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Friday, December 31, 2010

Happy New Year

A happy and prosperous New Year to all who visit this blog today.

Tomorrow marks the official start of a new decade. Below is an image which I believe captures the theme of the next decade. Click on the image below to enlarge it.

If real estate became the theme of the 2000's, this represents what I believe will be the theme of the next decade: Scotiabank is sold out of 1 oz and 100 oz bars of silver.

Happy New Year All...


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Thursday, December 30, 2010

Last comments on Silver for 2010

Last post on Silver before 2011, the year of the Rabbit.

If you had a chance to read the Sprott report referenced in yesterdays post, you got to read an excellent a summary of the large short position held in Silver by JP Morgan and HSBC.

This week a Chicago law firm announced another class-action lawsuit against JP Morgan Chase & Co. and HSBC Holdings PLC for manipulating the silver market.

Despite mounting pressure, the attempts at manipulating both the gold and silver downward continue.

The precious metal markets have become almost comically predictable lately.

You have JP Morgan (with their massive buying of shorts to drive down price) squaring off against some very large buyers who step in and counter the downward manipulation with strong buying.

These two forces are the primary drivers of price right now and there is almost a predictable pattern to what goes on.

Lately JP Morgan raids the market twice daily between approximately 8:00am EST and 9:00am EST. Once that happens, the large buyers step in and buy the dips driving the price of silver back up.

Take Wednesday Dec 29th, 2010.

Silver was raided at precisely 8:20 EST, taking $0.11 out of the price in under a minute. As usual, they sat back and watched for five minutes and then struck again at 8:25am, taking out another $0.11 in about 30 seconds. Then the large buyers stepped in and silver rebounded.

Now for today, Dec. 30th, 2010.

Silver shot up to $30.93 on the overnight trading.

To the bankers, this is a horrid development. Left to it's own devices, silver will end the week, the month and the year over $30, the highest levels since the 1980s.

Many observers believe that this is something that the bankers will simply not allow. Thus everyone watched the markets keenly for a significant raid today.

We weren't disappointed.

Silver was driven down from $30.93 and suffered two significant raids (just like yesterday) at 8:26am EST and then again at 8:31am. Silver was ultimately driven down to #30.30.

That's when the strong buyers stepped in again.

This is unprecedented in the last 30 years. Normally such sharp drops in the silver price in that span of time scares off investors who fear the price will collapse. This is how the price has been so effectively controlled in the past.

But the market has changed. You have significant buying by extraordinarily strong buyers happening (rumoured to by China and Russia).

Instead of triggering a freefall in the silver price, buying starts up again and drives Silver back up.

At 9:45pm PST tonight, Silver was up to $30.75 again after having been driven down over 60 cents.

Amazing.

I will be watching with keen interest tomorrow morning for a significant attack on silver in a last ditch attempt to shake silver below the $30 level before the year ends.

After that, watch for silver to take a huge jump on Tuesday.

Why?

First, the markets will be closed on Monday because of New Year's Day.

That takes us to Tuesday.

An analyst I follow closely recently make a keen observation. After observing the metals markets for years, he noticed that weekly gains are often made early in the week and selling usually occurs later in the week. The pattern repeats so frequently that it was clear it was not coincidence.

He concluded that JP Morgan is trying to hide their malicious intent from the weekly Commitment of Traders report. This is a report on the market that comes out every Friday but it is based on the previous Tuesday. So, any new short positions initiated JP Morgan on a Wednesday will not show up on the CoT until the next Friday. Thus JP Morgan has until the next Tuesday to cover any brand new shorts they just initiated if their raids fail.

So every week, down go metals mid-late week on fresh paper-metal selling; up go metals early the following week if shenanigans fail, the shorts are covered before new CoT survey.

Tuesdays are almost regularly raid free days.

Last Tuesday, Silver was up over a $1 an ounce without interference. Likewise, Silver mining stocks also go up significantly on Tuesdays.

Therefore I would humbly suggest to you that the first trading day of the New Year on Tuesday will see a huge jump in the Silver price.

Let's see what happens, shall we?

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As always, the content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

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.

All the content on this website is solely an expression of the author's personal interests and is posted as free-of-charge opinion and commentary. Nothing here is intended as investment advice. If you seek investment advice, consult a registered, qualified investment advisor.

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Wednesday, December 29, 2010

On the topic of Silver

This week I have talked about Quantitative Easing and how it can only continue. QE has triggered currency induced cost-push inflation.

Recognizing these trends are important. Understand what is going on around you and you can take advantage of it.

Quantitative Easing is having its expected effect. QE is debasing the purchasing power of the dollar. This has caused gold and silver metals prices to rise.

In 2011 this trend will continue.

And because of this I sincerely believe you should shun real estate and look to Silver as the best investment for your money, particularly if you are someone looking to buy into the real estate market for the first time... or if you are nearing retirement and looking to invest the proceeds from you bubble inflated housing asset.

If you haven't seen it before, I highly recommend you read Sprott Asset Management's Double-Barreled Silver Report

  • "While gold dominates the headlines, the silver market actually enjoys a superior fundamental supply/demand story than that for gold."

Sprott explains the complete rational for this statement and it is worth checking out.

Some have speculated that they believe 2011 will see an economic retrenchment in the markets which will bring down gold and silver in the short term - repeating a situation like we saw in 2008. The stock market crashed and metals/commodities came down with it.

I don't think that will happen this time around. I believe, in 2011, we may well see another Lehman type event in the first half of 2011, but the effect will be quite different from 2008. You will see a strong demand for physical metals in preference to any paper substitutes.

Instead of a rush for liquidity and a flight to the safety of the US dollar, I believe the flight this time will be to the safety of physical metals.

I also believe, in the short term (meaning the next two and a half weeks), we are going to experience another strong upturn in the price of silver.

Since late August silver has moved up in stages. After an initial run from $19 to $23, silver had a pattern of sharp price increases, followed by three-week consolidations.

The latest peak was about three weeks ago so, history would suggest that we are about to rise again. I have been looking for this week or the first week of January for the next move.

So far this week silver is up over $1.50 and sits, as I write this, at a new high for 2010 of $30.85.

I see silver moving to $32.50- $33.00 with an outside chance of $34.00 over the next 2 weeks.

Let's see what happens.

As for those of you who worry silver and gold are in a bubble which is about to burst, I say: not a chance. Precious metals are a long ways from a bubble yet.

Ask yourself, how many of your co-workers talk about real estate?

Now... how many talk about silver or gold? How many even know the current price of silver or gold? Put it to the test... ask them tomorrow.

In the meantime, check out this youtube interview of Harvard students on how the current state of the economy has affected their lives. Most of the students were very optimistic on the economic future of their country.

Towards the end of the video, the interviewer offers all these Harvard brainiac's the chance to buy an ounce of silver for $5 (this was posted on youtube on December 14, 2010 when silver was at $29.50/oz).

Not ONE of them accepts and appear to disdain the idea of buying silver.

Bubble? Not by a long shot.


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As always, the content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

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.

All the content on this website is solely an expression of the author's personal interests and is posted as free-of-charge opinion and commentary. Nothing here is intended as investment advice. If you seek investment advice, consult a registered, qualified investment advisor.

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Tuesday, December 28, 2010

QE... do the math.

Yesterday we talked about how the US Federal Reserve has to keep increasing the amount of Quantatative Easing (QE) it must pump into the American economy.

QE means only one thing: more US Debt.

And the numbers are getting stupid.

Should the current conditions persist, where will the United States be in 4 short years (2015)?

Usdebtclock.org is a fascinating little website that allows you to extrapolates future US debt at current rates of advancement.

The current US debt ceiling is approximately $14 trillion. That's the level at which goverment (supposedly) won't allow debt to pass. Mind you everytime they get close, goverment simply raises the ceiling and will do so again in spring of next year.

Small wonder.

If you thought $14 Trillion was bad in 2010, by the time 2015 rolls around the US national debt will hit $24.5 trillion.

Compounding that is the fact US Unfunded Liabilities are estimated at $144 trillion.

That, btw, is roughly $1.2 million for each and every American taxpayer.

These are numbers that cannot be ignored.

And when you consider how Washington fell into virtual gridlock earlier this month at the mere thought of ending the Bush tax cuts (and increasing government revenue to offset debt), there is no way you can even remotely believe government is going to be able to tackle the looming problem.

As you watch the travails of Greek and Irish bondholder, it is self evident that those problems will be nothing compared to what those unlucky enough to be in possession of US debt in 2015 will have to go through.

No one is going to wait for 2015 for the sh*t to hit the fan.

Moves are already going on behind the scenes to get out of US debt.

In fact some believe this is the real reason behind QE2. America had no choice but to monetize all debt issuance for 6 months because no one was willing to buy it.

This trend is going to intensify in 2011.

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Monday, December 27, 2010

On the topic of Quantitative Easing

Yesterday I talked about a trend that will continue next year: currency induced cost-push inflation.

Today I would like to talk about another trend you will see continue into next year: Quantitative Easing.

For almost 20 years now, the US Federal Reserve has been able to prevent market forces from correcting our economic imbalances by inexorably pushing rates lower.

This happened in 1991, 2001, and most notably in 2008.

These easing campaigns succeeded in boosting the economy in the short term by greatly increasing the amount of debt held by both the private and public sectors.

Each successful round was been enacted to prevent/delay the repercussions from the earlier effort.

The dot-com bubble was created. When it burst, rates were lowered to stimulate and created the housing bubble. When the housing bubble burst in the US, the Federal Reserve lowered interest rates to practically zero.

At this point, rates can go no lower.

So when that stimulus failed, the Federal Reserve has decided to bring on the heavy artillery in the form of “Quantitative Easing,” or as it is known in the vernacular, “printing money to buy government debt.”

By its own words, the Federal Reserve has said the goal of quantitative easing (QE) is to lower long-term interest rates. It is hoped that this will achieve what low short-term rates had not: an increase in stock and real estate prices, a rise in household wealth, and consequently greater consumer spending, economic growth, and job creation.

As the year winds down, it appears the Fed’s plan has backfired.

So far the selling pressure on long-term bonds is overwhelming the Fed’s buying pressure. Spiking rates (which move inversely to price) are powerful evidence that the bond bubble may be ready to burst. The Federal Reserve has thrown everything but the kitchen sink at the bond market to force yields lower, yet they have risen anyway.

Meanwhile the economy sputters, real estate continues it's downward slide in America and unemployment is not dropping.

Compounding the issue is a new Republican dominated congress which has come to power on the back of an austerity movement.

The US Federal Reserve is the only option to stimulate the economy right now.

One of the biggest obstacles facing that US economy will be the individual US States.

The worst recession since the 1930s has caused the steepest decline in state tax receipts on record. State tax collections, adjusted for inflation, are now 12% below pre-recession levels, while the need for state-funded services has not declined.

As a result, even after making very deep spending cuts over the last two years, states continue to face large budget gaps.

At least 46 states struggled to close shortfalls when adopting budgets for the current fiscal year. These came on top of the large shortfalls that 48 states faced in fiscal years 2009 and 2010. (for your information, the 2011 tax year began July 1 in most states)

States will continue to struggle to find the revenue needed to support critical public services for a number of years, threatening hundreds of thousands of jobs.

And if the State financial picture is bad, it pales in comparison to the municipal financial picture. Major American cities are in deep financial trouble.

There is no painless way out of this situation at this point.

Bernanke and the Federal Reserve are caught between the Scylla of deflation - which would liquidate the inefficient part of the economy - and the Charybdis of inflation.

A crystal ball is not required to see which the US Federal Reserve will choose in 2011.

Ben Bernanke has a PH.D in economics and his entire reputation is wrapped around be an expert on the Great Depression. He is an academic, and academics are very predictable.

When you go through graduate school you have to write a doctoral thesis, which will start your real career. Usually those thesis - if they are successful - lead to books and then more writings that branch off of the original thesis. Creative minds, and there is a difference between being imaginative and smart, then investigate new avenues of thought throughout their careers and come up with innovative theories and groundbreaking research.

That's what 'academic' life is all about.

Most of these 'academics' then spend the rest of their career circling around the theories behind their doctoral thesis. They remain anchored to it and don't deviate for the rest of their lives.

They can't.

Their entire professional reputation is wrapped around that thesis, it is their life's 'work'.

That is essence of Bernanke. He wrote a thesis claiming that the Great Depression happened because the Federal Reserve didn't lower interest rates fast enough after the stock market topped out in 1929 and because they failed to provide enough liquidity (printing of money) is the years after the crash.

There will be no deviation from this 'thesis'.

Bernanke has chosen the Charybdis of inflation - the whirlpool.

Quantitative Easing has only just begun.

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Sunday, December 26, 2010

Happy Boxing Day

Before settling down for the holidays I pre-wrote this post and scheduled it for Boxing Day for you reading pleasure.

I hope every one's Christmas went well.

No doubt driving around to visit friends and family you took time to fill up your gas tank.

If you live in Greater Vancouver, your jolly spirit will have been tempered by gasoline prices which have touched north of $1.20 per litre ($1.22 at some stations).

Whoa!

Gas has gone back to the highs we experienced when oil was at over $140 per barrel, whereas right now oil is at $90 per barrel. What gives?

Even better, government statistics tell us that inflation has fallen to 1.3%.

Uh-huh.

In the inflation/deflation debate, you will see a great many analysts predict that inflation fears are a ways out. They argue that until debt deleveraging runs its course, and credit demand picks up, inflation will remain low. Until the velocity of money increases, we will we not see significant inflation.

I disagree.

Make no mistake... I agree that there is a significant amount of debt deleveraging still to occur.

But we will see these deflationary pressures coincide with inflation.

A blogger I follow articulated it best.

He noted that most folks only understand and recognize demand-pull inflation.

This is the classic demand side, Phillips Curve inflation, that says rising wages, employment and wealth cause economic expansion which leads to more money chasing a static amount of goods.

New, excess demand "pulls" prices up and the result is price inflation.

With deleveraging picking up steam, and credit continuing to contract, demand-pull inflation cannot take hold.

Pretty simple stuff.

But what we have been experiencing, and what will intensify in 2011, is a forgotten strain of the inflation beast called currency induced cost-push inflation.

This type of price inflation is caused by producers and merchants being forced to pass along through higher prices the rising cost of inputs to their products.

Consumers, particularly the lower-and-middle income ones, bear the brunt of the pain.

Your income isn't rising to keep pace with rising expenses and you get squeezed. Hard. And its not luxury items that are going up in price, its the staples. Bread, milk, gasoline, clothes, eggs, meat... the basics that no one can realistically live without.

Bloomberg reports beef prices increased 6.2% above last November, with steak prices up 5.4% and ground beef prices up 7.4%. Pork is up 12.9%. Poultry prices (including turkey) up 3.2%.

Egg prices increased 4.7%. Dairy 3.8%. Cheese 5.4%. Ice cream and related product prices 32.1%.

Cereal and bakery product prices are down 0.3%, but rapidly rising wheat futures mean prices can only be held in check for so long.

Meanwhile coffee, sugar, and wheat are up over 35%.

Consumers are going to be hit with sticker shock and 2011 is going to be a mean year.

Why will input costs go up?

Simple, they are all dollar-dominated and with US Federal Reserve now engaging in Quantitative Easing to infinity, all dollar-dominated assets are going up in price. Significantly.

That's why businesses like McDonalds are already letting consumers know they plan on raising prices next year. As noted by the Wall Street Journal:

  • "Timing and executing price increases can be tricky as McDonald's and other companies are caught between paying more for key materials such as meat and wheat, and keeping prices low to attract price-sensitive customers in a still-weak economy."

Even that bastion of low prices, Wallmart, has been forced to hike prices. Inflation is raging in China and their costs are soaring. Wallmart simply cannot procur products at the same low wholesale costs.

So prices rise in North America while wages stagnate and deleveraging/credit contraction continues.

And it's nothing compared to what's coming.

Currency induced cost-push inflation has already arrived and is at work. Mark my words. In the midst of a tremendous amount of deleverageing, 2011/2012 is going to be a time of skyrocketing prices.

Pants, coats, groceries, gasoline, you name it.

Come next Christmas you will be wondering what hit you.

Good news though. The government will come out with Consumer Price Index stats that tell you inflation is only around 1%.

As I have posted before, the way government calculates inflation was changed in 2000. Everything that realistically affects the CPI has been stripped from the statistics.

Calculate inflation the way it was pre-2000 and inflation is raging at over 7%.

Take another look at those price changes above. Which statistic do you believe... inflation at 1% or inflation at 7%?

"Four legs good. Two legs better." Couldn't have said it better myself, George.

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Saturday, December 25, 2010

Merry Christmas to all!

Photobucket

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Friday, December 24, 2010

T'was the night before Christmas...

One quick item before I settle in to enjoy the festivities.

Finance Minister Jim Flaherty has come out on this Christmas Eve to state his concern about the impact rising interest rates will have on Canadian family budgets in 2011.

Sense a trend here?

Sigh... allow me to retire to bedlam.

To all who come to this blog today I wish for you the happiest of holidays. Thank you for indulging my thoughts, my viewpoints, my ramblings.

Holiday cheer to all the realtors, bloggers and interested parties.

I enjoy the blog and I enjoy the emails/comments.

To those who so diligently send me links, thoughts and comments, it is appreciated.

Happy Christmas to all. And the best of the season to you and your families.

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Thursday, December 23, 2010

A Festivus for the Rest of Us


Ahh the rush of the holidays.

Had planned to do an indepth post today on the silver issue but after spending the morning at the beach with my dog, I got bogged down all afternoon with several lengthy emails. Before I knew it... I had to get ready for tonight's Festivus party.

And in the spirit of Festivus, I have to say that the plethora of news articles generated by our Central Banks debt warnings are nothing short of a 'Festivus Miracle'.

It's no longer a case of 'bitter bloggers' who are crying 'chicken little' that the sky is falling... rather the whole issue now has an aura of legitimacy.

Of course, until a collapse happens... the idea that we are in a bubble simply will not be accepted, even with Mark Carney sounding the alarm about the dangers that lie ahead.

Look for an intense counter-offensive by the Real Estate Industry.

The first shot has already been fired by the likes of Helmut Pastrick, chief economist of Central 1 Credit Union, who said:
  • “I don’t see a price bubble and I don’t see that we need the mortgage criteria tightened as is suggested in some quarters”

Somehow the winter doldrums of January/February aren't going to be as boring as in past years.

Let the airing of grievances begin.

Happy Festivus everyone!

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Wednesday, December 22, 2010

Update

Now back home. Will try and post tomorrow.

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Monday, December 20, 2010

In Transit

unable to post at this time. My apologies. Hope to be back ASAP.

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Sunday, December 19, 2010

Opportunities (Updated - 60 Minutes News Story)

Late last night I got together with some friends for a pre-Christmas coffee.

Invariably the conversation turned to the topics of Silver and Real Estate, triggering an update of sorts.

During the summer, 'S' had asked my opinion about real estate.

Aware of my strident stand on the issue from friends, he wanted to hear first hand my thoughts on becoming a first-time buyer with his girlfriend.

You know my answer.

And I laid out the full case: buying real estate now was a poor decision, interest rates had no where to go but up, and the looming spectres of QE2/US debt problems/and the PIIGS meant that there were far greater investment opportunities out there with which he could benefit from in the short term.

My advice: instead of buying real estate, invest any downpayment he had set aside and by the end of the year he would be way ahead of where he would have been if he bought a condo.

My recommended investment of choice?

Silver. I specifically recommended a silver mining stock known as First Majestic (FR), a stock I have referred to several times before on this blog.

[For the sake of disclosure - at the time I owned some of the stock, I have since sold all that stock and currently I do not own any of it.]

If you read this blog regularly, you know my position on this. I do not consider myself a Gold/Silver 'bug'. I am firmly of the belief that Gold & Silver is not money, nor is it a hedge against inflation (it performs that role very poorly).

Gold/Silver is a hedge, however, against the mismanagement of the state; which at this time and place is the United States with it's world's reserve currency status.

In the summer I told 'S' that it was almost a certainty that the United States would be forced to continue Quantitative Easing on a massive scale. Because of this, I opined, it seemed clear to me that a large segment of the world would be moving into the mediums of Gold & Silver on a scale that hasn't occurred in over 100 years.

At the time of our discussion, that silver mining stock (FR) hovered at the $5.80 mark.

'S' contrasted my viewpoint with the experience of a mutual friend/coworker. He had just sold his condo for $805,000 (bought 10 years ago for $300,000). With no outstanding mortgage, it was all bubblicious profit.

What did the coworker do? He bought half a Vancouver duplex for $920,000 (a property which still required $80,000 - $100,000 of renovations) confident that real estate was the best place for his funds.

I told him our co-worker was crazy. I believe he was throwing away the opportunity of a lifetime to invest that money, realize a massive return and rent in the interim.

Fast forward to the end of the year and we had a chance to review.

So what's happened since August?

Physical silver has gone up by almost 70% and the mining stock First Majestic has gone from $5.80 to a close last Friday of $13.21.

Had our mutual co-worker invested the $805,000 in that stock, he would be sitting on over $1,833,000 today; a profit of over $1 million in just four months!

I re-iterated my point.

Real Estate right now is a tremendously poor investment choice.

There are far greater opportunities for huge returns that completely dwarf real estate.

Even if real estate in Vancouver goes up the estimated 10% next year, it won't compare to what I believe you will see if you invest in Silver.

First time buyers? Same advice. Take you downpayment and invest it.

That was my advice in August and that's my advice now.

Gold & Silver still have a tremendous upside. I can see Silver easily moving to $35-$38 an ounce by spring, hitting at 10-30% correction, and then taking off again.

Why?

The economy is stalling. QE2 is not generating the desired results, Europe is in shambles with huge debt issues still to be addressed in Greece, Portugal and Spain. And looming in the background with it's own debt catastrophe is the U.K.

Meanwhile there is the United States.

The next looming crisis will be the mounting debts of the individual States in America.

Many State and local governments have so much debt — several trillion dollars’ worth, with much of it off the books and largely hidden from view — that it could overwhelm them in the next few years with the problems starting to come to a head in 2011.

If you thought the Wall Street bailouts were massive, they are nothing compared to what is going to be needed for the individual US States. And the American government, along with the Federal Reserve, are not going to allow those States to go bankrupt.

QE 3, 4 and 5 are all but assured.

Canada?

Word is starting to spread that our nation's Real Estate Bubble is making our Banks look anything but sound.

Combine that with a looming credit downgrade for the Province of New Brunswick as well as for other provinces such as Ontario and Quebec and suddenly critics are saying our provincial balance sheets and economies bear a resemblance to the troubled states of Europe than a country that should be considered an oasis in the Western quagmire.

Gold & Silver are hedges against the mismanagement of the state. With what's going on in Europe, the USA, and our country, I can't envision any scenario that doesn't have massive amounts of money pouring into precious metals.

'S' was curious if my advice had changed since summer?

Not a chance.

[As always, please read disclaimer at bottom of this blog]

CBS 60 Minutes Update

Interestingly, the lead story on 60 Minutes tonight is State Budgets: Day of Reckoning. From the introduction...
  • By now, just about everyone in the country is aware of the federal deficit problem, but you should know that there is another financial crisis looming involving state and local governments.

    It has gotten much less attention because each state has a slightly different story. But in the two years, since the "great recession" wrecked their economies and shriveled their income, the states have collectively spent nearly a half a trillion dollars more than they collected in taxes. There is also a trillion dollar hole in their public pension funds.

    The states have been getting by on billions of dollars in federal stimulus funds, but the day of reckoning is at hand. The debt crisis is already making Wall Street nervous, and some believe that it could derail the recovery, cost a million public employees their jobs and require another big bailout package that no one in Washington wants to talk about.

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Saturday, December 18, 2010

Canadian Borrowing Gone Mad

I was working on a post compiling many of this week's debt warnings and rationalizations when I came upon this post by Mish Shedlock.

Mish says it better than what I had prepared, so check out his full post.

Also... adding to this week's round of debt warnings is this Carney piece in the Toronto Star where Carney warns that "the hard part of the recovery is just starting."

Intestingly, came across info that today on BBC Radio 4 (which is designed to serve as offshore radio and is part of the Royal Navy's system of Last Resort Letters - a system that in the event of a suspected catastrophic attack on the United Kingdom, submarine commanders check for a broadcast signal from Radio 4 to verify annihilation of the homeland) the Money Program panel had the consensus view that interest rates would go up substantially in the new year.

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Thursday, December 16, 2010

What's the issue all about, Charlie Brown?

Oh my... mainstream media, the real estate industry AND the blogopshere are all a twitter about the comments this week from the Bank of Canada Governor, the Finance Minister and the Prime Minister.

And they should be.

But what to make of it all?

You have those who argue the powers to be should be taking away the stimulus punch bowl.

Along that line, even the Banks are saying they can't be expected to resolve the problem and that government needs to change the rules, ie. reducing the allowable amortization period.

According to CMHC’s own mortgage payment calculator, Canadians were able to spend 15% more for a house (using the same downpayment) by merely by moving to a 35-year amortization mortgage from the traditional 25-year version. When the government did this, Canadians did't take the chance the make their mortgages more manageable... they simply plowed forward buying the most house they could thus driving up debt and prices.

Banks can't stop them. So Banks are saying, change the rules.

The next salvo will come from the real estate industry. In fact, it already has. The pressure is already being applied urging officials not to get hysterical about the imminence of a debt crisis. The argument being that we're indebted, but because of the bubbly value of our real estate - we're also wealthy.

(Just like our American cousins were in 2006).

We can see this R/E driven media manipulation on a number of fronts.

Financial Insights breaks down the nonsense argument that we are sidestepping the US collapse.

And VREAA has transcribed a CBC interview that essentially argues that all of our debt is 'good debt'.

The battle has begun.

The end of the CBC interview contains what is the central issue to the whole debate. Says CBC's Ian Hannomansing:

  • “Of course the wild card is interest rates. At historically low levels now, the BOC Governor has pointed out there is no guarantee how long they’ll stay there.”

Ahhh, yes... there it is.

It's all about interest rates, Charlie Brown.

If they stay low - no problem.

If they go up to the historical norm of the last 20 years - huge problem.

And if, as many fear, they return to double digits as the bond market overwhelms both a debt ridden Europe and America... well then we are ground zero for a massive collapse.

It's all about interest rates. And there's a good reason Carney said,

  • “The crisis is not over, but has merely entered a new phase... when interest rates begin to rise again, the repercussions may be swift, fierce and have the potential to catch many [Canadians] with debt loads they can no longer afford."

The debt to asset ratio is a red herring. So is the debate about amortization periods.

The issue is what's coming and the amount of debt everyone is carrying.

All government can do at this point is to try and prevent people from piling on more debt. But that won't diffuse the current debt dilemma.

Strip it all away and all that matters is you and your own personal situation.

Carney has told you what's coming. Are you ready?

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Wednesday, December 15, 2010

Lux Æterna: Cassandra's Nightmare

I recently read an analogy about the stock markets by Jawad Mian of Q Invest which could equally apply to our Canadian Real Estate markets.

In Greek mythology, Cassandra was a princess of the legendary city of Troy, and the most beautiful of King Priam’s daughters.

Cassandra was seduced by Apollo, who gave her the ability to predict the future. But when she refused herself to him, he cursed her by making people disbelieve her predictions.

So Cassandra went around knowing and predicting the future, telling people what was going to happen, but no one ever believed her. She foresaw the fall of Troy, but couldn’t prevent it.

Cassandra is a figure both of sagacity and of tragedy, where her combination of deep understanding and powerlessness exemplify the tragic condition of humankind.

I find the mythic origins of the Greek prophetess and the metaphorical application intriguing in so far as it relates to the Canadian Real Estate markets.

What Cassandra sees is something dark and painful that may not be apparent on the surface of things or that objective facts do not corroborate.

She may envision a negative or unexpected outcome; or a truth which others, especially authority figures, would not accept.

In her frightened, ego-less state, she may blurt out what she sees, perhaps with the unconscious hope that others might be able to make some sense of it. But to them, her words sound meaningless, disconnected and blown out of all proportion.

At the turn of the century, there were some who fretted that higher interest rates might soon return.

Dismissed as scaremongering Chicken Little's who thought the sky was falling, they were further vilified as Central Bankers in the Western World cut interest rates to stimulate the economy out of the dot com collapse.

"The Central Bankers are telling us interest rates will stay low," the housing bulls cried. "Now is the time to buy!"

And they were right.

As the American housing market imploded, and the 2008 Financial Crisis took hold, Central Bankers swore to cut interest rates drastically to resuscitate the economy.

"The Central Bankers are telling us interest rates will stay low," the housing bulls cried. "Housing in Canada will continue to rise!"

And they were right.

But over the last 12 months that has changed.

First it was Alan Greenspan, former chairman of the US Federal Reserve, who started sounding the warning bells.

Then Canada's Central Banker, Mark Carney, started with his warnings.

For most of this year Carney has intoned his cautionary tale: Interest rates will be going up - sharply. Make sure you are ready.

For years the housing bears have been dismissed because the signs coming from the Central Bankers undercut the primary reason the bulls said housing would collapse: interest rates.

Changing viewpoints is a gradual process. Flipping from bullish to bearish, and vice versa is difficult. We remember what most recently rewarded us, and internalize that.

Cassandra has become the archetype for many prophetic characters who are either ignored or cannot be comprehended until after an event has occurred.

Our catastrophic failure to heed caution has much to do with our preference to look at the surface rather than what underlies appearances.

Both Greenspan and Carney are issuing warnings about higher interest rates, mainstream media are regularly publishing stories about the existence of a housing bubble, about our extreme debt situation and the American Experience reflects back at us.

And still the warnings sound meaningless, disconnected and blown out of all proportion.

Sometimes illusions are far more comfortable than reality. That may explain the unchecked optimism many continue to have in regards to the Vancouver Real Estate market.

The housing market will soon start a steady erosion that will scar the life of anyone invested on the wrong side. That erosion will be caused by significantly higher interest rates.

The Greek philosopher Solon said: ‘Observing the numerous misfortunes that attend all conditions forbids us to grow insolent upon our present enjoyments. For the uncertain future has yet to come.’

Greenspan and Carney have made it clear now that the uncertain future is almost upon us.

  • “The crisis is not over, but has merely entered a new phase... when interest rates begin to rise again, the repercussions may be swift, fierce and have the potential to catch many [Canadians] with debt loads they can no longer afford."

Soon the Central Banker safety net will be withdrawn, or the bond market will negate their interference.

Will it be a Requiem for the Canadian Housing Dream? More importantly... will you be forced to mourn your own personal circumstance out of insolence?

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Tuesday, December 14, 2010

Bonus Tuesday Post: More Carney Warnings on Debt

Bank of Canada Governor Mark Carney is speaking out again today on debt.

In an interview today with BNN, Carney issued yet another stern warning.

Clearly our central bank is highly concerned about the fact that Canadians' debt-to-income ratio is now higher than Americans'. This is the first time in 12 years we have put ourselves in this position.

Carney commented that Canadians’ borrowing has entered "uncharted territory" and the risks associated with the level of debt households are carrying is something that "we all have to take seriously."

(please... keep the gagging down out there, blogoshpere)

Said Carney:

  • "We are in uncharted territory, household debt-to-income is higher than it’s ever been. The level of vulnerable households in Canada is high, and will be substantially higher if interest rates adjust, and that’s something that we all have to take seriously."

Once again the main concern is while interest rates aren't likely to rise until about mid-2011, Carney is worried that too many Canadians won't be able to handle higher payments when they do rise.

Of particular interest is Carney's assertion that the longer that rates stay low, the more abruptly they may need to rise to curb inflation when the economy improves.

More Carney:

  • "The issue is the sustainability of the situation. "No country can grow debt faster than income persistently. Ultimately it’s a shifting in time of consumption."

Perhaps the most intriguing element of Carney's warnings the last couple of days has been his caution that the Bulls should not take comfort in statistics that show, on average, growth in Canadians’ assets are vastly outpacing their debts.

Carney pointed to other countries whose banks made the "classic mistake" of lending based more on borrowers’ assets than their liabilities.

  • "The debt endures, the asset prices go up and down. People in Ireland, people in Iceland, people in the United States that took out big mortgages on assets that were worth a lot more for a long period of time, found out that the asset’s not worth very much but the debt’s worth exactly what it was when I took it out."

Ahh, yes... there can be a lot more 'HELL' in the acronym HELOC than people appreciate.

Carney is telling us Real Estate doesn't always go up. He sees a downturn coming. As in the United States, a slight downturn is what started toppling the dominoes.

Ultimately this will be our undoing as well.

"Sell now or lose out on that equity forever."

To watch the BNN interview:

Click here for Part One

Click here for Part Two

Click here for Part Three

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Silver-Gate Intensifies

Faithful readers will recall my earlier posts on Silver-Gate here, here and here.

Basically the Commodity Futures Trading Commission (CFTC) has alleged that JP Morgan and HSBC have engaged in "fraudulent efforts to persuade and deviously control the price of silver."

In addition over six separate lawsuit have been filed alleging breaches of the Racketeering Influenced and Corrupt Organizations (RICO) Act by these two banks.

Now... the practice of naked short selling has long been a serious issue on Wall Street.

But of what we know about the scope and intent of JP Morgan and HSBC's actions in this particular short-selling scheme... well, it dwarfs any other similar attempt to manipulate a commodities market.

Intense scrutiny and attention has been brought to bear on JP Morgan in the last few months as a result of these investigations. This has severly restricted their ability to fully carry out their actions.

Silver, as a result, has shot up over 65% since August.

Many believe without JP Morgan's manipulation, silver will return to it's historic 1:16 ratio with gold. That would put silver at almost $100/oz instead of the current $29.58.

Critics, of course, say there is no manipulation and that nothing will come of this.

As reported last night on Zero Hedge, JP Morgan has come out and admitted it's massive short position and intends to dramatically reduce it.

If the topic interests you, read the Zero Hedge post.

At the moment, many believe the pledge to reduce it's holdings hasn't occurred yet and any claims that it has reduced it's position are just P/R to reduce negative media attention.

The saga still has a ways to play out. However... I suspect the almost 70% rise in the value of silver since August is nothing compared to what lies ahead.

Overnight, silver has surged another $0.30 when I wrote this (about 10:30pm last night). Action in silver is very high.

With that in mind, here is an analysis from the daily report of a silver trader I follow:

  • The total silver comex open interest fell by 935 contracts to 129,712 from Friday's reading of 130,647. The front delivery month OI registered today at 483 dropping 46 contracts from Friday reflecting the 50 notices sent down for servicing. The estimated volume today on the comex was an astoundingly high 111,854. The banking cartel threw everything at the longs trying to keep the price from escalating. The confirmed volume on Friday, ie. the day of the raid was also very high at 63,196. So if I feel that 63,196 is high you can just imagine what traders are wondering when they see an estimated volume at 111,854. By the way, that represents 555 million oz of silver or about 1 years production. Makes sense to me!! It looks like the bankers will try another raid tomorrow as the volume supplied today was just too much. The bankers are trapped and they will do just about anything trying to extricate themselves from their massive short positions in both silver and gold.

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Monday, December 13, 2010

Bonus Monday Post


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Another significant warning about interest rates...

Time after time I have said that when it comes to the Real Estate Bubble in our little hamlet on the Edge of the Rainforest, the issue is all about interest rates.

When they go up dramatically, the bubble will burst in spectacular fashion.

Until they do, the bubble bears will have to withstand the taunts and barbs of the bulls.

And while bears have uttered the warning for several years now, rates have been artificially suppressed by stimulus initiatives and the bulls have chortled about it every chance they get.

Bears have also had to endure the criticisms from friends and family who chide them because the collapse has not come.

For those of us who can see what is coming, the taunts are insignificant.

Unless property has been bought to be flipped, the time frame is irrelevant. Buying five years ago or buying yesterday is immaterial... interest rates will destroy you because the amount of your mortgage is so massive that the amount still owing cannot withstand the level of interest rates we are about to be saddled with.

And the fact of the matter is most have not bought their real estate to flip.

What we see coming is the day the manipulation of interest rates end - either because governments have decided to withdraw stimulus or because governments can no longer effectively manipulate them (ie. the bond market forces interest rates higher).

And judging by the warnings from those who matter, that will be sooner rather than later.

Bank of Canada Governor Mark Carney has come out with his sternest warning yet of what lies ahead.

In a speech to the Economic Club of Canada today in Toronto, Carney said efforts by various governments to stimulate the economic recovery are keeping borrowing rates low. But...

  • "the crisis is not over, but has merely entered a new phase... when interest rates begin to rise again, the repercussions may be swift, fierce and have the potential to catch many with debt loads they can no longer afford... The Bank of Canada will set interest rates based on inflation, not on whether a large swath of Canadians have taken on too much debt. The bank may also raise interest rates even in a low-inflation environment to discourage risky borrowing."

Honestly... short of pounding you over the head with a shovel, how plainer can the looming future be made for you?

Canadians, of course, will respond with the same fairy tale denial that is almost a mantra now... "the government would never allow interest rates to go very high because it would hurt Canadians too much".

Okey-Dokey... Joe six-pack, allow me to introduce you to Stephen Harper, Prime Minister of Canada:

  • "The [current] situation is the result of individuals' choices, and the government can't control how they spend."

If you didn't catch it, that was your Prime Minister officially hanging you out to dry.

For years the refrain has been "buy now or be priced out forever."

For those who can read the writing on the wall, the refrain has become, "sell now or lose out on those capital gains forever!"

Problem is, too many Canadians are illiterate.

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Sunday, December 12, 2010

Cartoon on Vancouver Real Estate and Hyperinflation

Above is the latest in the cartoon fad, this one on Vancouver Real Estate.

You always have to love those who make bold predictions.

Recently we've had those who say real estate will keep going up, up, up come out with their comments that boldly proclaim there is no bubble.

As always, it's great to chronicle their positions for future reference.

The blog Financial Insights does a great job of recording a couple such items in their Sunday post with 2 references from Toronto and 1 from the article in the Edmonton Sun.

Speaking of stating their position on controversial subjects, let's turn our attention to John Williams. I have told you before about the author of the excellent website Shadow Stats. Williams is very straightforward in his views about inflation and hyperinflation. His predictions about Hyperinflation are intensifying.

A number of you have emailed me with items about the recent changes in the bond market as a precursor to the start of the tide turning on the American dollar.

Williams, I am sure, would agree with you.

Not only is he convinced significant dumping of US dollars will begin in the next 6-9 months, but he is convinced we will see high inflation in that period too. The youtube video title shrieks "hyperinflation will start in the next few months", but Williams doesn't exactly say that in the interview.

Point of interest: he is calling for ultimate hyperinflation in the United States, but stresses he doesn't see hyperinflation in Canada.

At the end Williams suggests you watch for a massive dumping of US dollars as a trigger sign. It brings to mind another youtube clip that outlines a hypothetical playing out a US dollar collapse in simulated news events. I don't agree with all of it, but I thought I would post it for you to check out.

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Saturday, December 11, 2010

Carney a hero?

Courtesy of our friends over at VREAA, our attention was drawn to BMO’s 10 fun economic, financial facts for 2010 to impress friends at parties.

According to one of the 'fun' facts, the deputy chief economist at BMO Nesbitt Burns tells us that:

  • "Vancouver posted the fastest increase in house prices among major Canadian cities this year, averaging 15%. Tougher mortgage insurance rules, a 13% slide in sales in the city, a 13% rise in new listings this year, the new HST, a feature story in Business Week about how Vancouver was the last housing bubble in the world, a website comparing million-dollar homes in the city to crack houses... none of it mattered when stacked up against shrewd investors from China."

Shrewd?

We'll see in five years.

I can't help but recall the comments of a friend's Dad made about 12 years ago in Richmond.

He is a realtor, and Canadian born of Asian descent. Commenting on a new Chinese restaurant that was lined up out the door he said, "Of course there's a line-up. It's new. And Asians flock in packs to the latest fad. We are such lemmings."

Such self-depreciating humour was not out of the ordinary, but it was the first time I had heard him (or his son) make the 'herd mentality' comment. When I asked about it he stressed - with seriousness and sincerely - that it was a common trait of the community.

I wonder how much of that is a factor now.

More importantly, I wonder why more on the west side of Vancouver don't seize on the opportunity.

Carney has move heaven and earth to stave off a collapse of our real estate market in 2009 and successfully re-inflated it. He also spent the last year warning Canadians about taking on so much debt.

Many have been saying, WTF... you facilitated the massive debt orgy. Raise interest rates to stop it!

Carney, for his part, has stressed over and over that the emergency level interest rates are to aid businesses... that homeowners must show prudence in their decisions.

But has Carney actually been doing current homeowners a favour?

The real estate bubble is going to collapse. He knows it, you know it.

What Carney did was give you the precious gift of time.

With the real estate bubble collapsing world-wide, Carney resuscitated your fundamental asset and bought you time.

In Vancouver all that the mainstream media (and R/E media) have been able to gush about for the past 12 months is how wealthy Asians have been coming in to buy up our overpriced real estate.

(Remember, China has pumped more stimulus on a per captia basis into their economy than has America. This money has found it's way into their stock markets and is credited with fueling both domestic and foreign real estate purchases)

For 12 months Carney has warned, cajoled and scolded us about debt.

Short of hitting you over the head with a stick, he has told you to get out of massive debt NOW before it is too late.

What an opportunity!

With the real estate market resuscitated, Vancouver homeowners can realize once-in-a-lifetime capital gains from the real estate bubble at a time the rest of the world have had theirs disappear, never to be seen again.

Should we vilify Carney or praise him?

Ultimately we are all responsible for our own actions, our own decisions.

Carney has given current homeowners a chance to save their equity, pull it out, and put it in places it will grow exponentially in the next phase of the crisis.

And served up for us is this supposed steady stream of stimulus imbued Asians who will buy with cash.

I am less inclined to blame Carney for facilitating those Canadians who have tanked up even further of massive amounts of debt since the crisis began, than I am inclined to be highly critical of those who should be properly counseling us to make prudent decisions.

From where I sit, the real villain's are the R/E shills who exploit the situation and the media who have abdicated their responsibility to inform in favour of catering to their main advertising base.

The latest shining example of this condition comes from the blog Alberta Real Estate Watch who brings us this December 4th, 2010 missive from the Edmonton Sun (click image to enlarge):

Basically the article tells you that"investing in real estate is the proven way to become a millionaire," and it will give you "an asset pool that appreciates every year"

Submitted by Erica LePan of The Mortgage Group Alberta, it is nothing more than manipulative advertising sans the typical investment warnings that 'past performance is not indicative of future returns'.

Worse, courtesy of the Edmonton Sun, it carries the aura and appearance of legitimate news.

Critics say Carney is an enabler with his low interest rate policy.

Perhaps. But at least Carney is warning Canadians about the consequences of their actions and he has given Canadian homeowners an opportunity that virtually every foreclosed-upon and distressed American homeowner would give their eye teeth to have right now.

The likes of LePan and the Edmonton Sun bear far more responsibility, IMHO.

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Friday, December 10, 2010

A significant day of reckoning is coming.

If you ever have any doubts about what looms on the horizon in the months ahead for Vancouver Real Estate (in general) and the North America economy (in particular), bookmark today's post and refer back to it.

Last week, after the U.S. debt panel failed to agree on measures to create more than $4 trillion in budget cuts over the next 10 years, BNN spoke to David Stockman, the former Director of the U.S. Office of Management and Budget under President Ronald Reagan.

If there ever was a proponent of the current measures to repair the American economy, you would figure an architect of Reagan's trickle down economics would be it.

You'd be dead wrong.

Stockman spoke about the American situation and where America goes from here. He has a stark analysis of his country's situation.

You will not find a more succinct and insightful analysis of the current economic situation in 12 minutes anywhere. Click here to see the interview, and I highly encourage you to watch the full clip before it cycles off BNN's archive list.

You will have no doubt, after watching this, about the direction that the economy will ultimately follow.

A couple of quickly transcribed excerpts:

  • "It's just a further confirmation that we have a total paralysis/stalemate in our fiscal governance process, the whole process is in denial... What is actually happening is that Washington will be ADDING $350 Billion to next year's deficit (instead of cutting). They will extend the Bush tax cuts, they are going to extend the so called external tax patch - that's $60 Billion - they're going to extend a lot of the tax credits - that's 10's of Billions of dollars - what's more they're going to extend unemployment insurance for another year - that's another $60 Billion... and it gets worse from there.

    We're really rolling the dice thinking that somehow we can borrow another $5-6 Trillion - that's really what's baked in the cake - and that somebody's going to buy all these bonds. The fact is the only buyer on margin all of these bonds, hundreds of billions a month, is the Federal Reserve, in this so-called QE2. But it's just out and out money printing, monetization, and when they stop I think there is going to be a real day of reckoning in the global bond and currency markets because there is no indication anyone in Washington recognizes the gravity of the situation."

Stockman goes on the suggest both the Democrats and Republicans are completely unable to grapple with the breadth and depth of cuts that are needed combined with the massive amount of taxes that have to be increased. As a result America is...

  • "... drifting towards the wall waiting for the bond market system to wake up and take action. I don't know when that is going to happen, it may be in the next months, it may be in the next years, it may take longer but sooner or later there is going to be a day of reckoning."

Stockman then discounts those who believe the Reagan era of 'trickle down economics' is a solution to the current problem.

  • "I think the Fed went off the deep end in the 90s and especially in the last 4 or 5 years with very easy monetary policy of low, low interest rates that were inappropriate and encouraged businesses and the household sector to massively leverage up, that led to the crisis in 2008 and we're still only begining to dig our way out of that... We're going to have a significant day of reckoning here, there is no recovery."

The most chilling part is Stockman's assertion that the bond market is going to force America's hand before long.

As I said yesterday, this is EXACTLY the fear expressed by former US Federal Reserve Chairman Alan Greenspan.

We are seeing the effects of what happens when the bond market does this. Just look at Ireland, Iceland, Spain, Portugal and Greece.

Are you ready for double digit interest rates yet? They're coming.

Of course naysayers will simply dismiss this as yet another post from a disgruntled bear blogger fearmongering about interest rates.

Hey... speaking of fearmongering about interest rates, Bank of Canada Governor Mark Carney sent out another warning to Canadians yesterday.

In the December issue of its Financial System Review, the Bank of Canada warned Thursday that the risk of another global economic shock is rising and Canadians may not be prepared for it.

And in a veiled hint that the Bank of Canada won't shield Canadians they way they did after the 2008 crisis, the Bank said "Canadians won't be spared another shock because during the current period of tough economic times, they have continued to take on debt."

How can that be, Mr. Carney? How could be possibly suffer? I mean... you will slash interest rates to dirt so the impact won't be felt, right?

Apparently not.

  • "Developments since (June) suggest that the vulnerability of the Canadian household sector has increased."

    "The probability of an adverse labour market shock materializing is judged to have edged higher in recent months, owing to the downward revision... to the outlook for the global and Canadian economies."

Sal Guatieri, senior economist with BMO Capital Markets, said in a commentary the review suggests the bank won't resume increasing rates until the global economy picks up and Europe's credit crisis ebbs.

  • "However the bank is also cognizant of the risk to household finances (and the economy) of keeping rates too low for too long. This suggests it has every intention of guiding rates back toward more normal levels at the earliest opportunity, which in our view, is likely in May."

Hiking interest rates come May? Is this why Carney issues another direct warning to Canadians by saying:

  • “Households bear ultimate responsibility for ensuring that they will be able to service that debt in the future.”

Umm... why do you say that Mark? Are you getting ready to hand us debt serfs out to dry?

What about our 'sound Canadian banks', if I can't pay my debts, won't that hurt them?

Well it seems the BOC goes to great lengths to warn that the potential for harm to our 'sound banks' this time around might be severe.

Carney suggests that high household debt this time around is going to get kicked by high interest rates. This will affect Canada's banks 'as borrowers lose their ability to make debt payments.'

Now why would Carney hike interest rates this time around when he didn't in the last crisis?

The source of the problems all stem from from other countries, the bank said.

(Ahhh... time to start connecting the dots... see Stockman's comments above re: bond vigilantes wrath being unleashed on the United States)

The BOC forsee's the very real possiblity of a global trade war. It also foresee's the looming threat of much higher interest rates.

Carney see's them coming. He's warned you time after time and given you almost a year's advance warning.

The good news?

Re/Max was far more effective in manipulating the P/R machine two days ago and got far more coverage in the press to convinced you that Real Estate everywhere in Canada can only go up, up up (at least 10% next year) and that interest rates are going to stay low for a while.

Thus, if you are smart, it should be easy to dump your massively leveraged real estate on some simpleton or wealthy Asian and prepare for what's coming.

Speaking of what's coming, did you catch this Globe and Mail article profiling the musings of Stephen Jarislowsky, billionaire investor and CEO of Montreal-based Jarislowsky Fraser Ltd?

Jarislowsky offered his thoughts on the next lurking financial disaster.

  • "In Canada the hardship still lies ahead. Our houses are still 20 to 30 per cent above normal levels, salaries are shrinking and a lot of Canadians are heavily indebted. There’s a lurking disaster, to the extent that you have reduction of purchasing power and we are just not saving hardly anything as a nation. That’s pretty bearish. I think things are going to get a hell of a lot worse. We still have a trade deficit today despite the fact that commodity prices are incredibly high. I hope I’m wrong but I think Canada is on the edge of a lot of trouble."

What drivel, eh?

You can either connect the dots or you can dismiss Stockman, Carney and Jarislowsky et al as wanker renters who live in their parents basements while hiding behind their computers to dump on real estate investors.

If you do dismiss them, tho, don't say you weren't warned.

And remember... buy now or be priced out forever!

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Thursday, December 9, 2010

Ben Bernanke meet Jon Stewart

In case you didn't see it, Jon Stewart offered his observations on US Federal Reserve Chairman Ben Bernanke's Sunday interview with 60 Minutes.

I can't embed the clip, but you can watch by clicking here.

Bernanke said on Sunday that "one myth that is out there is that we are doing is printing money. We're not printing money."

Bernanke made this statement in response to the Fed's actions of creating money out of thin air and buying government bonds.

Stewart juxtaposes Ben's latest 60 Minutes interview against another 60 Minutes interview the Chairman gave just 21 months ago when he was justifying buying corporate assets from the banks.

  • Bernanke: "To lend to a bank we simply use the computer to mark up the size of the account that they have with the Fed, so it's much more akin, although not exactly the same, it's much more akin to printing money than it is to borrowing."

    Interviewer: "You've been printing money then?"

    Bernanke: "Well... effectively and we need to do that"

So, as Stewart notes, the difference was that then the Fed was creating money out of thin air to buy corporate assets and now it's buying government bonds.

How is it that you were printing money then, but now you're not?

Stewart observes, "I guess Bernanke was looking at the average age of the 60 Minutes viewer and betting that anyone who saw him last year is dead now."

While humorous, it does expose something that many critics are sharply focusing on: Bernanke came on national TV and lied to the American people.

In fact, as Michael Pento of Euro Pacific Captial writes, Bernanke came out and told 2 big lies.

  • Lie #1 - The Fed isn’t printing money. Bernanke stated: “The amount of currency in circulation is not changing…the money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities.” Given that it is the Treasury Department’s Bureau of Engraving and Printing, not the Fed, that actually prints paper money, his statement is technically correct while substantively false. However, Bernanke is buying bank assets with Fed credit. With such an arrangement, printing becomes unnecessary.

    According to gentle Ben, credit created to buy something should not be considered money and has no affect on asset prices? But if that’s true, why is he concentrating his buying in the middle of the Treasury yield curve. His stated purpose is to boost bond prices and lower yields in order to stimulate borrowing and aggregate demand. So pushing up bond prices is an act of inflation. Bernanke similarly contradicts himself by saying that he isn’t creating inflation, while at the same time claiming that his easing campaign is designed to boost asset prices to combat the phantom of deflation.

    And by the way, the Fed is causing money supply to increase significantly. The compounded annual growth rate of M2 is over 7% in the last quarter. Apparently in the eyes of the Chairman, a 7% annualized increase in the broad money supply isn’t considered significant.

    Lie #2- Bernanke is “100 % confident” that, when necessary, the Fed can control inflation and reverse its accommodative monetary policy. He stated, “We’ve been very, very clear that we will not allow inflation to rise above 2 percent. We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time.” He failed to mention that the Fed doesn’t have the will to drain money from the system, without which all tools are useless. The Fed has consistently demonstrated its unwillingness to take the appropriate actions when necessary. In claiming he is 100% confident in his ability to control inflation, Mr. Bernanke ignores the record that during his tenure he has misdiagnosed the economy.

    In June of 2006, Bernanke culminated his inflation fighting efforts by raising the Fed Funds target rate to 5.25%, after CPI inflation reached 4.2%. But that interest rate was enough to help burst the housing bubble and to spark an international credit crisis. Bernanke was completely unaware that the Fed actions had created an economy that had become completely addicted to artificially-produced low interest rates and inflation.

    Shortly after the collapse of the real estate market and the ensuing truncated deflationary-depression, Bernanke took interest rates to near zero percent. But if the Fed was ever really serious about unwinding excessive leverage, the time had clearly arrived. Instead, the U.S. economy has become more addicted to free money than at any other time in our history.

    Commodity prices are soaring once again and the real estate market, banking sector, and the overall economy cling precariously on the arm of government induced bailouts and low interest rates. Even worse, our government has massively increased its level of debt, which now stands at just below $14 trillion. Once the rate of inflation eclipses the Fed’s 2% target rate, which appears likely, how then will the Fed raise rates to contain it? Could the economy then withstand an increase in the cost of home ownership? Most importantly, when will Mr. Bernanke find it politically tenable to dramatically increase debt service payments for the Federal government? In truth, there is never a convenient time to have a severe recession or a depression. Unfortunately, reality can be extremely inconvenient.

    Bernanke was accurate in saying that the economy is not expanding at a sustainable pace. Of course, his prescription was the same as it always is; print more money in the misguided belief that inflation will lead to growth. As such, he indicated that it’s possible that the Fed may actually expand bond purchases beyond the $600 billion announced last month. (Remember that the $600 billion comes after the $1.7 trillion that has already been printed, which failed to produce anything much beyond a weaker dollar). Therefore, the country can look forward to yet more inflation, continued anemic GDP growth, a poorer citizenry, and a vastly lower standard of living.

All of this is followed by news that US Treasuries have suffered their biggest sell off since the collapse of Lehman Bros (see reprint of Financial Times story on this blog).

Thus when QE is supposed to be lowering interest rates, they are rising.

This dynamic is the one which all the R/E shills in the Village on the Edge of the Rainforest remain oblivious/ignorant to.

Bernanke can say he will keep interest rates low for years to come. But the market vigilantes have the ultimate say.

I've posted on this blog numerous times the fears stated by former Federal Reserve Chairman Greenspan that this could happen.

Dramatically higher interest rates are coming. It's only a matter of time.

And when they come, as Bank of Canada Governor Mark Carney has been warning for months now, you don't want to be holding debt of any significance that you can't service at interest rates at the historic norm (8.25% or higher).

People mock the Bears because the collapse has not come yet and anyone who has bought in the last 7 years is way ahead than if they had listened to the Bears.

But unless they cash in on that equity now, hardly any of those buyers will survive what is coming.

Which is why two and a half years ago I became a staunch real estate bear and highly advocate liquidating debt, eschewing debt accumulation and investing to prepare for what is coming.

Regrettably few will appreciate the advice until it is too late.

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Email: village_whisperer@live.ca

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