Wednesday, April 14, 2010

Jumping the Shark

Do you recall the quote from yesterday's post that referenced the New York Times?

"Consumers are about to face a sustained period of rising interest rates."

Almost as if on que, the Royal Bank hiked their rates a quarter of a point. More significantly its the second rate hike in only two weeks!

And why are rates going up when the Bank of Canada hasn't altered their rate?

Because yields are rising in the bond market and it's the bond market, not the Bank of Canada, that funds mortgages.

And without the United States continuing with QE to infinity, the cost of money is rising.

Cameron Muir, our bud from the BC Real Estate Association, was on TV today saying that rates are beginning to 'normalize'. May I remind faithful readers that normal for the last 20 years would be a five year rate of 8.25%

And that's before you factor in inflation.

Which brings the conversation to an interesting post on Bill Fleckenstein’s website Ask Fleck:
  • “I am a large volume importer of industrial hardware, mostly out of Asia. I just received my April ocean freight rate update. Container cost up 5% from March and up 21% from April 2009. For my products, the YOY increase represents a 3% increase to cost of goods. Cost of steel as we know is going up significantly and these price increases for us – contrary to what the popular spin may be – are effective immediately. Obviously, as we are replacing fast-turning inventory, we are passing on these increases immediately. About a year ago, I reported to you that our business was extremely slow and our inventories very high. Despite price increases going on offshore, I pointed out that in our world, these increases would take time to trickle through due to the high inventory levels that we and our competitors were sitting on. Our position was that if we had it in stock, we would sell at basically any price for cash flow reasons. Any new inventory would be sold based on actual current cost. Needless to say, the purchases we made through the year were very minimal as we (correctly) were not optimistic about business looking forward.”

    “Now, business is still terribly slow but inventories have been depleted to the point that shortages are occurring. These shortages are exasperated by the fact that no one is buying any significant volume of replacement inventory. Our statistics would show that our purchases in March (for delivery this summer) are up about 400% from any given month last year BUT are still only about 30% of our peak going back before all hell broke loose. Can you imagine how this data can be spun by focusing on the former and conveniently ignoring the latter? We feel that we have hit bottom and have reasonable expectations to survive this debacle simply because we have downsized to about 20-25% the company we once were. Our domestic competitors and vendors overseas basically report the same. ... (The) bottom line is this: no one is (all that) busy but prices are literally skyrocketing. Smells like stagflation to me. Anyone who tells me that there is no inflation on the horizon is delusional and in for one hell of a shock.”

In an investment post by Jeffery Sault his readers are reminded that annualized inflation in India is running at about 15% and China is not all that far behind. In the Philippines, March’s inflation figure was just reported at +4.4%, up from the previous month’s 4.2%, with the cost of Philippine fuel/electricity/water up 14.6% over the trailing 12 months.

In North America, since January 2009 the price of copper is up 185%, crude oil is better by 118%, and rubber is higher by 167%. Moreover, from August of 2009 until now hog prices have rallied 75%, while cattle prices have lifted 19%. Such actions caused the Reuters CRB Commodity Index to travel above its 200-day moving average in June 2009 and stay there ever since (read: bullish and inflationary).

Meanwhile, economists continue to insist there is no inflation because wage inflation is non-existent.

If inflation were calculated like it was prior to 2000, it's existence would be evident. But we changed the rules, and pretend it doesn't exist.

Unfortunately it's effects still do.

Jumping the shark is an idiom used to describe the moment of downturn for a previously successful enterprise. The phrase was originally used to denote the point in a television program's history where the plot spins off into absurd story lines or unlikely characterizations. These changes were often the result of efforts to revive interest in a show whose viewership has begun to decline.

The phrase came from a three-part episode opening the fifth season of the TV series Happy Days in September 1977. In hindsight the consensus was that the show went downhill from this point.

Inflation is here.

Rising interest rates are here.

And I'm betting that, in hindsight, this is the moment people will say Vancouver Real Estate 'jumped the shark'.


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