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Thursday, December 31, 2009

We'll drink a cup of kindness yet for times gone by...

Got sucked into watching the Juniors and now am off downtown, so nothing for you tonight.

To all who drop in, thanks for stopping by.

Happy New Year to all.

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Wednesday, December 30, 2009

Another Prognostication

Predictions are fun to make despite the fact they are so often wrong.

Now... we've already established that the theme for 2010 is Debt... debt and the recession.

In reality a severe recession would be a good thing for us.

After having gone through a decade of borrowing to consume, Canada needs to rebalance.

This recession was caused not by too much inventory but by too much credit and leverage in the system. And the world is in the process of deleveraging. It is a process that is nowhere near complete. While the crisis stage is over (at least for now), there is still a lot of debt to be retired on the consumer side of the equation, and a lot of debt to be written off on the financial-system side.

Total consumer debt is shrinking for the first time in 60 years. And the decline shows no sign of abating.

That's why the recession is the solution, not the problem. The problem was the bubble inflating, blowing up. Not the deflation. Now it's time to allow the pain, no matter how unpleasant it is, to correct the imbalances.

And it's not just consumers who are attempting to deleverage. The corporate sector is trying to deleverage too, as Bloomberg notes in an article today. The amount of corporate debt outstanding globally shrank for the first time in at least 15 years in the first half of 2009 as U.S. banks reduced the size of their balance sheets.

Tetsuo Ishihara, a senior credit analyst for Mizuho in Tokyo, analyzed data from the Bank for International Settlements and noted that “it’s unprecedented that the global debt market shrinks. When redemption's and buybacks are greater than new issues the outstanding size can shrink, which appears to have happened here.

Financial companies in the Americas had $1.1 trillion of losses and writedowns since the credit crunch started in 2007, about 65% of the global total, according to data compiled by Bloomberg.

But in Canada, none of that deleveraging has happened... and it's all because of the Federal Government.

As this blog has already covered, the Feds slashed interest rates to dirt and empowered CMHC to expand their assistance into risker and risker home mortgages. It used to be that the mission of CMHC was to try and make home ownership affordable. Now their mission is to keep home prices high.

And this is where the government is making a huge mistake. The reality is that the best thing that can happen to our economy is for these high prices to come down.

But the government’s solution was to keep high prices through low mortgage payments subsidized by the government.

The free market solution would have been allowing the market to correct to bring us low prices.

If real estate prices go down, you don’t need to borrow that much money to buy a house. And if they do, it doesn’t matter that interest rates go up a bit, because your payment will be lower anyway.

But that didn't happen. Carney and Flaherty intervened and their actions have kept homes unaffordable. It ensures Canadians have to mortgage themselves to the hilt to buy a house.

Rather than help Canadians, Carney and Flaherty have made it worse. In 2010 we will see that this will become the foundation of our financial crisis.

The government looked at the problem as being one of falling real estate prices. That’s wasn't the problem, that was the solution.

The problem is that they went up to begin with.

The reality is that the world is just starting to go through a massive – and necessary – recession. Some think it is just ending. It isn't, its just getting started and we have barely gotten a taste of it.

What we really need is for the government to eliminate the deficit and go to a surplus. We need the government to stop spending money and depleting our savings (by taxing us to death).

We need consumers to stop spending money and rebuild their savings.

We need to have the government say to us, “this is the price we pay for years of indulgence and reckless spending, now comes the sacrifice. And there is nothing the government can do about it.”

We also need sound money.

Unfortunately that will mean we need high interest rates.

Kenneth Rogoff, Professor of Economics at Harvard, Former Chief Economist at the International Monetary Fund recently said, “It’s a question of how do you achieve the deleveraging. Do you go through a long period of slow growth, high savings and many legal problems or do you accept higher inflation? It would ameliorate the debt bomb and help us work through the deleveraging process.”

The developed world is drowning in debt and there are only two viable options – a global economic depression or very high inflation.

It seems policymakers have chosen the latter option and over the next few years we seem destined to experience the trauma of severe inflation regardless of Ben Bernanke's assurances to the contrary.

The American government is staring at total obligations of US$115 trillion, their debt to GDP ratio is off the charts and the American public is also up to its eyeballs in debt.

Inflation seems to be the chosen solution.

And that means Canada will be forced to deal with a readjustment that hasn't been prevented at all... just delayed.

It is notable that America is not alone in pursuing inflationary policies; most nations all over the world are printing money and debasing their currencies.

In this era of globalisation, no country wants a strong currency and everyone is engaged in competitive currency devaluations.

Given this reality, its hard not to agree with those who believe that this money and debt creation will cause an inflationary holocaust over the coming years.

Which brings us to our next prediction for 2010: Gold.

As we have noted before, Gold is not money... nor is it a hedge against inflation (it performs that role very poorly). What gold is, however, is a hedge against the mismanagement of the state - which at this time and place is the United States with it's world's reserve currency status.

It is almost a certainty that the United States will be forced to continue Quantitative Easing next year when they cannot find enough buyers for their $2.1 trillion Treasury sales.

As a result, gold's decoupling from the ups and downs of the US dollar may come as soon as next year as nation states and investors panic.

Because of that, I predict a gold price of over $2,000 an ounce by the end of next year.

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Tuesday, December 29, 2009

Whole lotta pain

Yesterday I talked about US debt and today the theme continues.

Specifically... US Treasuries and how few people acutally bought them in 2009.

Eric Sprott, the Toronto-based money manager whose Sprott Hedge Fund returned about 496% in the past nine years, has been trying to figure out that very question.

In a report entitled 'Is it all just a Ponzi scheme?', Sprott and David Franklin suggest that it's impossible to find who was the second largest buyer of Treasuries in 2009.

Of the $1.885 trillion dollars in public debt the US added in 2009, $704 billion (annualized) was bought by "Other Investors", a collection of buyers defined in the Federal Reserve Flow of Funds Report as the "Household Sector".

Interestingly, the $704 billion is 35 times more than this sector bought in the prior year, 2008.

Sprott and Franklin did some digging and here is what they found:

  • Amazingly, we discovered that the Household Sector is actually just a catch-all category. It represents the buyers left over who can't be slotted into the other group headings. For most categories of financial assets and liabilities, the values for the Household Sector are calculated as residuals. That is, amounts held or owed by the other sectors are subtracted from known totals, and the remainders are assumed to be the amounts held or owed by the Household Sector. To quote directly from the Flow of Funds Guide,

    "For example, the amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government and the balance is assigned to the household sector."

    So to answer the question - who is the Household Sector? They are a PHANTOM. They don't exist. They merely serve to balance the ledger in the Federal Reserve's Flow of Funds report.

    Our concern now is that this is all starting to resemble one giant Ponzi scheme. We all know that the Fed has been active in the market for T-bills... they bought almost 50% of the new Treasury issues in Q2 and almost 30% in Q3.

    It serves to remember that the whole point of selling new US Treasury bonds is to attract outside capital to finance deficits or to pay off existing debts that are maturing. We are now in a situation, however, where the Fed is printing dollars to buy Treasuries as a means of faking the Treasury's ability to attract outside capital. If our research proves anything, it's that the regular buyers of US debt are no longer buying, and it amazes us that the US can successfully issue a record number Treasuries in this environment without the slightest hiccup in the market.

As we discussed yesterday, the actual number of US Treasuries sold to foreigners was next to nothing. As the Sprott report points out, the US Treasury and/or the Fed has been buying US treasuries themselves, in much larger numbers than they acknowledge.

The coming year of 2010 will be known as the year of the Debt.

It will bury entire nations. Nations like Greece and Ukraine, and states like California, and it will threaten to topple scores more.

As was posted yesterday, the looming question is who is going to buy the $2.06 trillion worth of US Treasuries next year?

China, Japan and the UK have increasing doubts about amassing USD denominated paper including Treasuries, Japan also plans to be as aggressive a seller as the US when it comes to debt. And of course there are many other countries who desperately need to sell sovereign bonds in order to pay for their already accepted and implemented budgets - not the least of which is Canada.

And that's just the nation states.

Corporations and lower levels of governments, in every nook and cranny of the planet, want to sell you their debt. Badly.

So the story of 2010 is going to be all about debt and the rapid rise in interest rates to cover it.

It's impossible to foresee at this point how high the rates may rise, but it looks patently obvious that it is going to be a lot more than a few percentage points... and there will be a lot of pain involved when they do.

A whole lotta pain.

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Monday, December 28, 2009

The Hangover

The week after Christmas is a time for 'the hangover'; general recuperation from post-feasting over-indulgence.

And it could well be that 2010 is viewed as a giant 'hangover' year. With that in mind I'd like to toss out a few thoughts for your consideration.

A few faithful readers wanted my advice about investing in this tumultuous time.

The first, and best, advice I can ever give is that you should never take serious investing advice from an anonymous Internet blogger.

As a portion the disclaimer at the bottom of this blog so eloquently states, "the author(s) of the posts on this site are not investment advisors and they do not offer investment advice. They try to provide some hopefully useful data with sources - especially concerning real estate - and then add their own analysis."

With that in mind, a few things for you to consider...

The number one issue that faces our country in the coming year, in my humble opinion, has already be pinpointed by our Finance Minister.

"Canada could face 'serious' economic consequences should the United States fail to address its bulging budget deficit", warns Finance Minister Jim Flaherty.

2009 will be remembered for two things: there was a huge credit and liquidity crunch, and then there was Quantitative Easing.

And Quantitative Easing was the way government played a shell game with the economy.

Right now the vast majority of us are oblivious to the debt monster hiding in the closet.

Consider this from Zero Hedge:

  • In 2009, total supply of all USD denominated fixed income, net of maturities, declined by $300 billion from $2.05 trillion to $1.75 trillion. Accounting for securities purchased by the Fed, the stunning result is that net issuance in 2009 was only $200 billion.

    Take a second to digest that.

    And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget.

    As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all. Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand.

    To sum up: $200 billion in 2009; $2.1 trillion in 2010.

Where is the money going to come from?

2010 is going to be a hangover year for the US economy. There is an upcoming explosion in US Treasury issuance. Fiscal 2010 gross coupon issuance is expected to hit $2.55 trillion, a $700 billion increase from 2009, which in turn was $1.1 trillion increase from 2008.

Unless the US consumer decides to dramatically ramp up purchase of some US Treasuries (and not just any: 30 Year Bonds or bust), the Bond printer will be forced to find vast foreign appetite for its debt.

We already know that China is a major question mark, and will aggressively be looking at pumping capital into its own economy instead of that of America. Japan will have its hands full monetizing its own sovereign issuance, let alone America's. And lastly, the UK - traditionally the third largest purchaser of US debt - is beset with problems worse than the United States and will not be doing much purchasing any time soon.

So the tipping point could be as close as 2010.

Which brings us to the first of the predictions for 2010. Look for:

  1. the United States to announce a new iteration of Quantitative Easing, a move that will be met with massive disapproval.
  2. Prepare for a major increase in interest rates. Carney and Flaherty can see it coming and have started pounding the warning drums in Canada. Many observers in the US are confounded by Ben Bernanke's complete lack of preparation from a monetary standpoint to a forced interest rate increase. This is what is fueling the fears of runaway inflation almost overnight.
  3. Watch for an engineered stock market collapse. Stock Market investors have realized there is no more risk in equities because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke's forced intervention in bond and equity markets. When the time comes to hit the reverse button, the resultant rush into safe assets from the stock market will be dramatic. Will it be enough to generate the needed endogenous demand for US Treasuries? Doubtful. But you can rest assured that there will be an engineered sucking of money from equities into Treasuries on a giant scale nothwithstanding... and it will drive the market down by 30% or more.

Baby New Year will have a spinning head right from day one.

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Friday, December 25, 2009

Merry Christmas

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Thursday, December 24, 2009

Twas the night before Christmas...

Happy Christmas to all.

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Wednesday, December 23, 2009

Jeff Rubin: Housing in for shock... prices to drop 25% or more?

Jeff Rubin was the chief economist at CIBC World Markets for 20 years. He was one of the first economists to accurately predict soaring oil prices back in 2000 and is now a popular commentator on oil depletion and its economic repercussions.

He argued that it wasn't sub-prime mortgages, but record oil prices that drove the world economy into its deepest post-war recession.

Speaking of mortgages, he has some advice for Canadians currently holding a mortgage.

Look at your current situation and ask yourself a long, hard question: just how big a mortgage can you carry?

  • "When money is free, it’s hard not to borrow it, even if the lender keeps warning you to be vigilant against debt. That’s exactly what Bank of Canada Governor Mark Carney has been telling Canadians while at the same time keeping their cost of borrowing as low as it’s ever been.

    Today’s inflation rate is no more sustainable than today’s interest rates... And this time the inflationary fallout won’t just be in the energy component of the Consumer Price Index. The impact will be much broader...

    Stress test your floating-rate mortgage three or four percentage points from today’s level and take a good, long look at the resulting increase in your monthly mortgage payment. For some homeowners, that could be as much as another $1000 per month.

    Twenty years ago a similar shock to borrowing rates caused Canadian housing prices to fall by an unprecedented 25 per cent. I know because I called it.

    That call was as much about where interest rates were going as it was about where housing prices were heading. Based on current borrowing rates, today’s homeowners will be facing almost as large an increase as they did back then.

    So heed Governor Carney’s caution when you decide how big a mortgage you can really afford to carry. Because once the Bank of Canada starts raising your mortgage rate, it will be a very long time before they stop."

You all know I completely agree with Rubin on this, it's exactly what I, and the other members of the Rainforest Roundtable, have been saying all year long.

When it comes, however, the drop in real estate prices in Vancouver will be much steeper than it was 20 years ago.

I stand by my prediction of at least a 40% drop in single family home prices and a 50% drop in condo prices.

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Ignorance and Want

They were a boy and girl.

Yellow, meagre, ragged, scowling, wolfish; but prostrate, too, in their humility.

Where graceful youth should have filled their features out, and touched them with its freshest tints, a stale and shrivelled hand, like that of age, had pinched, and twisted them, and pulled them into shreds.

Where angels might have sat enthroned, devils lurked, and glared out menacing.

No change, no degradation, no perversion of humanity, in any grade, through all the mysteries of wonderful creation, has monsters half so horrible and dread.

Scrooge started back, appalled. Having them shown to him in this way, he tried to say they were fine children, but the words choked themselves, rather than be parties to a lie of such enormous magnitude.

"Spirit! are they yours?", Scrooge could say no more.

"They are Man's," said the Spirit, looking down upon them. "And they cling to me, appealing from their fathers."

"This boy is Ignorance. This girl is Want. Beware them both, and all of their degree, but most of all beware this boy, for on his brow I see that written which is Doom, unless the writing be erased. Deny it!" cried the Spirit, stretching out its hand towards the City.

"Slander those who tell it ye! Admit it for your false purposes, and make it worse! And await the end!"

"Have they no refuge or resource?", cried Scrooge.

"Are there no prisons?" said the Spirit, turning on him for the last time with his own words. "Are there no workhouses?"

The bell struck twelve.

Scrooge looked about him for the Ghost, and saw it not. As the last stroke ceased to vibrate, he remembered the prediction of old Jacob Marley, and lifting up his eyes, beheld a solemn Phantom, draped and hooded, coming, like a mist along the ground, towards him.


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Tuesday, December 22, 2009

Finally... an admission.

It's been interesting watching the reaction to Finance Minister Jim Flaherty's comments that that the Federal Government will, if necessary, further tighten the conditions under which the Canada Mortgage Housing Corporation insures mortgages.

But Flaherty made a significant comment today and it seems to have escaped notice in all the hand-wringing over what changes the Finance Minister could possibly introduce. Flaherty said,

  • “The Governor (of the Bank of Canada) and I have both encouraged the banks to maintain their lending standards, that’s important. We don’t ever want to end up in a situation like the Americans ended up with — people getting into a lot of trouble with the interest rates on their mortgages.”

Did you catch the significance of the comment?

We'll come back to it in a second.

Flaherty's nascent attitude on dealing with the housing issue (increasing minimum downpayments, reducing amortization periods) is clearly at odds with what he really wants to do... which is nothing.

Everyone knows there are mortgage brokers out there, like this one, who are getting Canadians into the market with nothing down and spreading the loans over 35 years.

That's how payments have been made affordable.

Scotiabank estimates 18% of Canadian mortgages are for terms longer than 25 years, and 10% are amortized over 35 or 40 years.

Broker acquaintances suggest the 35 ams are even higher.

Flaherty and Carney are clearly trying to strike fear into the industry in hopes that the industry will clean up it's act when it comes to manipulating the 'lending standards'.

Personally I don't think it's going to work.

And as 2009 comes to a close, its interesting Flaherty and Carney feel they can no longer publicly ignore what is going on.

Perhaps more startling, however, was Flaherty's startling admission.

Did anyone notice that he finally acknowledged that the conditions surrounding the American housing collapse are not all that different from the conditions looming in Canada?

Flaherty did not dismiss the American housing collapse by blaming it on 'subprime mortgages' and an 'irresponsible banking system' like so many times before.

Isn't that the snake oil government and the real estate industry has been selling us all year long?

No... for the first time we have seen a Canadian official publicly admit what really caused the American collapse:

"People getting into a lot of trouble with the interest rates on their mortgages.”

In America it was teaser rates that reset, first with subprime mortgages and then with regular mortgages.

In Canada it is ultra-low emergency rates that will reset.

Bloggers like this page have been saying all year that Canada is really no different than the United States.

We have thousands of Canadian homeowners who have been using their homes as ATM's, just like the Americans. They have renewed their mortgages, maxed out their equity, and are clinging to low variable rates.

In addition, we have thousands of Canadian homeowners who have jumped into the market with little or nothing down and cannot deal with interest rates returning to their historic norms.

The American condition was rotten with these factors and what set the collapse in motion was a resetting of interest rates. First it took down the subprimers, then the regular mortgage holders.

Now that very condition threatens not only the Canadian housing market, but the Canadian economy as well.

Today's news is not that Flaherty may change the rules for mortgages. Today's news is that Flaherty finally admitted that the Canadian situation is no different from that in America.

But we already knew that, didn't we?

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Monday, December 21, 2009

The Secret of Oz

Had a chance to watch "The Secret of Oz: Solutions for a Broken Economy" last night.

Interesting.

It's a follow up film by Ben Still to an earlier work titled, "The Money Masters: How Banks Create the World's Money".

In 'The Secret of Oz', Still argues that the United States is headed for a deep depression unless lawmakers address the root of the problem: mounting interest payments on the national debt.

Still wonders if the solution to America's economic troubles can be found in the pages of L. Frank Baum's "The Wonderful Wizard of Oz"?

It is well known in economics academia that "The Wonderful Wizard of Oz" – written by Baum in 1900 – is loaded with powerful symbols of monetary reform which were the core of the Populist movement and the 1896 and 1900 presidential bids of Democrat William Jennings Bryan.

The yellow brick road (gold standard), the emerald city of Oz (greenback money), even Dorothy's silver slippers (changed to ruby slippers for the movie version) were symbols of Baum and Bryan's belief that adding silver coinage to gold would provide much needed money to a depression-strapped, 1890s America.

Still's film picks up on Baum’s symbolisms and spells them all out – The yellow brick road, the silver slippers, the Emerald City, the mindless Scarecrow, the heartless Tin Man, the cowardly Lion. Even the witches and flying monkeys have meanings.

Still attempts to present a way the United States can rise up from unworkable debt based math and return quickly to a prosperous future. For Still it requires "pulling back the curtain on America's financial history and viewing it as it is, not how the men behind the curtain box it and present it."

The film focuses on the belief that the people - not the big banks - should control the quantity of a nation's money. The bottom line: No More National Debt.

All money is created out of debt, but nations don't have to borrow money from banks. Sovereign nations can create their own money - debt free - just as Abraham Lincoln did.

The premise is routed in the actions taken by US President Abraham Lincoln.

The film is doing very well on the film festival circuit. It's been accepted by 8 film festivals and has won at 3. It won the Silver Sierra Award for Excellence in Filmmaking at the Yosemite Film Festival, the Award of Merit at The Accolade Competition in La Jolla, California and the Silver Screen Award at the Nevada Film Festival.

It's worth taking a look.

The film is available on Amazon.com and is popular enough that it has found it's way on to other forms of exchange.

It you get the chance, check it out.

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Sunday, December 20, 2009

Sunday Funnies - December 20th, 2009

(Click on image to enlarge)

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Saturday, December 19, 2009

Get Ready for Real Estate to Really Catch Fire

Sound incredible?

Consider....

November/December, normally a down time for the industry, have been red hot. Word has it that concerns about possibly missing out on low interest rates, combined with the looming introduction of the HST tax, are pushing many new buyers into bidding wars to get into the market.

Regardless of the shortsightedness of this, I am told it is a definite factor in the current market frenzy.

And if that is indeed the case, then prepare for the market to explode.

In an exclusive interview with Canwest News Service and Global National, Finance Minister Jim Flaherty said the government is closely monitoring the red-hot housing market for signs that it is reaching "irrational" levels.

Now... we already know that the market is irrational and, as we have discussed, this is largely by design.

The government, seeing what happened to real estate based assets in the United States, slashed interest rates to dirt in a desperate attempt to re-inflate the collapsing economy and housing market.

And their actions have been wildly successful.

We've also talked about how they don't want to destroy this momentum... just slow it down a bit.

To this end Bank of Canada Governor Mark Carney has taken to the talk circuit issuing 'warnings' to individual Canadians and financial institutions to be 'prudent'.

Now Flaherty has come out and said that the Federal Government will, if necessary, further tighten the conditions under which the Canada Mortgage Housing Corporation insures mortgages,

The Conservatives have done this once already.

In July 2008 the Finance Department announced that CMHC would shorten the maximum amortization period that it would accept to 35 years from 40, as well as require a down payment of at least 5% of the value of the home. The new rules came into effect in October 2008.

"If we have to, we'll do what we did last year and limit the rate of amortization further than we already did, and require higher down payments,"said Mr. Flaherty.

If Flaherty takes action, it will likely come when the next budget is brought down in March, 2010.

But watch... the mere suggestion will inflame the market and sent another crush of people dashing after cheap rates in a desperate attempt to avoid both the increased costs of the HST and the looming spectre of 10% down and 30 or even 25 year amortizations. Potential new buyers will panic as they try to get the property that they want - regardless of how much they overpay.

Far from helping to moderate the overheated market, the fear is that Flaherty's simply pour gasoline over it.

(Note: Two posts for Saturday. See below for 'Financial Heroin')

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Financial Heroin

This could possibly be another double post day (aren't you lucky) so check back later today if you are so inclined.

I came across this on Zero Hedge and had it emailed to my by a faithful reader. For those of you who are interested, it is today's 'must read'.

It's titled 'Financial Heroin' and comes to us from Don Coxe Advisors LLC, distributed by BMO Capital Markets on December 16th, 2009. The full report is below for you to peruse.

Here are some condensed comments:
  • If Ben the Heroin Hero stops the infusions in time, he will deserve to be mentioned in the same breath as Paul Volcker—a real hero….

    Because he will have done the brave thing—at the risk of the loss of his job and of the Fed’s independence.

    Already the Pelosi Congress is considering legislation that would (1) subject Fed monetary policies to review by the Congressional Budget Office, and (2) strip the Fed of its supervisory authority over financial institutions, handing that power to a new agency created by Congress—presumably in the image of its Creator. The same politicians who applauded so vigorously as Fannie and Freddie debased the lending requirements for mortgages and expanded their balance sheets so recklessly, now seek to apply that expertise to supervision of the entire banking system.

    Last week, Volcker, the man who has done more than anyone in modern history to design and deliver sound regulation to international banking, told a London audience what he thought was good and what was bad about today’s banks.

    Volcker said the “single most important contribution” they’ve made in the last 25 years was introducing ATMs. ATMs meet, he said, the test of being “useful.” Apart from that, he had nothing good to say about commercial banks that behaved as investment banks. He agreed with the head of Britain’s Financial Service Authority that such banks are “socially useless.” He said derivatives, such as credit swaps and collateralized debt obligations, had taken the economy “right to the brink of disaster.” He noted that the economy had grown faster during the 1960s when such instruments didn’t exist.

    One shocked member of his financial audience challenged his dismissal of modern finance, and the magisterial Volcker huffed, “You can innovate as much as you like, but do it within a structure that doesn’t put the whole economy at risk.” He reiterated his support of Soros’ view that “proprietary trading should be pushed out of investment banks to hedge funds where it belongs.”

On weapons of financial mass destruction:

  • Volcker is right. The collateralized debt obligations, collateralized mortgage-back securities, and other computer-spawned complexities and playthings were not the solutions to basic needs in the economy, but to unslaked greeds on Wall Street. Without them, banks would have had no choice but to continue to devote their capital and talents to meeting real needs from businesses and consumers, and there would have been no crisis, no crash, and no recession.

    Bernanke would doubtless concur, although he doesn’t dare say so in public. He is engaged in a multi-trillion-dollar rescue operation to save the global economy from collapsing under the weight of toxic derivatives and bad trading bets.

    When will he take the risk of stemming the heroin flow?

    As the 1970s demonstrated, the longer central banks wait to scale back on above-trend money growth, the worse the ensuing inflation — even when the economy slides back into recession. It would seem that the appropriate year-end advice for levered bettors on US stocks and corporate bonds is, “Enjoy yourself, it’s later than you think.”

Lots has been spent: yet it is seemingly never enough:

  • After previous deep recessions, the snapbacks were dramatic, as inventory liquidation turned to inventory accumulation, and layoffs turned to callbacks. Despite all those trillions spent and all that monetary stimulus, the US economy has moved only from the critical care ward to the ambulatory convalescent wing.

    With winter coming on, Bernanke, Obama & Co. could soon be of the same view as the despairing Lady Macbeth: “Nought’s had; all’s spent.”

And how to invest in the face of an endless bubble:

  • In brief, as long as you don’t try to delude yourself that you’re a value investor when you’re buying the typical non-commodity and cyclical components of the S&P or the Russell 2000, you can console yourself in the knowledge that this particular bubble may not be ready to burst for some months.

    However, the amount of Bernanke pumping needed to keep it afloat is increasing, which suggests even he can’t keep this bubble alive much longer if the real economy fails to take wing. Despite a huge upside breakout of the Monetary Base in the past two months, the S&P has moved up just a tad. Even that move is suspect, because it has been accompanied by a plunge in short sales of non-financial stocks, and lackluster volumes.

Here is the full report...




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Friday, December 18, 2009

Santa Baby?

Double dipping today so you get two posts for the price of one (make sure to see the post below this one on 79.9% interest rates).

Wandered over to Garth Turner's site and caught this post on Economic Forecasting.

Garth is very bullish on the strengthening of the US dollar. He opines that with all the troubles in the world (Dubai, the European basket cases of Greece, Italy, Iceland et al), the US dollar is still the global reserve currency and perceived to be the safest of safe havens offering total liquidity and shelter from debt storms.

He insists there will be no double-digit inflation in the States, "no matter how damn much money they print" and that the US dollar will strengthen based on a growing realization stateside about the severe threat presented by the continuing accumulation of debt.

Turner notes there is "a growing political appetite to (a) raise taxes and (b) slash Washington’s spending. In some form, both of these will happen, especially if Republicans win a few key seats next year. This will be very bullish for the greenback, even though it means more years of slow growth."

Turner also says that Washington has hundreds of billions in bonds to sell each year – the majority to offshore investors. Thus the US has a huge incentive to stabilize the dollar and the easiest way to do that is with monetary policy and a quick little rate hike.

But will that do the trick? Or is there a looming problem that Bernanke and Co. have failed to plan for?

We've talked about it here before, the fact that the United States (and other western governments) need to borrow a massive amount of money to fund their deficits.

Interestingly, the Governor of the Bank of China just came out with a couple of thoughts on that issue.

He said that it is "getting harder for governments to buy United States Treasuries because the US's shrinking current-account gap is reducing the supply of dollars overseas."

The economic crisis of the last year has played havoc on global trade.

And with with every country (especially China) keeping things going by printing money and implementing stimulus projects of their own to build bridges, roads and other internal projects; those countries are running out of non-domestic cash.

Internal infrastructure stimulus projects may fill the void at home brought about by the collapse in global trade, but they don't bring in western cash.

Exports do. And China's exports are down dramatically.

Without vibrant global trade, there aren't enough US dollars flowing in.

Where do you think China has been getting all those US dollars to plow into buying US Treasuries?

This is about to become a huge, critical issue for the United States. Now that Treasury monetization is ending, the US needs to constantly find foreign buyers of its debt to fund unsustainable deficits.

Foreign buyers who have US dollars.

According to Shanghai Daily, this could be a big, big problem.

Bank of China's Zhu Min said,

  • "The United States cannot force foreign governments to increase their holdings of Treasuries. Double the holdings? It is definitely impossible."

    "The US current account deficit is falling as residents' savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world. The world does not have so much money to buy more US Treasuries."

And that's the crux of it: in cranking up the printing presses to create trillions of assorted securities, the US Treasury has soaked up the world's dollars.

And since US banks are sitting on all this money in the form of bank excess reserves and not lending, these excess reserves can not be used to buy Treasuries and MBS. This would be literal monetization as opposed to the figurative one which is what Quantitative Easing has been.

Since none of the money is flowing out to the world (aka China), the world is running out of dollars with which to buy Treasuries.

Holy Catch-22, Batman.

This looming problem is discounted by some critics who point out that China still has trillions in foreign exchange reserves.

But China has been selling mortgage backed securities at a furious rate... and it hasn't been buying treasuries. China's Treasury holdings have been flat at exactly $800 billion since May 2009. China has been doing what millions of high frequency traders have been doing: focusing on short term investments which can be liquidated instantaneously.

In essence Zhu Min is saying that the US should no longer rely on China for funding its bottomless deficits. And because of that Zhu told an academic audience that it was inevitable that the dollar would continue to fall in value because Washington would continue to issue more Treasuries to finance its deficit spending.

If that's the case, things are about to get much worse as the Fed has no choice but to turn the monetization machine on turbo... a development which will drive the US dollar far lower than anyone cares to admit.

Garth Turner insists the US will never allow it's dollar to drop, but America may not be able to control that destiny anymore.

Ertha Kitt crooned in her holiday classic, "I'm filling my stocking with a duplex, and cheques... sign your 'X' on the line"

But it appears China has no plans to hurry down the American chimney tonight.

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How about a credit card rate of 79.9%?

If you though a credit card interest rate of 39.9% by Capital One in the US sounded outrageous, try 79.9%.

According to USA Today, First Premier Bank is skirting new regulations intended to curb abusive practices in the industry by employing a strategy other subprime card issuers could start adopting to get around the new American rules.

In the past a company like First Premier would levy a minimum of $256 in fees in the first year for the privalege of using their credit card with a line of credit of $250.

Starting in February, changes to American law will cap such fees at 25% of a card's credit line.

So what are the weasels are First Premier Bank going to do?

In a recent mailing for a preapproved card, First Premier lowers their fees to the legal limit (charging $75 in the first year for a credit line of $300).

But the new law doesn't set a cap on interest rates so First Premier will rachet up their APR from 9.9% to 79.9%.

[For a $300 balance, a cardholder would pay $20 a month in interest]

"It's the highest on the market. It's the highest we've ever seen," said Anuj Shahani, an analyst with Synovate, a research firm that tracks credit card mailings.

The bank said "no final decisions" have been made regarding any rate changes for existing cards, but you can well imagine a sense of panic developing in any consumer who has one now with an outstanding balance.

The offer from the bank states there are no hidden fees that aren't disclosed in the attached form. That's where the 79.9% interest rate and $75 annual fee are listed. There's also $29 penalty if you pay late or go over your $300 credit limit.

And they hasten to add that they guarantee a 60-second status confirmation and that "... you might have less-than-perfect credit and we're OK with that."

LOL... gee, I wonder why.

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Thursday, December 17, 2009

O tidings of comfort and joy...

You may have seen them if you occasionally read the comments section of this blog.

Some like to chide me for being so negative and repeating, ad nausem, my warnings about debt and rising interest rates. The number of comments pale in comparison to the dozens of the emails I get on that theme, but I love to read them.

So it makes me wonder if similar letters and emails are now being sent to Bank of Canada Governor Mark Carney.

'Cause let's face it... his public statements lately are inter-changeable with the posts of those in the blogosphere.

And yesterday the Governor had more tidings.

Speaking to a business audience in Toronto, Carney delivered this clear and unequivocal warning to Canadians:

  • "Responsibility starts with the individual. Our advice to Canadians has been consistent: We have weathered a severe crisis—one that required extraordinary fiscal and monetary measures. Extraordinary measures are the means to an end: the return to the ordinary. Although we expect the recovery to be gradual and protracted, these measures are working. Ordinary times will eventually return and, with them, more normal interest rates and costs of borrowing. It is the responsibility of households now to ensure that in the future, when the recovery takes hold and extraordinary measures are unwound, they can still service their debts."

As we are found of reminding faithful readers, 'normal' interest rates over the last 20 years mean a rate of 8.25%.

Yikes.

The implications for many recent homebuyers in the Village on the Edge of the Rainforest who have taken out variable mortgages at rock-bottom rates and maximized the amount they could borrow are clear: any rise in interest rates risks putting a financial squeeze on a large number of debt-laden Vancouverites.

Even the Mortgage Brokers Association of B.C. is starting to take notice as they said yesterday that, "Canadians are potentially leaving themselves wide open for significant financial obligations once interest rates begin to rise."

Really, who could have known?

But it didn't end there. Carney once again focused on a fact we quoted yesterday from The Globe and Mail:

  • "The ratio of mortgage debt to household incomes in Canada recently hit a record 70%, up from 65% a year ago. And 40% of home buyers are opting for short-term, variable-rate mortgages, which will eventually ratchet up, leaving some owners in deep financial trouble."

To this Carney told Canadians that the nation “must be vigilant” in containing the threat rising rates would have on increasing the debt-servicing costs for Canadians who have taken on increasing levels of debt.

Sorta rings hollow because what is coming is serious business and I think it's too late to be 'contained'.

Consider the bold prediction earlier this week from economist and author Jeff Rubin. He predicted the jump in interest rates could be as steep as 3% to 4% over the next two years as the Bank of Canada struggles to contain inflation caused by increasing energy costs.

3% - 4%! Yikes again.

That type of increase could add up to $1,000 to the monthly payment on a $400,000 Vancouver mortgage.

And everyone I know that has bought a house in the last three years is carrying much more than a $400,000 mortgage.

None of them can afford even a $500 increase in their monthly payments, let alone $1,000 or more.

While the Globe and Mail can publish joyous, helpful little articles like this one that urges Canadians to "Wrestle Down That Debt While You Can", the reality is that its too late, the damage has been done.

Maybe that's why Carney had this Christmas message for banks:

  • "Similarly, lenders have responsibilities. Financial institutions should actively monitor risk stemming from households and not take false comfort derived from mortgage insurance and past performance of household credit. As our simulations suggest, the overall credit profile of Canadian households could well shift if debt continues to grow at current rates."

Oh... it will shift alright. And it's going to create a dire situation for banks. Under one of Carney's 'stress test profiles', the BOC hypothesises that:

  • "the consequences for financial stability from the potential impact of a more severe economic downturn on households could result in a hypothetical increase in unemployment that could produce loan losses for financial institutions representing about 10% of their Tier 1 capital."

And as faithful readers will recall, Sprott Asset Management predicted that if the Canadian banks’ tangible assets were to drop by 3%, their tangible common equity would effectively be wiped out.

Double Yikes!

But bloggers have seen this scenario coming all year. And did anyone catch American Karl Denninger on BNN yesterday?

He was asked to be on the Canada's Business News Network to talk about housing. After his appearance he wrote about it on his blog:

  • "[I did] a bit of research after the show [and] I came up with the following....

    Canadian family income as a whole ("families of 2 persons or more") is allegedly $70,000 (approximately.) The average house price? $325,000.

    That's a multiple of 4.64, or dramatically into bubble territory (the maximum for affordable housing is roughly 3x, so this is 154% of the maximum!)

    It's worse in places like Vancouver - there the ratio is over 10 (!) for single-family homes and about 8x for all residences.

    Let me be clear, strictly on the numbers: Canada is in for a housing bust WORSE THAN OURS.

    Beware Canadians..... you can argue over the timing of the outcome here, but if you think the 'bad event' won't happen and act on that belief, don't cry when a year or three down the road I start piping up with 'I told you so!'

And some think I'm too negative when I call for a collapse of over 40% in the value of Vancouver houses and over 50% in the value of Vancouver condos.

God rest ye merry gentlemen... Let nothing you dismay.

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Wednesday, December 16, 2009

Hark how the bells, sweet silver bells, all seem to say... throw cares away?

Another day and another flurry of Canadian housing bubble stories in the mainstream media.

Among the treatsies yesterday was this Globe and Mail offering titled 'Housing Market Has Big Cracks' which tells us, "it is probably a real estate bubble that will eventually burst - two years after the rest of the world... Too many appear to be blindly following Americans down a path of excessive debt, enticed by low rates."

Oh my!

Even worse are the statistics that follow.

"The ratio of mortgage debt to household incomes in Canada recently hit a record 70%, up from 65% a year ago. And 40% of home buyers are opting for short-term, variable-rate mortgages, which will eventually ratchet up, leaving some owners in deep financial trouble."

Meanwhile the Montreal Gazette notes that we have gone 'From Great Depression to Bubble of a Bubble' in a span of only 12 months.

You don't say.

And with all these mainstream media musings, we should expect to see the regular cast of R/E apologists moving to crank it into overdrive to counter all this 'negative talk', shouldn't we?

Enter stage left...

First up: Canadian Real Estate Association economist Gregory Klump.

He pooh-pooh's the chatter and reminds us that "consumer confidence has been increasing."

Really? What about record levels of unemployment?

Balderdash says he.

In the United States they may view 10% unemployment as starting down the road to economic apocolypse, but our buddy Klump sees the glass as half full.

“If we have 10% unemployment, that means 90% of people are employed,” Klump said. “People are re-entering the market – they have the confidence to take advantage of bargain-basement prices. There's been a release of pent-up demand, and that has a long time to play out. Prices have gone as low as they are going to go.”

There you go!

Next comes the discrediting of the naysayers.

Towards the end of the Gazette article referenced above comes this little tidbit:

"One senior real estate industry veteran, who asked not to be identified, wonders whether economists are now calling for a crash to grab themselves headlines. 'They are all piling on the bubble story now,' he said."

Spotlight hogs, one and all.

The best of the week comes from our old friend Phil Soper, president and chief executive of Royal LePage Realty.

They conducted a survey of 1,225 Royal LePage real estate agents and brokers across Canada.

[No pesky, headline-grabbing, negative economists in that group]

Tell us Phil... what did your survey of folks with a vested interest in real estate 'consumer confidence' reveal for us?

Well... real estate agents/brokers tell us "20% of agents and brokers said they are not hearing any concerns from buyers."

[Gee. 20% of buyers believe they are doing the right thing. Does that mean 80% of agents and brokers are hearing buyer's say they are making the mistake of their lives? I digress, back to Phil...]

"Buyers remain nervous about the economy but few believe house prices will drop again."

[Hmmm... no jobs, no money, and 80% of buyers believe they are screwing up royally but they conclude real estate prices will keep going up. With that sort of irrational logic at play, I now understand why there are so many people buying]

"Canadian real estate markets are enjoying a strong recovery as 2009 draws to a close and appear poised for healthy growth in 2010. Our survey shows that consumer confidence is edging towards normal levels.

[Now... just to keep things straight... that's the same survey that says only 20% of buyers have no concerns about the economy?]

"Canadians clearly believe that the worst of the recession is behind them and that the real estate market is on the path to sustainable recovery."

[Wow... that's quite the leap]

"The most obvious sign that market conditions are improving is found in the significantly higher unit sales volumes. That said, we have seen some significant recent increases in home prices, which is unusual at this time of year. Paradoxically, the recession is contributing to the unexpected rise in year-end house prices. On one hand, Canada's low interest policy has stimulated demand. On the other, many Canadians who might otherwise feel comfortable putting their homes on the market don't yet have the confidence in the state of the economy's recovery to list their homes, which is contributing to the current supply shortage."

Sooo... the nervousness of the shepple had created an artificial shortage of housing which has duped a certain percentage into engaging in bidding wars for the reduced supply which has, in turn, created a sense of recovery?

Thanks for clearing that up for us, Phil.

The bottom line is that Phil has chatted with his coworkers and their enthusiasm conclusively proves we "are on the path to sustainable recovery".

Marvelous. Let's summarize Sopel's holiday message to Canadians, what is he telling us?

That realtors and brokers all seem to say... "throw cares away!"

How festive of them. I'll retire to bedlam.

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Tuesday, December 15, 2009

Do you see what I see?

It seems articles on the Canadian housing bubble are starting to pop up everywhere in the mainsteam media.

Yesterday there was this one by David Rosenberg, chief strategist for Gluskin Sheff & Associates Inc, observed that "if being 15% to 35% overvalued isn't a bubble, then it's the next closest thing."

Meanwhile Bank of America Merrill Lynch, in its 2010 investment outlook, warned that Canada was "likely inflating a housing bubble" and that the "Bank of Canada may be underestimating the inflationary impact of a red-hot resale market."

So what do you know... it has become fashionable to acknowledge the presence of the 1,000 pound gorilla in the room.

Now what?

Yesterday's post covered off how both Carney and Flaherty aren't about to do anything about it.

And their inaction comes just as we learn that Canadian household debt has hit 145% of disposable income. Not only is this an all-time record, it's more debt than families in the United States had in 2006 when their real estate market collapsed.

Even more disturbing is the fact that, relative to incomes, Canadian housing prices are higher than they were in America when their R/E market collapsed.

The reality is... our situation is not all that much different than what America was facing. And, as has been posted numerous times on this blog, the factor that looms as the lynchpin for disaster is that our emergency, record-low mortgage rates are producing the exact same effect as teaser rates did on US mortgages.

Which brings us to this interesting little story in the Wall Street Journal.

Brian Fitzgerald, a WSJ writer, finds himself in the same position that one in four American's with a mortgage is in: he is underwater.

And the way he looks at purchasing a home now is dramatically different than it was when he made the decision to buy in 2006.

Do Canadians today see things the way he saw them in 2006?

Fitzgerald's New Jersey house is currently worth about $30,000 less than the current balance on his mortgage.

Fitzgerald stresses that he was not a home flipper or boom-era borrower who opted for an exotic loan with no documentation. In buying his house, he was making "a life decision."

Fitzgerald, you see, is remarkably similar to so many Canadian families who have purchased a home over the past three years. And his comments on how he came to be in this significant underwater position should send chills down the spines of those Canadian families.


  • "We started thinking about buying in 2004... we probably could have held out a few years in our sizable apartment in Metuchen, N.J., a bedroom community about 35 miles outside of New York City. But we knew interest rates were hovering at historic lows. It was impossible, working at The Wall Street Journal, to not read those headlines every day. At the same time, people all around me were buying homes and refinancing their mortgages to capture these relatively inexpensive home loans. It was like a race, and everyone else was crossing the finish line while I was still putting on my sneakers.

    When we started looking, one of the first things that struck me was how expensive even run-of-the-mill two-bedroom homes were–$450,000, $625,000 and more. A house going for less than $350,000 was rare, and what we found in that range would give pause to even the hardiest of fixer uppers. It was distressing. These weren't impossibly large homes either, at least not to this lifelong apartment dweller. Buying in tony Metuchen was out of the question.

    We weren't oblivious to the fact that people were stretching to buy homes. We were adamant about getting a fixed-rate loan. Rates really had nowhere to go but up, so why would we want an adjustable rate?

    We were concerned about the down payment... we [ended up] plunking down only 7% or so on the down payment. [As a result] we were faced with a steep insurance fee. I was naively insulted by this PMI – the idea that we were risky borrowers out of the box. So we opted for a "piggyback" loan, a second loan that would cover the rest of the down payment and allow us to avoid the PMI. We would pay about the same per month, and when our home's value rose, we would refinance and combine the two loans into one. A lot of the people I turned to for advice were recent homebuying colleagues facing similar questions, or longtime owners who were doe-eyed by low interest rates. I don't recall anyone saying 'Dude, wait a few years.'

    We negotiated a bit on the price and closed the deal in May 2006 for about $328,000 at a 6.12% rate. At the time, I didn't know that the second loan was a de facto home-equity line of credit. I knew it would be a higher rate–a little more than 2.5 percentage points higher. But the loan amount paled in comparison to the main mortgage, so I wasn't overly concerned.

    What we didn't foresee was home values–ours included–dropping so steep, so fast. Zillow.com now estimates our home is worth $270,000.

    The price drop sometimes feels like an apparition. On paper, my home is considered less valuable than what I am paying for it. In reality, it is the same home (warts and all) that I liked when I signed the papers. I can afford the mortgage and insurance payment, even with my wife at home raising the kids. That is a luxury I can't put a price on. I wouldn't call us comfortable like a nice pair of jeans, I would call us comfortable like the same pair of jeans after Thanksgiving dinner.

    Financial consultants would scream at me for how much of my net pay the loan sucks up. I could hold the least expensive mortgage in America, and I'd still be in trouble if I was laid off... if I knew in 2006 that in 2009 I'd be able to get the same home for a 20% discount AND still get a low rate, I never would have pulled the trigger."

Speaking to two mortgage brokers over the weekend, Fitzgerald's situation parallels the situation many Canadian buyers are in. They have also finagled their way around their downpayment by juggling finances to - for all practical purposes - borrow the money for the downpayment... similar to what Fitzgerald did.

Thousands, if not hundreds of thousands, of Canadian families are currently echoing Fitzgerald's comments in their lead up to purchasing their homes over the last three years. The similarity in the comments is undisputable.

  • They probably could have held out a few years,
  • They knew interest rates were hovering at historic lows,
  • People all around them buying homes and refinancing their mortgages to capture these relatively inexpensive home loans,
  • It seemed like a race, and everyone else was crossing the finish line while they were still putting on their sneakers,
  • When they started looking, it seemed even run-of-the-mill two-bedroom homes were expensive, homes in their price range would give pause to even the hardiest of fixer uppers. It was distressing.
  • They weren't oblivious to the fact that people were stretching to buy homes and they felt they had to do the same,
  • They were concerned about being able to even make the down payment.

All those things are being said by similarly pressured home buyers in Canada today.

And mark my words... the only thing that will change three years down the road when Canadians compare themselvest to Fitzgerald's situation will be the amount their homes drop in value and how high interest rates on mortgages have shot up.

In three years many Canadians will be saying, "if I knew in 2009 that in 2012 I'd be able to get the same home for a 40% discount, I never would have pulled the trigger."

And if the market only collapses 40%, we will consider ourselves lucky.

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Monday, December 14, 2009

Follow the pea

It's the Christmas season and time to navigate the holiday party circuit.

Headlining much of the party chatter angst is every one's favorite topic - real estate.

But this year the fears and trepidation that were all too commonplace this time last year are gone. Replaced by a re-birth in speculative frenzy bordering on religious fervor.

Hobnobbing over eggnog I am amazed at how everyone is convinced that the Village on the Edge of the Rainforest has escaped the market meltdown fate of our American cousins.

R/E defenders trumpet that - despite a near Depression - real estate only suffered a modest drop in prices, prices which have since rebounded.

There is a palpable sense of invincibility growing again, a faith in the manifest destiny of the Vancouver market.

Once again I find myself holding court as the lone naysayer in a room filled with re-born real estate evangelists.

Particularly amazing is how so many have glommed onto the report released by the Federal Reserve Bank of Cleveland titled "Why Didn’t Canada’s Housing Market Go Bust?"

That report concluded that it was primarily the lack of a subprime lending industry in Canada that kept the housing market in this country from imploding. When combined with the oft-repeated mantra of the superior Canadian banking system, it is stunning to see how it has people gushing again about a non-stop, upward trajectory for real estate.

I shake my head.

First of all our vaunted Canadian banks aren't quite as secure as we may like to believe.

Faithful readers have already seen the post on the Sprott Asset Management report which clearly outlines how our Canadian banks barely escaped the 2008 meltdown.

They received $65 billion in liquidity injections from the Insured Mortgage Purchase Program (IMPP) (meaning CMHC purchased insured mortgages from Canadian banks to provide additional liquidity on the asset side of their balance sheets), the Bank of Canada provided them with an additional $45 billion in temporary liquidity facilities and there was also assistance from the Canada Pension Plan (CPP) through the purchase of $4 billion in mortgages prior to the IMPP program for a total government expenditure of $114 billion.

All five Canadian banks are levered at an average of 31:1. According to Sprott this implies that if the Canadian banks’ tangible assets were to drop by 3%, their tangible common equity would effectively be wiped out.

But despite this precarious position, Canadian banks are still facilitating mortgages for both current mortgage holders and eager new buyers whereas in the United States potential buyers struggle for financing and foreclosures reign supreme on current mortgage holders who need to renegotiate.

How can this be?

The Federal Bank of Cleveland says it's all due to the lack of a subprime lending industry in Canada.

Au contraire mon frere!

The only reason our real estate market hasn't tanked like it has in the United States is because of the way our government has intervened in this crisis.

While both countries have slashed interest rates to dirt to stimulate both the economy and the real estate market; in Canada we have also have the CMHC.

The CMHC publicly admitted that it was ordered by the Federal Government to approve as many high risk borrowers as possible to prop up the housing market and keep credit flowing.
  • In 2008 some 42% of all high risk applications were approved, a 33% increase over 2007.
  • Between the beginning of 2007 and 2009 Canadian Banks increased their total mortgage credit outstanding listed on their books by only 0.01% -- possibly the smallest amount of change in post WWII history.
Because of the way these mortgages are being securitized by CMHC, credit is flowing from our banks into the real estate industry. And all of these mortgages are backed by the Federal Government.
  • The Canadian mortgage securitizaton market has grown from $100 billion in 2006 to $295 billion by mid-June 2009.
  • CHMC plans to expand securitization of debt to $370 billion by the end of 2009 as per the conservative government request.
  • CMHC indicates in its plan that it will insure $813 billion via a combination of mortgage insurance and mortgage-backed securities (MBS) by the end of 2009.
  • According to CHMC figures from 2008 and 2007 it is clear that CMHC has drastically exceeded their planned figures. It is expected that $812 billion is more than likely to be a minimum target.
  • At these rates of progression the Government of Canada will in effect be insuring well over $500 billion in securitized mortgages and lines of credit by the end of 2010. The Canadian Government will also have issued over $600 billion in outstanding mortgage insurance.
The Canadian real estate market is flourishing while the American real estate market is floundering because credit is flowing to homebuyers in Canada.

In the United States, it is not.

I'll repeat the key statistic again: between the beginning of 2007 and 2009 Canadian Banks increased their total mortgage credit outstanding listed on their books by only 0.01% -- possibly the smallest amount of change in post WWII history.

It means our banks aren't on the hook for all the mortgages that have been issued, the Federal Government is. That's why credit is available for real estate in Canada when it isn't in the United States.

Uncle Sam is too busy bailing out Wall Street instead of Main Street.

The reality is that our so-called 'solid' real estate market exists only because of massive federal government subsidization. The whole industry sits on a precarious foundation of quicksand that is part of an intricate shell game of asset protection being played by the Federal Government.

That's why Bank of Canada Governor Mark Carney 'urges prudence' but won't take action to raise interest rates and why Finance Minister Jim Flaherty won't tighten up mortgage lending requirements as an alternative to BOC action.

I suspect many of my fellow party-goers, those who are all too ready to ooze that elusive 'market confidence' that officials were so desperate to restore last Christmas, will not fully realize what is going on until it is too late.

Classic 'marks' in what to me is clearly a 'confidence' game.

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Sunday, December 13, 2009

Sunday Funnies - December 13th, 2009

(click image to enlarge)




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Friday, December 11, 2009

Poppycock

You may recall back in October we talked about Bank of Canada Governor Mark Carney going up to Parliament Hill and using a portion of his presentation to tell our elected officials what bloggers have been saying all year - that Canadians may be getting in over their heads in the purchase of homes.

The BOC, said Carney, would be conducting an 'analysis' just to be sure.

Well... the 'analysis' is out and Carney tells us that he has concluded that household debt is now biggest risk to financial system.

Quelle Surprise!

Especially given the Sprott Asset Management Report we profiled that shows how little asset prices would have to decline in order to wipe out the tangible common equity of our vaunted Canadian Banks.

Carney, recognising the looming potential disaster, once again laid the groundwork for his mea non- culpa by urging prudence among Canadians who are borrowing at super-cheap rates today but may not be able to afford higher payments tomorrow.

The BOC used a 'stress test' to show that rising interest rates between mid-2010 and mid-2012 would saddle a growing number of Canadians with unmanageable debt loads.

"Households need to assess their ability to service these debt obligations over their entire maturity, taking into account likely changes in both income and interest rates," the bank said.

[... meaning what? Dump that house/mortgage now to some other schmuck who might also ignore my warnings before it's too late?]

To banks, Carney had this to say. “Financial institutions need to carefully consider the aggregate risk to their entire portfolio of household exposures when evaluating even an insured mortgage, since a household defaulting on an insured mortgage would likely be unable to meet its other debt obligations."

Translation: a collapse is going to hurt us all.

That said, Carney took care not to create too much concern. He was quick to stress that Canadian banks currently have more than enough capital on hand to absorb potential losses, suggesting that even the worst-case scenario in the stress test would fall short of risking a collapse of the financial system.

Uh-huh.

Interestingly the world is starting to take notice that everything may not be peaches and cream in the Land of the Maple Leaf's banking system.

The respected financial website SeekingAlpha ran a story today saying, "Who Says There Were No Canadian Bank Bailouts?"

"[Canada] essentially put $15 billion of capital into the Canadian banks that participated in [a unique] $75 billion CMHC program. How is [this funding] any different than the pref share offerings via the American TARP program, other than the fact that Canadian taxpayers didn’t receive any purchase warrants on Canadian bank shares as compensation? Let’s not forget, the TARP was originally designed to take assets off U.S. bank balance sheets so as to free up capital.

There is only a subtle distinction between injecting capital into a bank and relieving it of assets so that it can avoid a capital injection. Kind of like your Dad temporarily buying your bike from you when you ran out on money in University, and then selling it back to you six months later when you were flush from a summer job.

The notion that Canada’s 'free market' took care of itself over the past 15 months is poppycock."


So is the idea that our nation, particularly the City of Vancouver, isn't sitting on a massive housing bubble.

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