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Wednesday, February 29, 2012

Wed Post#2: Wild day for Gold, Silver and revelations in US Treasury's


So after wild gains yesterday - particularly in Silver), both Silver and Gold plunged dramatically today. Silver was down over $2 per ounce while Gold dropped over $100 intraday.

Algo driven liquidations followed Ben Bernanke's testimony before congress as he implied that QE3 is off for now. As the cascading price triggered the $1700 sell limits, Gold fell all the way to $1685 then reversed back over $1700.

The fundamental elements driving Gold/Silver remain the same and I note that even more dats is coming out confirming China's move away from the US Dollar.

Today the US Treasury department released its adjustment to foreign purchases of US Treasury bond holdings.  This bi-annual exercise updates the monthly reports.

A great many naysayers have been expecting the revision to show that China has in fact been building up its US Treasury stake (following the now traditional transfer of UK purchases to China), contrary to the reports that they have been dumping those Treasurys.

The reality is that China has indeed been dumping its US exposure.

China sold over $100 billion in Treasurys in December alone (bringing its total to $1152 billion,down 12% from its June total of $1307 billion.

This means the US will be forced to rely ever more on domestically funded purchases of USTs... which means Primary Dealers and the Federal Reserve.

The biggest surprise from the data is that, contrary to previous speculation, Russia has not been dumping its Treasurys.

In fact the country's holding of $150 billion are the same as they were back in June, and over $60 billion more compared to the pre-revised number.

The key element here is that unless the US finds substitute demand for it's Treasurys, the only remaining buyer will be the entity that already has the largest holding of US paper - the US Federal Reserve.

The American's are monetizing their debt.

How much longer before other nations start to follow China's lead?

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Wed Post#1: Inventory Listings


Back on Saturday we made a post about the surge in Vancouver Real Estate listings inventory and asked what Macleans had stated on their magazine cover: Is it time to panic?

We noted that the blog Vancouver Condo Info was reporting daily updates on sales and listings with information provided by local realtor Paul B.

Those listings numbers have been telling an interesting tale since the beginning of the year.

On January 3rd, 2012 there was a total inventory of 10,671 listings.

By February 1, 2012 that number had soared to 13,368.

As of today we cracked the 15,000 mark with a total of 15,012.

Most of the surge came in January, but the trend has continued in February as listings of properties for sale are far outpacing properties sold. Take a look at data posted so far for in the month of February:


Date   Listing  Price(+-)  Sold   Inv    Inv(+-) 
Feb 1     305      74        38   13,368  
Feb 2     251      64       155   13,447    79
Feb 3     249      56       122   13,548   101
Feb 6     325      82       113   13,691   143
Feb 7     281      70       140   13,793   102
Feb 8     516     138       214   14,013   220
Feb 10    234      63        94   14,108    95
Feb 13    314     106       133   14,187    79
Feb 14    281      85       147   14,273    86
Feb 15    254      60       112   14,365    92
Feb 16    252      94       110   14,411    46
Feb 17    225      84       148   14,436    25
Feb 20    317     133       141   14,526    90
Feb 22    239      96       135   14,664   138
Feb 23    222      67       108   14,709    45
Feb 24    220      88       112   14,775    66
Feb 27    294     129       107   14,931   156
Feb 28    294     120       179   15,012    81

In two months we have added almost 50% more inventory to the total amount of Real Estate for sale.  Each and every single business day this year has seen more properties listed than sold.

And only now is the Housing Bubble truly going mainstream.

On the right you will see we have added a tracking box for daily inventory totals.  Will the onslaught of listings continue through what should prime selling time known as the 'Spring Market'?

At what point does inventory have significant impact on prices... 18,000? 20,000?

We will keep daily track on the left to chart this trend.

Hat tip to wreckonomics for the graphic above.

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Tuesday, February 28, 2012

Tues Post #3: Good News... HAM still wants your Real Estate!!!


Worried about all that negative press on Real Estate the last few months?

Macleans Magazine getting you down with their cover stories telling you "you're going to get burned" with the real estate you own?

Concerned that houses listing for over $2.5 million on the West Side of Vancouver aren't selling?

Well flush those blues away homeowner, the Canadian Real Estate Magazine has good news for you!
"If you thought Chinese investors were starting to lose interest in Canadian real estate, think again. According to a new report, both Vancouver and Toronto are forecast to be this year`s most popular destinations for Chinese overseas property investment."
Whew... thank goodness.

And who wrote this good news report?

I'm sure it came from a credible, non-biased source, right?

Well... it comes from Derek Lai, director of international properties for Colliers International real estate services. And if the Real Estate mag's article is any guide, there's no real justification offered for the continued influx of HAM other than the fact that it has come in the past and will continue to do so in the future.

Sounds like you can take it to the bank to me. Feel better now?

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Tues Post #2: The Greek Issue Update - ISDA to meet


On Sunday we talked about the Greek Issue and talked about how the ISDA, the International Swaps and Derivatives Association Inc, are the people who determine whether a credit event is a default or not.

We also mentioned that the ISDA is heavily influenced (if not largely controlled by) the very big 5 US banks who hold 97% of the credit default swaps that would have to pay out if the Greek Issue is determined to be a default.

Now there are those who believe you will never see the ISDA declare the bondholder 'haircut' a default because it could potentially ruin the very members who play such a large part in the ISDA and the derivatives market.

It seems we will now get a chance to see if that is true.

Today the ISDA announced that a meeting will be held at 11am GMT on Thursday, March 1 to determine whether a credit event has occurred.

Will the big 5 US Banks be forced to pay out on their derivative insurance?

Or will major European Banks and Hedge Funds be left holding the bag with their 'insurance' rendered useless - thereby triggering another Lehman/MF Global moment in a few months?

Someone I don't think it will come as any great surprise that the ISDA will announce that the recent Greek solution was a voluntary agreement and 'by the books', thereby avoiding a CDS trigger.

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Tues Post #1: Full Macleans Article: "You're About To Get Burned"



Time to panic about the housing market
Why is everyone ignoring this unfolding disaster?
by Tamsin McMahon

====================

Back in the heady days of 2005, America looked like an awfully nice place to buy a house. Home prices were marching ever upwards. Home ownership was at record levels. Mortgage rates were at historic lows. Unemployment was falling while the economy was growing at a healthy clip.

Home sales had started showing their first signs of slowing that year, but that didn’t sway the National Association of Realtors from its persistently sunny view of the country’s housing market. “We’re confident that housing is landing softly,” David Lereah, the association’s chief economist, wrote in a November 2005 report just before house prices started a descent that would eventually wipe out nearly $30 trillion in global wealth.

Looking back, the signs of a country burying its head in the sand about a housing bubble seem obvious: the well-told tales of tricky teaser rates, of mortgage fraud and of gigantic home loans handed out to buyers with no income or assets. Household finances were even sketchier. In 2005, the average American owed $1.30 in debt for every dollar of income. Home equity was eroding as Americans pulled more than $900 billion out of their homes to buy cars, granite countertops and put their kids through college.


Then in 2008, the housewarming party was over as the country’s major banks teetered on the brink of collapse and took the economy with them.

Here in Canada, we patted our backs for not falling into the same trap, and basked in the spotlight as the world’s new beacon for financial stewardship. It’s a compelling narrative that has been promoted by the federal government and the Bank of Canada as they encouraged Canadians to spend their way through global economic turmoil.

But pry through the pocketbooks and bank accounts of the average Canadian and the country looks remarkably like the America of 2005—or even worse by some measures—complete with record house prices and unprecedented debt. “One of the really terrible narratives we’ve allowed to develop in the minds of Canadians is that somehow we are better than the U.S. and so that means we have nothing to be concerned about,” says Ben Rabidoux, who runs The Economic Analyst website and parlayed his obsession with watching the housing market into a job with a Wall Street firm that advises institutional investors on how not to get caught up in the Canadian miracle/disaster.

What Rabidoux and others have seen is just how much Canada’s economy has come to rely on the country’s housing boom—and how much consumers have been digging themselves into debt just to keep it going.

Since 2008, Canada’s ratio of debt to after-tax income has exploded. By the third quarter of 2011, Canadians owed an average of $1.53 for every dollar they brought in, up 40 per cent in the past 10 years and just below where the U.S. was before its housing crash. By the end of 2010, the average homeowner had just 34.3 per cent equity in their home, the lowest level in two decades and a 20 per cent drop in just four years.

“Everybody points out the differences in the U.S., about financial regulations and subprime mortgages,” said David Madani, a former Bank of Canada analyst now with Capital Economics. “But to me this is all a borderline attempt to misdirect the whole debate because we’re engaging in that type of discussion and only that discussion. It ignores the big elephants in the room.”

The elephants Madani sees include a sharp run-up in house prices compared to income: the average Canadian home now costs five times the average income, well above the multiple of three that is considered affordable. There’s also a sharp rise in home ownership rates, which at about 68 per cent of Canadians mirrors closely the 69 per cent at the top of the U.S. bubble. Madani also points to continued overbuilding and Canada’s still healthy construction industry. New building permits reached $6.8 billion in December, a 4.5-year high.

The biggest elephant of all is how much the boom has been fuelled by cheap and abundant credit thanks to a low interest rate policy pursued by the Bank of Canada, along with government-insured mortgages. “All the warning signs are there,” Madani says. “We just have to connect the dots.”

There is evidence the tide may already be turning in Canada’s housing market. The Canadian Real Estate Association reported home sales had fallen 4.5 per cent in January compared to December, the steepest decline since July 2010. Prices still rose, but by just two per cent, the slowest in the past year. Kelowna, B.C., a popular spot for retirees and vacation homes, reported a tenfold increase in foreclosures compared to three years ago. The hard landing might already be upon us.

In some major housing markets like Toronto, the signs of a bubble are as glaring as ever. Driven by a glut of condos that has made single-family homes a rarity, house prices have soared to nearly $500,000 on average. Even more proof that the city’s homebuyers have lost their heads: in January a west Toronto renovator’s dream went for $200,000 over asking price.

Nicole Austin, 31, and her boyfriend, Jim Varlas, know the mania all too well. The couple decided to sell their downtown Toronto condos and buy a house in Markham, a suburb north of the city. They moved in with Varlas’s parents and started shopping around for a house with a budget of $400,000. “Either the homes in our price range were really outdated and hadn’t been touched since the 1970s, or they would need to be renovated,” Austin says. They upped their budget to $500,000 and bid on three homes. They lost all three in bidding wars that pushed prices up as high as $575,000. “In some cases we knew what the house was worth and there was a certain point where we’d just walk away because it was getting ridiculous,” Austin says.

Earlier this month, the couple settled on a new build, paying “in the mid-to-high 500s.” But Austin says taking on a larger mortgage than expected was a fair tradeoff for finding a house in their chosen city. The couple say they expect prices to crash, but that doesn’t matter much since they plan to be in their home for at least 10 years.

With an average price topping $348,000 in January, Canadian homes are now worth a total of $3 trillion, nearly twice the country’s GDP. Home prices have doubled since 2002 and risen 13 per cent since the global recession hit in 2008.

When home prices rise, so does consumer confidence. Canadians, believing that their bricks and mortar are a gold mine, have become ever more willing to open their wallets. In less than 10 years, consumer spending has gone from 58 per cent of Canada’s GDP to 65 per cent.

The housing boom has helped prop up Canada’s construction industry, which now represents 7.4 per cent of the labour force, higher than it was in the U.S. at the height of its boom. Add in other housing-related industries, such as real estate agents, mortgage brokers and insurance companies, and the sector represents a staggering 27 per cent of the Canadian workforce. In the U.S., those same numbers peaked at 23.5 per cent. “We are far more dependent directly and indirectly on this current housing boom than they were in the U.S.,” says Rabidoux. “How in the world are you going to orchestrate a soft landing?”

More worrisome is where consumers have been getting their spending money. As wages stagnate and credit card use levels off, Canadian consumers have increasingly turned to their homes as a source of cash. As of last year, Canadians had pulled roughly $220 billion from their houses in revolving home equity lines of credit, a per capita amount three times larger than the U.S. at its peak.

Home equity lines of credit, known in the industry as HELOCs, have increased 170 per cent in the past decade, twice as fast as new mortgages. The federal government recognized just how risky HELOCs had become last April, when it announced it would no longer allow the Canada Mortgage and Housing Corporation to insure them.

Such home equity withdrawals were a large factor in fuelling the economic recovery. In 2007, Rabidoux says, home equity withdrawals in B.C. alone reached 4.5 per cent of the province’s GDP. “This is the real story of the Canadian economic miracle,” he says. “There’s nothing else that did such a fine job of pulling the country out of a recession than inviting people to take three per cent worth of GDP out of their homes.”

Of course, so long as home prices keep rising as fast as they have—averaging five per cent a quarter through 2011—the risk of all this debt seems minimal. It’s when the prices start to slide, as they have recently, that household debt becomes a problem.

Madani thinks the Canadian housing market has already hit a wall. “Overconfidence is what’s driving the market. It’s been fuelled by cheap credit. That just can’t keep going on forever,” he says. “I think it’s going to end badly.”

It’s hard to blame consumers for taking on huge mortgages when banks are offering five-year rates as low as 2.99 per cent. “Low interest rates are like a drug,” says TD Economics chief economist Craig Alexander. “The low interest rates are encouraging people to buy houses and take on debt. When they’re unhooked from that drug, they’re going to have to be unhooked very gradually because going cold turkey is going to hurt them.”

Banks themselves can only be blamed so much for offering consumers mortgages for next to nothing. The Bank of Canada has held its key interest rate at one per cent since September 2010, and most economists expect the bank to keep it there until well into next year.

It’s a dangerous game. Low interest rates might sound great for anyone looking to take out a loan, but they can have a perverse effect on an economy when they stay low for years.

Low interest rates had as much to do with the U.S. housing bubble as subprime mortgages, even working to make such lending more popular, says Stanford University economist John Taylor. He argues there never would have been a housing boom or a bust at all if the U.S. Federal Reserve and its chairman, Alan Greenspan, hadn’t slashed interest rates in the wake of the 2000 dot-com bust and then held them low until 2005. Not only did low rates encourage Americans to take on larger mortgages, but they pushed banks to make more aggressive loans in search of profits and increased demand for higher-yielding—and therefore riskier—debt.

Given what happened in the U.S., many question why the Bank of Canada is sticking to the same strategy. The bank is well aware that its monetary policy has encouraged Canadians to pile on the debt. Governor Mark Carney has taken to sounding the alarm bells about household finances every chance he gets, telling the CBC in December, “The greatest risk to the domestic economy is household debt.”

The warnings have, predictably, fallen on deaf ears. Who, after all, can resist the lure of free money? The damage was done in 2009, when the Bank of Canada slashed interest rates to 0.25 per cent in April and promised to keep them there until the second quarter of 2010 on the condition that inflation didn’t spiral out of control. Inflation spent much of 2011 at three per cent, above the bank’s target rate of two per cent.

“You could argue that the Bank of Canada, by keeping interest rates so low for a long time, violated to a certain degree its mandate in terms of price stability,” says Thorsten Koeppl, the Queen’s University economist who spent much of 2011 advocating for higher interest rates to curb inflation.

So if Carney is partly to blame for inflating the bubble, could he have done anything differently? Most economists say Carney’s hands have been somewhat tied by the U.S. Federal Reserve, which is expected to keep its interest rate at near zero until 2014. Raising Canada’s rates too high by comparison would inflate the loonie, punishing exports and manufacturing.

But at some point the risks of a housing bubble begin to eclipse those of harming the export economy, and some economists have started calling on Carney to stop just scolding profligate consumers and start setting interest rates based not just on inflation, but on the stability of the financial system, including rising levels of household debt.

“I don’t know how effective his talks will be if we see lower and lower and lower rates,” Koeppl says. “The stakes are much higher, the imbalances are larger, the risks are larger and the moral suasion works less and less. The issue really here is when do we go back to a normal monetary policy regime?”

Getting back to normal interest rates of three to four per cent becomes increasingly difficult the longer rates stay low. Carney may be caught between trying to boost employment by getting business to spend their unused capital and trying to stop consumers from digging themselves into a hole. But he may also have backed himself into a corner if inflation or unemployment rises unexpectedly.

“One of the problems with getting out at the extremes of things like debt and financial crises is that all of your policy options get harder and harder and harder and you can’t fix one problem without another major side effect. And we’re in side effect city,” says University of Manitoba finance professor John McCallum.

TD’s Alexander believes an interest rate hike of two percentage points would push 10 per cent of Canadians into danger territory where they would be spending upwards of 40 per cent of their income on debt payments. “The economy is very sensitive to shocks,” he says. “Every quarter-point increase in the interest rate could have a far greater impact on the economy than a quarter-point increase could have had 10 years ago.”

Mortgage rates are especially vulnerable. Shorter-term variable rates, which are linked to the Bank of Canada’s overnight rate, have become increasingly popular, now making up about 40 per cent of the market. Nearly half a million homeowners swapped their fixed-rate mortgage for variable rates last year. “If you’ve got a very big variable rate mortgage and those rates moved up two to three per cent, I think a lot of families are right at the line in terms of spending and suddenly they’re looking at a very big jump,” McCallum says.

Where analysts say there is more room to move is in Canada’s housing policy, including reining in the growth of mortgages insured by the CMHC. This month, the government-backed insurance corporation warned that it was close to maxing out its $600-billion budget for insurance, driven in large part by banks insuring portfolios of low-risk mortgages, which are repackaged as bonds and sold to investors, primarily in the U.S.

Since they were first introduced in Canada in 2007, such investments, known as covered bonds, have grown from a $2-billion industry to $50 billion, with much of the growth coming in just the last year. The rise in mortgage bonds has also worked to drive mortgage rates down by freeing up banks’ money to make more loans.

The Conservative government has taken some steps to tighten mortgage rules, including lowering amortization periods to 30 years from 40, and raising the minimum down payment for CMHC insurance to five per cent from nothing. CMHC says it will limit the amount of portfolio insurance it offers to banks.

Rabidoux thinks the CMHC should reinstate a cap on the price of mortgages it will insure. Until 2003, the corporation would only insure mortgages up to $300,000 in markets like Vancouver and Toronto. After a decade of relatively flat growth, house prices rose steadily once the CMHC removed the cap. “The point of the CMHC is not really to get people into their dream house off the backs of taxpayers,” says Rabidoux.

But the debate has already morphed into one over whether the Canadian government should be in the mortgage insurance business at all, or whether the CHMC is the product of a bygone era when working stiffs had little opportunity to buy their first home without a huge down payment.

“It may be those times are past and we need to take another look at the whole of housing policy,” says economist David Laidler, a professor emeritus at the University of Western Ontario. “It’s something you need to think about as a major policy issue on the same level of health care.”

Of course, it may be too late for such a discussion. As the U.S. showed in 2005, no matter how loud the alarm bells and how long they’ve been ringing, a housing crash always comes as a surprise to the people paying the mortgage.

Or as John McCallum puts it: “The thing with household debt is it’s not a problem until it’s a problem. But when it becomes a problem, it’s usually a really big problem.”

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Monday, February 27, 2012

Point Roberts: a few minutes drive by car... a world away in Real Estate


Nothing holds a mirror up to the insane housing bubble in the Greater Vancouver area like the isolated 1200-hectare U.S. peninsula community of Point Roberts, Washington.

The small little enclave of U.S. land is only accessible by crossing the regular US/Canada border, travelling across the southern portion of the Lower Mainland of Vancouver, and then accessing the peninsula which is located directly south of Tsawwassen, a suburb community of Vancouver. On a good day it's a 20 minute commute from the city limits of Vancouver proper.


Point Roberts is a community of about 1,300 people. It owes its existence to the 1846 Oregon Treaty, which divided the Pacific Northwest along the 49th parallel.

But drawing the border in such an arbitrary manner unwittingly sealed off Point Roberts from the rest of the United States.

After the Treaty was signed, British colonial authorities offered a more accessible plot of territory in exchange for the stranded peninsula, but the offer was stubbornly ignored by American officials.

So Point Roberts exists as a small 1200 hectare Island of America located within the natural geographic confines of British Columbia's Lower Mainland.

And while it is 'officially' the United States, hectares upon hectares of Point Roberts are owned by Canadians who were looking for cheap vacation homes in the shadow of Vancouver.

Why cheap?

Because despite being in the shadow of the largest housing bubble in North America, Point Roberts is no where near as bubblicious as real estate located 2 minutes north of the border.

As the National Post noted today, a recent listing on a Point Roberts Real Estate website lists a three-bedroom country home perched on a full acre for only $800,000.

In Tsawwassen, $800,000 only buys you an empty quarter-acre lot.

In Vancouver proper, it barely buys a two-bedroom condo on the fringes of downtown.

It is the most glaring reality check for Vancouver's insane housing bubble.

While Vancouverites have watched their city became one of the most expensive places to own a home in North America, Point Roberts land prices have dropped about 30 to 40% since 2008

As local Point Roberts real estate agent Jim Julius noted to the National Post, “there is a global recession going on, after all.”

You don't say? I wonder how much longer before those who live here fully understand this fact?

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Sunday, February 26, 2012

The Greek Issue


If you've been following the European debt situation lately you know the whole Greece issue is a constant 'on-again-off-again' soap opera as to whether an agreement has been reached to resolve the crisis.

And after the latest 'agreement', Greece is back in the news requiring more money.

It raises the spectre of whether or not a Greek default will occur.

Some have speculated there will be a default and it will destroy the Big 5 US Banks because of their derivative exposure.

That won't happen, but you may be surprise to find out why... and how this is just the tip of the iceberg on the European debt issue .

No one is really sure what happens in the credit default swap CDS markets.

No one really knows how big this market is, who the counterparties are, and, worst of all, whether the CDS contracts will actually trigger in what many would consider a default.

I say "what many would consider a default" because you are going to see any agreement in this issue ruled 'not-a-default'.

Up to now, most of the media discussion has centered on potential contagion among the banks as most of the Greek sovereign debt is held by the European banking community (and numerous hedge funds).

But the real fear amongst those who follow the situation is that the real concern lies in the area of credit default swaps (CDS).

The swaps are insurance policies, individually written, that basically say - if Greece defaults, we’ll pay you what Greece should have paid you.

Credit default swaps have grown exponentially over the last decade. Since they are individually written, there is no clear visible record of how many CDS contracts are outstanding. Also unknown is who is involved. The two parties obviously know who the counter-party is but there is no public record that would allow a regulator or a third party to find out who was involved.

What is known is that the Big 5 US Banks have sold the vast majority of this insurance, insurance which has been a cash-cow for those banks and largely responsible for those obscene Wall Street bonuses we hear so much about.

As Greece debt came up for sale, Banks and others looked at the very high and attractive yields on those Greek bonds and salivated as they bought them up.

As for the risk involved?... well, they bought insurance to protect themselves.

Then the 2008 financial crisis hit.

As the world wide economy imploded, the house of cards of sovereign debt in Europe began to collapse.

Portugal, Ireland, Italy, Spain and Greece (the PIIGS) were at the forefront of the crisis.

And lately Greece has been getting all the attention.

As negotiators on the Greek debt problem attempted to work out a solution to Greece's debt crisis, they asked the debt holders to agree to take, first 70 cents on the dollar for the debt owned to them and now 50 cents.

It was termed a 'haircut' on their investments (cutsie way of saying you're going to lose money).

But would that 'haircut' trigger their Credit Default Swap (the insurance they bought to protect them if Greece didn't pay back the full amount of the bond)?

On the face of it, it seems pretty clear. They have CDS insurance to ensure they get all their money back, Greece can't pay, insurance will cover the difference - right?

Well... not so fast.

Five of the largest US banks control 97% of all the credit default swaps.

And the total amount of these swaps and derivatives is in the hundreds of Trillions of dollars (yes... that's Trillions with a capital 'T'). JP Morgan alone holds over $60 Trillion in these derivatives.

Jim Sinclair, a precious metals and commodities trader since 1977 who has worked as am Executive member in two major Wall Street firms on the New York Stock Exchange, has discussed this issue in depth. Since the five largest US banks control 97% of all credit default swaps, a demand of payment on those derivatives would instantly wipe out these financial institutions.

Therefore it is imperative that any 'agreement' on how to deal with these bonds (and Greece's inability to deal with not paying them) cannot be determined a 'default'.

Enter the International Swaps and Derivatives Association Inc (ISDA). This is a trade organization of participants in the market for over-the-counter derivatives. Its membership consists of derivatives dealers, service providers and end users and they are the organization who make official, binding determinations regarding the existence of "credit events" and "succession events" (such as mergers), which may trigger obligations under a credit default swap contract.

In short the ISDA are the people who determine whether a credit event is a default or not.

The only problem is that the ISDA is heavily influenced (if not largely controlled by) the very big 5 US banks who hold 97% of the credit default swaps that are in question here.

If the ISDA rules that a 'credit event' (or default) has occurred in the Greek issue, the big 5 US Banks will be insolvent and wiped out. Wiping out these banks would wipe out the US Banking system.

Therefore you can be rest assured the ISDA will NEVER allow a 'legal' default on this debt.

That's why you keep hearing about negotiations on the Greece issue where bondholder's are being forced to accept 'haircuts' on their bonds.

The contention is that if the bondholder's "accept" the offer of 50 cents on the dollar, they make the event voluntary and it will not "trigger" the CDS payout.

These requests for a 'haircut' have caused lots of folks to ask for a ruling from the ISDA (the ruling group on CDS contracts). If you "accepted" an offer with a gun to your head, was it really voluntary?

Naturally the ISDA will rule that it is and therefore the CDS contracts are not triggered.

As Jim Sinclair contends the bondholders could be forced to accept 0%, the ISDA will never rule that a default because the big 5 US Banks cannot be placed in a position to pay out this insurance.

For those who think Greece will default later next month, it's not going to happen - legally happen that is.

The bondholders may be forced to lose everything, but the Big 5 US banks won't be forced to pay out on these derivatives and CDS contracts because the ISDA will never rule this issue a default.

The real focus is on what comes next.

This is what you should be watching in Europe.

In 2008, AIG had sold Credit Default Swaps (CDS) on Credit Default Obligations (CDOs). CDOs defaulted and AIG had to pay. AIG went broke. The counterparties to the CDS were Goldman Sachs, JP Morgan et al and had to be made whole on their losses that they thought were insured by AIG.

It was a crisis which could have brought down the US banking system.

In response the US Government intervened and funneled TARP cash thru AIG to Goldman Sachs, JP Morgan et al to cover losses

IN 2012, Greece is about to default, just like the CDOs of 2008.

The ISDA (controlled by the Big 5 banks) will rule that any haircut on Greek bonds is not a default. Therefore the Big 5 Banks will never have to pay off on CDOs bought by Greek bondholders.

But the Greek bondholders, who thought they had principal insurance, are now screwed and are left holding the bag.

This is what caused MF Global to go under when the first Greek 'haircut' was not ruled a default.

Those Greek bondholders (the big Euro banks, big Euro govts, big hedge funds) will now be insolvent. They are going to require massive capital injection.

As those CDS contracts do not kick in, the next phase begins to unwind.

What good is insurance that doesn’t pay off? Does it mean all CDS insurance is useless? Who will be the next to fail because the insurance they thought was protecting them isn't going to pay out?

As you have read on this blog ad nauseum. The 2008 Financial Crisis was a financial earthquake, the repercussions of which many of us still do not understand nor appreciate.

That's why the big 8 Central Banks of the world have been involved in another round of massive money printing - to try and save Greek bondholders. And the level of money printing has only just begun.

As I have said, we are still only beginning to realize how profound and far reaching the 2008 Financial Crisis really is.

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Saturday, February 25, 2012

"Officially Time to Panic"


If you click to enlarge the above image, you will see the upcoming March 5, 2012 cover of Maclean's magazine. And if you look below the headline, you can see the sub-heading heralding that it's 'officially time to panic.'

It seems the turnaround is now complete.  

We have gone from only having 'doom-and-gloom' blogs sounding the alarm to the warning signs being everywhere.

Is it time to panic?

Over on the blog Vancouver Condo Info, daily updates are maintained on sales and listings with information provided by a local realtor. And those numbers have been telling an interesting tale since the beginning of the year.

On January 3rd, 2012 there was a total inventory of 10,671 listings.

By February 1, 2012 that number had soared to 13,368.

As of today there are 14,709.

Most of the surge came in January, but the trend has continued in February as listings of properties for sale are far outpacing properties sold. Take a look at data posted so far for the month of February:

Day    Listing Price-Change  Sold  Inventory
Feb 01   305       74          38     13368  
Feb 02   251       64         155     13447
Feb 03   249       56         122     13548
Feb 06   325       82         113     13691
Feb 07   281       70         140     13793
Feb 08   516      138         214     14013
Feb 10   234       63          94     14108
Feb 13   314      106         133     14187
Feb 14   281       85         147     14273
Feb 15   254       60         112     14365
Feb 16   252       94         110     14411
Feb 17   225       84         148     14436
Feb 20   317      133         141     14526
Feb 22   239       96         135     14664
Feb 23   222       67         108     14709

Total inventory has surged from 13,368 to 14,709 in the last 15 business days, growing at about a rate of 90 per day.

Interestingly it doesn't seem that the message is filtering down to the street level yet.

Asking around, my experience is that the average joe is still oblivious to the concerns being expressed in the mainstream media about the Canadian and Vancouver real estate situation.

The Macleans cover calls it a "Real Estate Crisis".

It isn't yet. But I suspect that if (when?) panic does really set in, we will see extraordinary movement - both in those listing numbers and in declining prices on homes that do sell.

At this point events will cascade far faster than even the more ardent bears anticipate.

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Friday, February 24, 2012

Debt Shock? Whatchyou talkin bout Mark?


The end of another week and the focus continues to zero in on negative news for Real Estate.

And, once again, the warnings are coming from Bank of Canada Governor Mark Carney.

"The Bank of Canada has renewed its warning that debt-laden Canadians could face a 'significant shock' if housing prices fall."
Whoa... whoa!

If housing prices fall?  Housing prices don't fall, what are you talking about Mark?

In a series of special reports the Bank of Canada reviewed household debt and changes in the value of Canadian's "single-most important asset" — their homes.

While there has been a steady rise in the ratio of household debt to personal disposable income, house prices have been steadily increasing since 2000, the review said.
"These facts are interrelated, since rising house prices can facilitate the accumulation of debt. Households could, therefore, experience a significant shock if house prices were to reverse."
Whoa, wha??? There he goes again.  Significant shock if house prices were to reverse???

But real estate always goes up!  And what about the Asians?... the rich Asians are going to keep prices high, right?
"The evidence indicates that a significant share of borrowed funds from home-equity extraction was used to finance consumption and home renovation in Canada from 1999 to 2010. Such indebtedness constitutes an important source of risk to household spending, since it makes households more vulnerable to a potential decline in house prices."

Mike, baby, what are you saying? That Canadians have been using their homes like ATM machines just like the Americans did?

Then there was Federal Finance Minister Jim Flaherty:

On Thursday, Flaherty said "people have to be wise . . . in how they look at things."
"Interest rates are going to go up. They have nowhere to go but up. So people need to ensure that they can afford higher mortgage interest. It isn't necessarily for everyone to have most expensive house they could possibly buy, maxing out the 10-year mortgage they can get from a financial institution."

ALRIGHT... STOP RIGHT THERE! Interest rates are going up????

NO WAY... US Federal Reserve Chairman Ben Bernanke said rates were staying low until 2014. Rates are NOT going to go up. You wouldn't do that to us... it would hurt the economy too much.

Clearly Carney and Flaherty must have been munching on magic mushrooms or something before the last press conference.  I mean, what the hell???

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Thursday, February 23, 2012

New home sales on the West side of Vancouver


For the past few years we have been told that the west side of the City of Vancouver has been HAM central (Hot Asian Money) and that the influx of money from China will not only keep driving prices skyward...  but will more than support/sustain values which bears may 'claim' are out of whack with local fundamentals.

Bear blogs have noted that the influx of money into many Real Estate markets (Australia/Canada) is driven by the fact that China has pumped more stimulus into their economy per capita than have the Americans into theirs.  A lot of this money is flowing out of China and into investments like Vancouver Real Estate.

The mistake many make is to believe this money will be unending.

As we have documented on this blog, China is trying to engineer a downturn in it's very bubblicious real estate market. The spillover effect has lead to what many believe is a popping of the housing bubble in Australia. As real estate values collapse in China, as credit is reduced in China... there is less money available to funnel out of the country and into Aussie real estate.

Many have suggested (to outright ridicule) that this pattern will begin to surface here in Vancouver as well.

Since many Asians look to buy new houses when they invest their HAM money here, it is new home sales that are watched with keen interest in markets such as the west side of Vancouver.

And it is just such an analysis that VREAA focuses on in a post today.

Noting that sales of brand new homes has dropped dramatically on the west side of Vancouver, VREAA (courtesy of contributor ZRH2YVR) observes that there are currently 17 months of inventory of new builds on the market compared with a 7.5 average for the whole market.

Even more intriguing is what happens when you break up all properties for sale by price.

There is a very strong drop off in sales above the $2.8 million level.

For properties under that level, months of inventory is sitting at about 4 months. But above that value, it immediately jumps over 10 months of inventory and reaches 24 months at the 4 million level.

For your humble scribe this is of great interest for I know personally of someone who is involved in housing speculation exclusively on the west side of Vancouver.  

The modus operandi has been to buy a west side tear down for about $1.2 - $1.8 million, spend $850,000 constructing a higher end new home, and then selling that home for approximately $4 million.  

His last endeavour was his most successful and emboldened by past success (he works in partnership with three others), his group had visions of purchasing at least 3 properties this year to replicate their efforts. They have been very optimistic about how well the properties they plan on purchasing will do because the timeline will see them coming on the market in early 2013 which will coincide with the removal of the HST.

Naturally we have had numerous debates about where the market is going and the wisdom of this strategy.

As west side new home high end inventory balloons to 24 months of inventory at the $4 million level, what will the impact be on his interests.

He has already purchased at least one tear down property that I am aware of.

With over 450 west side homes for sale over $2.8 million and negligible sales, this is (as VREAA notes) a "crazy amount"

What impact is this going to have on his group (and other speculators doing the same thing)?

With capital tied up in these projects (much of it borrowed money), new tear down's (under the $2.4 million mark) cannot be purchased.

As months of inventory grows in the under - $2.4 million category and as inventory fails to move in the over - $2.4 million category, how long before the pressures of the market start to have their impact?

How long before other speculators have to bail and sell 'below market value' to minimize losses being accused on interest payments on the borrowed money?

And what of those boomers, for whom retirement is based on capitalizing on housing bubble prices, start bailing at 20% or 30% below current market value just to ensure they 'get what they can' from a collapsing market?

We will watch sales (and actual prices achieved on those sales) with keen interest. 

I can't help recall how we saw similar scenario's play out in the early 1980's.

Of course... it's different this time, right?

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Wednesday, February 22, 2012

Anyone spare a job?


If you follow this job you know how we have profiled real estate on the periphery of Greater Vancouver has been sucking wind for the last year and more.

The Okanagan and Vancouver Island have been suffering particularly bad.

In what may come as a sign of the times, should we be surprised realtor's are now jumping ship?

Above is a screen shot of Victoria Realtor Jeremy Eade's former listings.

I say former because it appears Jeremy may have had enough of the real estate business.  It seems Jeremy has packed his bags (or is planning to pack his bags) and wants to head back to Calgary.

Will he be selling real estate?

Check out his Kijiji ad and decide for yourself (click to enlarge):


A sign of things to come?

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Tuesday, February 21, 2012

The Age of Ron Paul: The Thomas Jefferson of our day


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Monday, February 20, 2012

Mass Exodus of World Bankers... what's going on?


Rumours and conspiracy theories are flying all over the blogosphere tonight as it is becoming increasingly evident that there is a mass exodus amongst the ranks of the world's leading bankers.

1) Feb. 6, 2012 / Bank of India CEO Chaturvedi resigns
2) Feb. 10, 2012 / Tamilnad Mercantile Bank CEO resigns
3) Feb. 13, 2012 / Kuwait Central Bank CEO resigns
4) Feb. 15, 2012 / World Bank CEO Zoellick resigns
5) Feb. 15, 2012 / Anz Bank CFO Australia resigns
6) Feb. 15, 2012 / Nicaraqua Central Bank Pres Rosales resigns
7) Feb. 15, 2012 / Royal Bank of Scotland Australian CEO Stephen Williams resigns
8) Feb. 15, 2012 / Nova Kreditna Banka Maribo CEO resigns
9) Feb. 15, 2012 / Nova Ljubljanska Banka CEO resigns
10) Feb. 17, 2012 / Credit Suisse Chief Joseph Tan resigns
11) Feb. 18, 2012 / German President Christian Ruff resigns

All of it comes as a stunning speech is made by Sir James of Blackheath in the British House of Lords with allegations involving the stunning amount of $15 Trillion. Sir James described a set of mysterious transactions where over $15 trillion dollars was transferred via HSBC to RBS a few years back by one individual, who then proceeded to lose that money when RBS was taken over.

There are also rumours Goldman Sachs CEO Blankenfein was asked to resign but refused.

Is it all connected?  It's worth keeping tabs on.

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Sunday, February 19, 2012

All you need to know about money printing


A few days ago there was another significant round of currency debasement.  Quantitative Easing (QE) is  taking place on a massive scale despite the fact you are not hearing about it in the mainstream press.

If the basic definition of quantitative easing (QE) is a significant increase in a central bank's balance sheet via increasing banking reserves, then all eight of these central banks [the others include the Bank of England, the Swiss National Bank, the Banque de France and Germany's Bundesbank] are engaged in QE (see graph above -click to enlarge).

What's particularly shocking about the data is that while every major central bank is busily printing money like it's going out of fashion – which it is – one of the biggest culprits is the one most widely associated with sound monetary policy, namely the Bundesbank, which has been one of the biggest inflationists of all:


The combined size of the Big 8 central banks' balance sheets has almost tripled over the last six years, from $5.4 trillion to more than $15 trillion and still rising. That $15 trillion compares with the capitalisation of world stock markets which stands at $48 trillion. The Big 8 central banks now account for the equivalent of one third of world stock market capitalisation.

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Saturday, February 18, 2012

Sat Post #2: Canadian Bank sues JP Morgan (and others) over interest rate swap suppression


Interesting little development in the world of high finance today.

Bloomberg has announced that an unnamed Canadian bank has filed suit against at least seven firms including JP Morgan over conspiracy to manipulate the price of interest rate swap derivatives for more than three years.

The lawsuit is contains a trove of documents that are shedding light on the manipulations going on. The issue is significant because Interest rate swaps artificially support the bond market by creating massive demand for bond trades that are embedded into these swaps.

From Bloomberg:
JPMorgan Chase, Deutsche Bank AG (DBK) and HSBC Holdings Plc (HSBA) are among at least seven firms accused by another bank of participating in a conspiracy to manipulate the price of derivatives worldwide for more than three years.

The unnamed bank, seeking immunity, told Canada’s Competition Bureau that traders and cash brokers conspired to influence the Yen London interbank offered rate from 2007 to 2010 to profit on interest-rate derivative positions linked to the benchmark. The bureau spelled out the probe in documents it filed with the Ontario Superior Court in May.

The documents, shown yesterday to Bloomberg News by court clerks, offer one of the most detailed accounts yet as watchdogs in Europe, Asia and the U.S. look into concerns that firms conspired to manipulate interest rates serving as benchmarks for trillions of dollars of financial products. Canada also is investigating Citigroup Inc. (C), Royal Bank of Scotland Group Plc (RBS), ICAP Plc (IAP) and RP Martin Holdings Ltd., the court documents show.
It is important you understand the volume and value in this market.

Current figures aren't available but as of 2007, JP Morgan held $61.53 trillion in total OTC swap derivatives. BOA held $23 Trillion, Citibank $19.9 Trillion, HSBC $2.1 Trillion and Wachovia held $3.1 Trillion in OTC swaps, which are probably now on Wells Fargo's books. Combined, the top 5 US banks held $110 Trillion in OTC swaps as of 2007.

These figures has likely increased significantly in size over the past 5 years as the financial system teeters on the verge of collapse.

Compare this $110 Trillion with the next next top 20 banks (they held a mere $1 Trillion in OTC swaps combined!)

Of this total $111 Trillion, an astonishing 65% of these books are Interest Rate (IR) Swaps.

This massive trading of OTC Interest rate swap derivatives creates massive artificial demand (no end user is purchasing the bond...this is merely trading for trading's sake), which results in an artificially high price for said bonds. This suppresses interest rates and keeps them at severely and artificially low levels.

As the blog Silver Doctors outlines, this is how you can see 3.5% 30 year rates when actual inflation is running 8-10% annually. Massive artificial demand is created for bonds due to an unimaginable volume of Interest rate swaps tradei back and forth among the US Treasury's proxies of JPM, Citi, HSBC, etc.

JPMorgan's interest rate swap book alone requires $41.4 BILLION in bond purchases PER DAY in order to properly hedge the growth in these swap books, plus an additional $30.3 BILLION in bond purchases PER DAY to hedge maturing interest rate swaps that need to be rolled-over and replaced. All just to keep a static book.

It has been documented that just during Q4 of 2007, JPMorgan alone required $71 Billion worth of bonds daily just to hedge its interest rate swap book.

According to the US Treasury, during Q3 of 2007 the Treasury required a total of $105 Billion in debt borrowings. Assuming the treasury sold 100% of its Q3 2007 offerings to JPMorgan, $105 Billion would satisfy about a day and a half of hedging requirements for JPM's swap book. Clearly it is physically impossible for JPM to be hedging this type of volume and is one of the reasons critics say it is clear that JP Morgan is actually an arm of the US Federal Reserve. 

Critics also say that this is why gold and silver are so stridently suppressed, as they would otherwise blow the whistle on this whole ponzi game of finance.

It is also why the developments in Europe with Greece, Portugal, et al is so important.  If default takes place, not only would there be a serious mainstream move into gold and silver (and the metals would significantly rise to their unmanipulated, free-market values) but at this point JPM's OTC derivatives would kick in JP Morgan would have to pay out on their $61.53 Trillion derivative position.

This would without question take down the entire financial system.

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