 percent of revenue, according to IBISWorld. That figure shows how competitive and fragmented the business is in the United States, where local cafes, fast-food chains and even gas stations peddle coffee and lattes.

(For a graphic on the top coffee-producing countries, click link.reuters.com/typ38t)

"We are all focused on that highest quality cup of coffee and there is room for everyone to grow," said Craig Russell, senior vice president of Global Coffee for Starbucks.

Seattle-based Starbucks is a major buyer of artisan beans, going up against rivals like Chicago-based Intelligentsia, which sells half-pound (8-ounce) bags of its Santuario Geisha roast from Colombia for $80.50 and expects to grow to 12 stores this year from nine.

"The third wave of coffee really is about understanding the craft and the lifestyle of coffee," said Instagram CEO Systrom, a self-described coffee addict and one of a group of investors led by True Ventures and Index Ventures that poured $20 million into San Francisco-based Blue Bottle late last year.

He and fellow investor Hawk, who said he kicked in $100,000, also advise Blue Bottle on its growth plans.

Investment opportunities appear limited to the very wealthy - but it is not for a lack of effort from fans of the cafes.

"We get all sorts of weird inquiries all the time," said Sightglass co-founder Jerad Morrison, who did accept startup capital from Dorsey, a personal friend.

Baristas at the new coffee shops often sport handlebar mustaches, bow ties or suspenders. They spend long moments lovingly tamping espresso, coaxing clever designs from frothy cappuccino milk, or coaching customers as they select beans.

It is a time-consuming process that bears little resemblance to the button-operated speed and efficiency of Starbucks' current generation of espresso machines.

The third wave caters to fanatics like Northern California author Bill Tancer, 47, who said a "coffee concierge" opened his eyes to a new world of coffee during a visit to Philz, which received an "eight figure" investment from Summit Partners, a private equity firm. TechCrunch reported that the infusion was in the $15 million to $25 million range.

Summit and Philz declined to comment.

"We had this back and forth about what I was looking for in a cup of coffee - did I want rich, light, more acid, flowery?" said Tancer, who since has become a home roaster.

"There are so many coffees out there to discover. It's a bit of an adventure," he said.

HAND UP OR SELL-OUT?

In 2011, Portland, Oregon-based Stumptown, which has nine coffee bars, took a large investment from TSG Consumer Partners, a private equity firm. The parties declined to quantify it, but two sources familiar with the deal said it was in the area of $20 million to $25 million and constituted a controlling stake.

The sources declined to be identified because the information is not public.

Some die-hard fans fretted that the craft coffee trend-setter had sold out, considering that TSG has a strong track record of investing in small brands, helping them grow, and selling them to large corporations. Indeed, one of its most notable investments was a stake in vitaminwater maker Glaceau, which was ultimately sold to Coca-Cola Co for $4 billion.

TSG declined to comment, but Stumptown's new president, Joth Ricci, said maintaining the brand's identity would be a major factor in any future deal.

"You figure out the right fit for a brand. Some work really well and some don't," Ricci said.

Customers said Stumptown's quality remains high, even if it now seems a little more corporate.

"I've definitely seen them go from their scrappy roots to almost acting like a franchise. ... It feels a little less genuine but, I don't think the quality has gone down at all," said videogame maker Lindsay Gupton, 47, who lives in Seattle.

While he is still loyal to Stumptown, Gupton is on the lookout for coffee's "fourth wave."

"I'm such a coffee purist. I'm always going to seek out the latest, greatest," said Gupton.

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