Whispers from the Edge of the Rainforest

A few words...

2012-01-31T11:23:00.000-08:00

I just wanted to take a moment to thank all of you who left comments and sent emails.

I simply have not felt like posting this past week. Those of you with cherished pets understand. They become members of the family and their loss is deeply felt.

Thank you.

I hope to have a post for tomorrow.

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A difficult weekend - updated

2012-01-25T09:11:00.000-08:00

They say all dogs go to heaven.

And if there was ever a dog that deserved to, it will be this one. For six and a half years this wonderful animal brought joy and happiness to my life.

The first time she was taken to the vet, the doctor examined her, looked up and said; "this is a special dog. You will never have problems with her, with other dogs or with people." And he was right. You could take her anywhere and you never had to worry about her temperament.

For many months I was convinced she was a dog that didn't know how to bark (that would change).

She loved walks in the park with a stick. And she ADORED the beach, the water and her ultra ball. Hours upon hours were spent throwing that ball (not only would she fetch, but she would run back and toss it at me, making me fetch if I wasn't ready for the throw. That's her tossing the ball below). If other dogs were too distracted to get their ball back after it was tossed into the river, she would obligingly retrieve before the strong current carried it away forever... to the delight of grateful owners.

She could always sense when you were having a bad day. If you were, she would come up beside you, give you a lick and curl in against your leg.

On the weekend she was stricken ill.

Yesterday she passed away - taken far too soon.

I don't know if all dogs go to heaven but if not (and they are required to earn their way), then this dog certainly deserves that honour.

Wherever she is now, I hope I get to join her there one day. If that place has a beach, a whip-it and a ball... it will surely be heaven for me.

Rest in peace my dearest puppy. I will miss you terribly.

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Will be back shortly...

2012-01-24T19:25:00.000-08:00

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Global Deleveraging only just begining

2012-01-20T12:22:00.000-08:00

McKinsey & Company is a global management consulting firm which bills itself as "the trusted advisor to the world's leading businesses, governments,and institutions".

In a report released today, McKinsey notes that total debt to GDP has declined in only three countries since the 2008-09 crisis: the United States, South Korea, and Australia.

As we all know Canada has not only NOT seen their total debt to GDP decrease, it has hit historical highs.

In fact, total debt has actually grown in the world's ten largest mature economies due mainly to rising government debt - Keynesian style.

McKinsey notes that the US is following the two phase deleveraging process that 1990s Finland and Sweden followed but point to the household segment as leading the way with 15% reduction in debt to disposable income (driven unsurprisingly in major part by mortgage defaults).

The bottom line in the report is that US (households) are at best one-third of the way through their deleveraging and the UK (financials) and Spain (non-financials) face much more significant pressures (which will inevitably impact aggregate demand given governmental borrowing pressures) as their deleveraging has only just begun.

It's interesting that McKinsey mentions Australia.

Faithful readers know that for the longest time Canada and Australia stood above other countries in the Western world for having seemingly escaped the imploding real estate bubble.

Both were viewed as commodity rich countries which were being fuelled by Hot Asian Money.

Both real estate markets were - supposedly - immune because of rich Asian buying up land there.

But as we have noted numerous times on this blog, 2011 was a turning point for R/E in the Land of Oz.

And perhaps nothing hilights this fact more than real estate auctions in Australia.

Unlike North America (where auctions are used to sell distressed and foreclosed properties), the use of auctions in Australia is one of the main means of housing sales and their results are often a barometer of the market’s strength. Aussie newspapers even devote entire sections to auction sale results.

But 2011 saw the reality catch up the housing market in Australia and after home prices fell the most in at least 12 years in 2011, home auction results foreshadow another year of declining Aussie home prices.

According to Bloomberg the Aussie auction sales are tanking. Peter Green, a principal at Australian property broker Laing+Simmons, “in the last three months, the number of people visiting open houses has been cut by half. And buyers may show up to auctions, but they don’t bid.”

Half of the homes that went to auction in December failed to sell.

Bloomberg notes Australia escaped the housing rout seen in the U.S. and Europe, in part due to government measures to boost demand in the wake of the collapse of Lehman Brothers.

As we all know, this is exactly what Canada did too.

In 2011 Aussie housing prices recorded the biggest drop since Brisbane-based RP Data began compiling figures in 1999.

For years Australia has used the rationalization of money from China as the reason their housing bubble will not implode. But now Australia has begun their develeraging process.

Will Bloomberg be writing about Canada next?

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SOPA and PIPA - are you aware of what's going on?

2012-01-19T19:43:00.000-08:00

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Tues Post #3: Ron Paul Dominates Fox's Twitter Survey Of The South Carolina/FOX News Debate

2012-01-17T19:53:00.000-08:00

It is almost comical to watch the mainstream media's coverage of the stunning movement afoot towards Texas Congressman Ron Paul's campaign for the Republican Presidential nomination.

When FOX News conducted a Twitter survey of the South Carolina debate (and Ron Paul dominates), watch how they try to dismiss the Survey results as a poor reflection of what people think.

When the show's co-host calls him on this - pointing out that Ron Paul is not just 'doing better' than the competition... but out and out 'did the best' - it's almost painful watching the FOX host begrudgingly have to admit this is true.

Below are Ron Paul hilights from the debate.

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Tues Post #2: A Tsunami of listings flooding market?

2012-01-17T16:30:00.000-08:00

"If you are a seller - list now!"

- Ozzie Jurock newsletter advice

January 7, 2012

Our friends over at Vancouver Condo Info keep track of the daily R/E numbers and the emerging story is quite fascinating.

In 2011 there was not one single day where the number of new listings exceeded 400 in one day.

In January 2012 the listings have been coming fast and furious. On Monday those listings crested that magic 400 mark as Vancouver had 428 new listings on Monday alone (with only 65 sales). For reference in 2011 the most listings on any single day in Vancouver for the month of January totalled 292 (Jan. 17, 2011).

Even in Richmond, another haven of Hot Asian Money last year, there have been 534 new listings from January 3-16 (with only 85 sales).

Where is this going? It's still to early to tell but I suspect a lot of sellers are sure relieved to see the banks engaging in an interest rate war with each other (as noted yesterday).

Less than enthralled with the bank's interest rate war is the IMF. As the San Francisco Chronicle notes the IMF is concerned the record low interest rates are combining with record household debt to pose a significant risk to the economy with excessive speculation.

Will these moves blow the market even higher?

Will demand be offset by a surge of sellers willing to cut prices to take advantage of a market flush with greater fools jacked on cheap money who are all to willing to inflict 'cashtration' on themselves?

Time will tell.

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Tues Post #1: Battle of the bank rates

2012-01-17T00:01:00.000-08:00

A few days ago we told you how Ozzie Jurock was advising his followers that while Vancouver's real estate prices were basically the same this December (2011) over last December (2010), Jurock gave some uncharacteristically negative analysis:

"Well, YES (Vancouver prices are the same this December over last December) ... BUT the December average price of $ 691,000 is a whopping $141,000 or a full 17% lower than the May 2011 average price, which clocked in at $834,000. In fact overall sales decreased 13% over last December but a WHOPPING 34.1% decrease over the 2,515 residential sales in December 2009. Sales of detached properties a decrease of 18.1% from the 769 detached sales recorded in December 2010, and a WHOPPING 30.2% decrease from the 902 units sold in December 2009."

BMO Capital Markets has now come out with their most recent analysis and they expect the December sales to be up 3% compared with a year ago and the average price to have gained 4%.

“Below the surface, however, the story gets a tad more interesting,” economist Robert Kavcic wrote in a report.

Kavcic noted the formerly white-hot Vancouver market is now cooling with sharply lower sales and with prices coming off their highs.

“Looking ahead to 2012, cooler housing activity should prevail as elevated household debt levels, shaky confidence and a weakened job market counter extremely low mortgage rates.”

Mortgages, however, mean revenue for the banks.

And as the battle for customers intensifies amid a drop-off in consumer borrowing, those very banks are in the process of launching a a counter offensive to combat that shaky confidence and weakened job market.

Some of Canada’s biggest banks are now advertising promotional ultra-low mortgage rates to win market share.

The Bank of Montreal began the offensive with a special discount five-year fixed rate at 2.99% for a limited time.

TD Bank responded with a four-year special fixed rate at 2.99% available until the end of February, while Royal Bank later matched that with its own four-year 2.99% rate offer, along with a seven-year special fixed rate of 3.99 per cent.

In 2008/2009, when the market weakened as the Financial Crisis began, emergency level interest rates were the market saviour.

Without the expected worldwide economic recovery taking hold yet, will interest rates even LOWER than emergency level rates be the panacea?

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Mon Post #2: Ron Paul - the emerging Republican nominee?

2012-01-16T20:58:00.000-08:00

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Is January shaping up to be a Real Estate disaster in Greater Vancouver?

2012-01-16T00:01:00.000-08:00

Over the past two weeks we have seen a seemingly endless stream of negative Real Estate items, including the stunning recommendation from R/E optimist Ozzie Jurock that if you are a seller - list NOW!, if you are a buyer - hold off.

You have to wonder... what will be the impact on buyer psychology of all this bearish analysis? I mean... who wants to catch a falling knife, right?

Indications from those close to the industry indicate that last week's numbers were absolutely brutal for the R/E industry. Over on the blog, Vancouver Condo Info, this sentiment was echo'd by contributor ZRH2YVR who says:

"Sales at this time of year are typically slow, but the level of sales now is only a trickle. There is a definite indicator that the areas which have spiked last year are no longer the hot areas. Inventory of the market is high for this time of year and listings are coming in at record pace for January."

He predicts that Greater Vancouver could exceed the highest inventory on record which occurred in 2008. Those on the blog who track daily inventory and sales numbers report that the Greater Vancouver inventory total soared to over 12,000 listings last week.

While the month is only half over, Vancouver West detached sales are on a pace to see a 66% decline for the month of January. Vancouver's two closest suburbs are on track for an equally dismal performance: Richmond is on track for a 51% decline in detached home sales and Burnaby for a 59% decline.

It will be very interesting to watch the impact of all the negative stories in the mainstream media on the real estate market for the rest of the month.

There is no doubt, the swirling tides of change are brewing in the market.

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A sign of things to come?

2012-01-14T12:49:00.000-08:00

Real Estate watchers in the Village on the Edge of the Rainforest have seen high end properties in Vancouver shoot up over the past couple of years, but not everything has been making stunning gains.

And as all signs point to a looming market correction, there has been an interesting development.

The Penthouse at Shaw Tower in downtown (1077 West Cordova) sold this week.

Billed as Vancouver’s tallest waterfront tower, the Penthouse at Shaw Tower features panoramic unobstructed views of Burrard Inlet, the Five Sails of the Vancouver Convention Centre, Coal Harbour, Stanley Park, Lions Gate Bridge, English Bay, Downtown City Lights, and Mount Baker.

The Penthouse suite occupies a full floor of the Shaw Tower and this has 4 bedrooms, a home office, climate controlled wine room, media room, and multiple large decks. The interiors feature limestone flooring with radiant heat, custom wood mill work, chef’s kitchen, limestone gas fireplace, art feature walls, onyx, limestone, mill work closet systems and automation system, sunshades and blackout shades, security system, private hot tub, built in BBQ.

The home comes with 4 parking stalls and private storage room. The building has concierge service, gym, and private boardroom and home theatre. Realtors bill it as a unique opportunity to own the most stunning penthouse in Vancouver.

The problem?

The property has languished on and off the market now for almost four years.

Back in May of 2011 it hit the market with an asking price of $19,800,000. The price was dropped to $15.5 million with not takers.

It finally sold this past week for $10.1 million.

The media reported the sale as a property that sold for 2/3rds of the asking price ($15.5 million down to $10.1 million) but when you take the asking price from May 2011 into account, it's almost a 50% drop.

Is this a portent of what's to come in Vancouver?

Hard to say. A property is only worth what someone will pay for it and we have seen some real outlandish asking prices. The real question is, what did the owner originally pay for it?

Is the $10.1 million sale price a gain or a loss? Did the owner dump the property because all signs are pointing downward?

We're not sure. But what does stand out is that the asking price had to be slashed in half to complete a sale.

Maybe Royal Bank (contrary to Phil Soper) was valid in preparing for a 25% real estate correction.

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The Dollar dump continues

2012-01-13T00:01:00.000-08:00

Last Saturday we made reference to a Zero Hedge article that commented about what was then a record $77 billion in Treasury sales from the Fed's custody account.

The obvious conclusion from that data is that, contrary to what one hears in the media, foreigners are offloading US paper hand over fist.

ZH then wondered, if Treasurys are being dumped, "what they are converting the USD into, and how much longer will the go on for? The last thing the US can afford is a wholesale dumping of its Treasurys."

The concern is that the traditional diagonal rise in foreign holdings of US paper has not only pleateaued, but it is in fact declining: a first in the history of the post-globalization world.

Well here we are a week later and as of yesterday's H.4.1 update, the outflow has increased to it's 6th consecutive week by yet another $8 billion to a new all time record of $85 billion.

The 6 consecutive weeks of outflows is now tied for the longest consecutive period of outflows from the Fed's Custody account ever.

This week's sale brings the total notional of Treasurys in the Custody account to just $2.66 trillion (down from a record $2.75 trillion) and the same as April of last year.

And since the sellers are countries who have traditionally constantly recycled their trade surplus into US paper, this is quite a distrubing development.

As ZH notes, it is getting increasingly more difficult to ignore this disturbing trend, especially with US bond auctions mysteriously pricing at record low yields month after month.

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The Empire Strikes Back

2012-01-12T11:20:00.000-08:00

The first two weeks of 2012 have given us a plethora of bearish items on Real Estate.

From the nation's largest bank, who tells us it is so concerned about a significant real estate correction that it has stress-tested itself for a 25% collapse... to the uber-R/E optomist Ozzie Jurock who exhorts to his followers:

"if you are a seller - list now! If you are a buyer, take your time, the market will not run away from you."

The damage all this negative press must be doing to that all important metric known as 'buyer confidence' must be immense.

Let's face it... who wants to catch a falling knife?

So it should come as no surprise that we would see some push back in the media from those most affected by all this negative hype.

And - almost as if on cue - along comes real estate giant Royal LePage to counter these damaging developments to it's business.

Headlining "More Gains in Home Prices Expected", LePage's CEO Phil Soper is quick to dismiss all this negative talk which might lead some to hesitate from buying (and subsequently hurt his company's commissions).

"Widespread calls for a major real estate correction in 2012 simply can't be justified," Soper said in a statement. "The industry has significant momentum entering the year, and buoyed by the stimulative effect of very low interest rates, we expect the market to continue to expand — albeit at a slower pace."

Soper is adamant that Canada's housing market will continue to be strong this year, with rising property values expected in ALL major markets and his company is forecasting prices to rise 2.8% nationwide by the end of 2012.

And bucking the consensus of virtually everyone else, Soper insists that even the pricey housing markets of Vancouver and Toronto will see continued price appreciation this year.

I suspect Royal LePage et-al will now strike back with a massive - and none too subtle - media campaign to influence that all-so-important 'buyer confidence' in a desperate attempt to negate the negative outlook currently being propagated.

Let's see how long before the major papers are 'influenced' into running those cutsie little profiles of prospective buyers who see this as an 'awesome' opportunity and time to buy.

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Are Canadian Banks preparing for a housing collapse?

2012-01-11T00:01:00.000-08:00

With each passing day of 2012, the real estate situation grows more and more intriguing.

Yesterday it was the stunning comments of Ozzie Jurock that grabbed out attention.

Today it is the actions of the Royal Bank of Canada.

During 2011 there was no mention from Canada's largest bank that potential disaster looms on the horizon.

Yet RBC CEO Gordon Nixon let slip at an investor conference in Toronto on Tuesday that Royal Bank of Canada is not only concerned, but has taken the unusual step of conducting stress tests on its books to see how Royal would withstand a decline in housing prices by as much as 25%.

Nixon is quick to point out that the bank doesn’t figure the situation will become that dire, but he is concerned enough that he has investigated whether RBC's lending operations could withstand such a large hit if one were to occur, particularly in the Vancouver and Toronto condominium markets.

The bank’s exposure to the Canadian condo development market is about $2-billion, Mr. Nixon said.

No matter how you spin it, this is a stunning development.

Yesterday perennial R/E cheerleader Ozzie Jurock astonished local observers by telling followers to ignore that fact that Vancouver prices are the same this December over last December and to focus on the fact that:

the December average price of $ 691,000 is a whopping $141,000 or a full 17% lower than the May 2011 average price (which clocked in at $834,000).
that overall sales decreased 13% over last December and were a "WHOPPING" 34.1% lower than in December 2009.
and that sales of detached properties decreased 18.1% from the sales recorded in December 2010, and were a "WHOPPING" 30.2% lower than in December 2009.

Over on the blog, Vancouver Condo Info, the conversation focused on the dramatic numbers coming out in local real estate.

Noting that it’s normal this time of year for listing to outnumber buyers as people who haven’t managed to sell relist their property, the observers at VCI are taken aback at just how significant the ratios are.

Leading the pack were the numbers for the westside of Vancouver with 96 new listings, 10 price changes and an astonishingly paltry 5 sales.

The author of the post says, "Yes, that’s right. 96 new listings on the west side of Vancouver on one day and only 5 sales. Any idea whats going on here? Were there so many listings that all the sales didn’t get entered, or did we really just have crazy sales/ list ratio day?"

As we noted yesterday, Ozzie Jurock may have provided the answer when he suggests to all who will listen that, "if you are a seller - list now! If you are a buyer, take your time, the market will not run away from you."

And with Canada's largest bank testing the waters to see how they would withstand a housing collapse of up to 25%, one can only imagine that those list/sell ratios will intensify dramatically.

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Everyone's a bear now - even Ozzie Jurock?

2012-01-10T00:01:00.000-08:00

As mentioned several times over the last week, everyone seems to be coming to the realization that the Real Estate market is in for a correction.

Douglas Porter, deputy chief economist with the Bank of Montreal says, “while the timing of said slowdown remains up in the air (and it’s no foregone conclusion it will start this year), it is highly unlikely that Canada’s housing market can continue its recent winning ways.”

Porter’s colleague at BMO, senior economist Sal Guatieri, doesn’t expect the “nastier” turn, saying in a separate report that the market is losing steam, and that valuations remain a worry, but that there will still be “modest gains” in overall sales this year, along with steady prices. "If you listen closely you can hear the sound of air seeping out of Canada's housing balloon," Guatieri said.

Jacques Marcil, senior economist of Toronto-Dominion Bank, believes housing markets will weigh on the economies of British Columbia and Ontario and he projected a “significant correction” this year, noting that the hot Vancouver market probably peaked in 2011.

Even the Real Estate Board of Greater Vancouver reported this week that sales last year climbed 5.9% from 2010, but slowed at the end of the year. Sales in December fell 12.7% from the same month a year earlier. And while prices were still up by 7.6%, the REBGV tells us they were 1.5% below their peak of June, 2011.

But perhaps most astonishing is to see even Ozzie Jurock cast disparaging words on the ever inflating real estate market.

Jurock headlines that Vancouver prices are the same this December over last December but then goes on to give you some very bearish analysis which includes some very uncharacteristic negative comparisons:

Jurock even goes on to offer you some very bearish advice. "If you are a seller - list now! Prices usually rise January to May as do sales... and fall after that. If you are a buyer... take your time... the market will not run away from you."

Imagine if everyone were to follow Ozzie's advice, i.e. a rush of listings while buyers patiently wait and stay away?

It could make for a very interesting spring.

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'BC to face a significant correction in 2012' - TD Bank

2012-01-09T00:01:00.000-08:00

We didn't get around to it, but last week economist from another Canadian bank came out forecasting trouble for BC Real Estate.

TD Bank predicts BC will face 'real estate trouble' over the next two years but attempts to soften the blow by saying CANADA will not suffer a bust in the housing market.

Comforting, I guess, but let's face it... the rest of the nation is nowhere near the type of bubble we have here on the left coast.

Perhaps that's why TD added that, "British Columbia is forecast to have it worse and will likely see a signifcant correction this year".

Strong words but what is 'a significant correction'?

The TD report examined the country's provincial economies and projects home resales in British Columbia to sink 3.7% this year and prices to decline 3.5%. The report also talks about 2013 and says, "the correction will extend into 2013, as unit resales fall a further 5% while prices slip 4.4%."

So TD see's the market dropping over the next two years and that prices will drop 8%, a correction TD calls 'significant'.

8%?... is that really 'significant'?

Perhaps what is more significant is the growing consensus that the housing market is going to suffer a downturn.

When even the banks are telling you that houses are going to be cheaper a year from now (twice as cheap two years from now), do you buy?

And with sales down 12.9% in Greater Vancouver last month, will even more buyers shy away from the market in the months ahead creating even more intense downward pressure on prices?

The first six months of 2012 are going to be extremely interesting to watch.

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If the US walked into the bank and asked to raise their 'debt limit'...

2012-01-08T00:01:00.000-08:00

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Is a US dollar dump underway?

2012-01-07T12:20:00.000-08:00

Zero Hedge notes the US Federal Reserve provides a weekly update known as the H.4.1.

Observers of the Federal Reserve's Custodial Treasury account follow these updates with keen interest. Recently they have been somewhat perplexed. There has been a continued, weekly selloff of $56 Billion of US Treasury's.

Is the continued drop an asset rotation - under duress or otherwise - out of bonds and into stocks, to prevent the collapse of the global ponzi? Or, as Zero Hedge pondered, has the dreaded D-day in which foreign official and private investors finally start offloading their $2.7 trillion in Treasurys with impunity arrived?

Recall that a few months ago China has made it abundantly clear it will sell its Treasury holdings, the only question is when.

The most recent came out on January 4th and a further $17.7 billion has been "removed" from the Fed's custodial Treasury account.

The alarm bell that is going off her is that in six consecutive weeks, foreigners have sold off more government bonds in a sequential period of time than ever before. It means that someone, somewhere is very displeased with US paper, and, far more importantly, they want to make their displeasure heard loud and clear.

It is an interesting development worth watching. The consolidated outflow notional is now a record high $77 Billion (beating the previous record of $52 Billion). Should the selloff accelerate, look for the Federal Reserve to have to step in.

The real question is what they are converting the USD into? And how much longer it will go on for?

The last thing the US can afford is a wholesale dumping of its Treasury's. The traditional diagonal rise in foreign holdings of US paper has not only pleateaued, but it is in fact declining: a first in the history of the post-globalization world.

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The Outer Limits

2012-01-04T20:56:00.000-08:00

If there is a theme to the 2011 year for Real Estate in British Columbia it is how Vancouver reached new all time highs while the Outer Limits (anything outside Greater Vancouver) languished.

And nothing highlights that trend more than Victoria.

The Victoria Times Colonist newspaper reports today that the city's home sales tumble to 11 year low.

According to year-end figures from the Victoria Real Estate Board, 2011 bore witness to the lowest total number of unit sales in 11 years. And last year's 3,069 single-family home sales was the lowest since 1990.

Victoria Real Estate Board president Carol Crabb says the reason for the dramatic drop ranges from global economic uncertainty to people waiting and hoping to see prices fall.

"The whole feel of the market has shifted a little," she said. "It has slowed down. People are taking longer to make decisions, though I'm not sure why when interest rates are so good. But there is some uncertainty out there."

It's a scenario that sounds eerily like the United States where record low interest rates have simply failed to resuscitate a collapsed real estate market.

One certainly has to wonder if the beginning of the collapse in, in fact, upon us.

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Will we watch a Trillion dollars go poof?

2012-01-03T21:25:00.000-08:00

The B.C. Assessment Authority posted 2012 assessment information today and the 1.9 million properties in British Columbia have a combined assessed value of more than $1 Trillion dollars.

Wow.

BC homeowners sure are wealthy, right?

Consider, however, the stunning debt ratio and burden Canadians are carrying.

How much of that $1 Trillion is leveraged out due to HELOC's?

How much credit card debt are we carrying?

And like Nortel stock, what happens if price plummets precariously? You 'assets' evaporate while your debt remains.

It's a good thing real estate never goes down.

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Mon Post #2: On the Precious Metals front...

2012-01-02T14:30:00.000-08:00

There has been considerable angst over precious metals with the latest slam from the MF Global fallout during the month of December.

Above is a great clip with Peter Schiff who reiterates what we certainly believe, which is that the long term outlook for both Gold and Silver remains bullish.

None of the fundamentals have changed, none of the conditions have improved... so the outlook remains the same.

One interesting comparison you might find useful is too look at the price of Gold as of December 31, 2011 (which is down almost $400 from the $1900+ highs it hit during the year) and compare that December 31 price with the price of Gold from December 31's of years past:

2000 -- $273.60

2001 -- $279.00

2002 -- $348.20

2003 -- $416.10

2004 -- $438.40

2005 -- $518.90

2006 -- $638.00

2007 -- $838.00

2008 -- $889.00

2009 -- $1096.50

2010 -- $1421.40

2011 -- $1566.80

Gold continues it's bull run and will do so in 2012.

Here is a great chart analyzing the 'corrections' over this time period (click image to enlarge):

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Monday Post #1: On the Real Estate front...

2012-01-02T00:01:00.000-08:00

Happy New Year everyone. First up this week is information on the Real Estate front.

With almost everyone now seemingly calling for a correction of some kind the data for the month of December 2011 is keenly anticipated.

Realtor Larry Yatkowsky is out with his latest graph (click image above to enlarge) and looking at the figures for Single Family Houses (SFH) you certainly have to wonder if the long anticipated correction may have begun.

The average price for SFH's dropped a significant 6% month over month (from $1,134,396 to $1,064,249). This drop means SFH's are now down a total of 13% from their peak highs. Our friends over at VREAA have laid out that drop month by month:

May 2011: $1,223,421 *Historical peak
June 2011: $1,215,265
July 2011: $1,133,357
August 2011: $1,162,242
September 2011: $1,104,896
October 2011: $1,162,349
November 2011: $1,134,936
December 2011: $1,064,249 (down 13% since peak)

As you can see it isn't a straight drop, but it is a stunning 13% decline from the high of 7 months ago. Another interesting statistic is Inventory.

When you compare December of 2011 to December of 2010, the total inventory for sale is up 17%. Meanwhile total sales are down - also by 17%. While December is always considered a slow month, this large boost in inventory with a corresponding drop in sales activity is significant. And the downward trend on the average price graph certainly stands out and captures your attention.

All eyes are now focused on the Spring market. Will the number of listings start to accelerate with listings ballooning in January, February and March? Will sales continue their downward slide as buyers hesitate for fear of catching a falling knife?

And what of the growing number of Boomers approaching retirement - 70% of whom lack sufficient funds for the Golden Years and whose entire retirement 'plan' lies solely in selling their bubble value property to cash in on those gains and downsize?

Will there be a rush to list and complete a sale even if it means accepting significantly lower offers beyond the current 14% drop from the bubble highs? They would still be making a massive profit over what they paid 30 - 40 years ago so the ability/willingness to accept what would currently be considered low-ball offers is there.

We continue to watch with fascination.

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Happy New Year

2012-01-01T00:01:00.000-08:00

To all of you out there, Happy New Year and all the best in 2012.

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Sat Post #2: New Year's Eve

2011-12-31T17:01:00.000-08:00

On a night where we often reflect on the recently completed year- and on years gone by - I wish you all a safe and Happy New Year's Eve.

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Sat Post #1: Foreclosure Process in British Columbia

2011-12-31T00:06:00.001-08:00

Yesterday's post prompted a discussion about the Foreclosure Process in British Columbia so as the second last post of the year let's make that the topic.

Ever popular downtown realtor Ian Watt has a site that specializes in Foreclosures and some info on the topic. This info is from his site.

Buying a foreclosure in BC is somewhat different from buying a regularly owned property and it is certainly different from buying a bank owned property in the United States.

First of all, please understand that in BC the courts will ensure the homeowner is protected and their property is marketed and sold for an amount as close to "Fair Market Value" as possible.

Whereas in the US, the laws protect the banks and properties can sell substantially well below market value, buying a foreclosure in BC could get you a deal and save you some money on the purchase price, but rarely does a property ever sell less than 20% off fair market value.

The Foreclosure Process in most cases works like this:

After a lender has been given the right to sell the property by the BC Supreme Court, the lawyer acting on behalf of the lender hires a realtor to market the property. The property can still be owner occupied and showing may be limited and sometimes difficult due to the nature of the circumstances.

When the foreclosure property is listed on the MLS, the listing agent will showcase that property to as many purchasers as possible in hopes to get an offer that is suitable to the lender.

When a buyer submits a written offer, which includes a Schedule A (which amends the regular Contract of Purchase and Sale), to the listing agent, the listing agent will present that offer to the lender's lawyer and he or she will act of behalf of the lender during the negotiation. During this period the lender and the purchaser will negotiate a price they are both satisfied with.

Upon accepting the offer, the purchaser will have 5 business days (in some cases) to do all their due diligence. After the buyer is satisfied with her due diligence and she has her financing in order, she then prepares a certified deposit cheque or bank draft and remove all subjects in regards to the lender. This is now a subject free offer as far as the buyer and the lender are concerned. However, there is one last subject which is "Subject to Court Approval".

The lender's lawyer will now set a court date and this could take on average 2 to 4 weeks time. A few days before court, the listing realtor will disclose the price which the offer was accepted for. That will give any other perspective purchasers the ability to decide if they want to come to court and outbid the original offer or not.

Unlike a regular property for sale, the first offer that comes in and is accepted by the lender is not necessarily the person who ultimately ends up owning the property at the end.

At Court the listing agent will collect all, if any, competing offers which must be subject free, contained in a sealed envelope, include a schedule A addendum, and be accompanied with a certified deposit cheque or bank draft.

When the judge has this property address file in front of her, the judge may give the owner one last time to redeem the owner's mortgage and any other outstanding debts. If there is no attempt to pay off all the debts she will proceed with the offers to purchase the property.

Should there be mulitple offers, whoever has the highest subject free bid in the sealed envelope will most likely be awarded the property. Depending if the property is vacant or owner occupied, the completion and possession could be after the court date will be somewhere between 2 to 8 weeks.

It is strongly recommended that the purchasers are in court to either up their bid or be present to initial any changes that the judge may request. There are no second chances for anyone after the judge has made her decision and there is no chance to back out of the contract.

The property is now sold and all documentation is forwarded to the parties involved for conveyance.

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What if?

2011-12-30T09:06:00.000-08:00

All the talk of a housing correction of 12% (or more) in 2012 - and the impact such a correction might have on those already tightly squeezed by their current debt situation - raises an interesting question.

What will banks do at mortgage renewal time?

It is interesting to watch the reactions of the average Canadian when you raise the topic of US subprime mortgages.

They know very little about what a US subprime mortgage is.

In the United States, it is common for people with mortgages to have a 30 year term at the same interest rate for all 30 years.

Subprime mortgages were for those for didn't qualify for these type of mortgages. Subprime mortgages were for shorter terms (1 - 7 years) with teaser rates that would expire. Basically subprime mortgages were mortgages that had an interest rate that would 'reset' after a few years and the mortgage holders had to go out and get a new mortgage.

Once this is explained to them the average Canadian's brow furrows, the head cocks, and you can almost smell the wood burning as the realization dawns.

Virtually every single Canadian has a 1, 3 or 5 year mortgage with an interest rate that 'resets' at current market rates at the end of the 1, 3 or 5 year mortgage term. And by 'reset' we mean a brand new mortgage is issued to the mortgage holder.

Virtually every single Canadian mortgage is just like an American subprime mortgage.

In the United States, as the housing bubble burst and property values began to collapse, many subprime mortgage holders were forced to renew mortgages at substantially higher interest rates. Many faced significant interest rate hikes because of their risky status and the underwater state of their mortgage vs their property value.

In Canada the situation is somewhat different with the CMHC but what will happen in Greater Vancouver to a Lower Mainland homeowner who has a $500,000 mortgage with no equity (because of HELOC withdrawals) and has seen the 'value' of their property drop 12% - 15% (or as some are predicting - 30%).

A 15% drop in 'value' means you are asking for a new mortgage that is now $75,000 greater than the appraised value of the property.

A 30% drop could leave people underwater by as much as $150,000. (We won't even begin to factor in the situation faced by the 0/40 crowd whose 5 year terms are coming due just as the Conservatives ponder reducing mortgage terms to 25 years next March).

Will the bank renew these mortgages?

Most people assume they will.

But some people to question is this is, in fact, the case. Over on the blog, Vancouver Condo Info, one contributor noted the following this morning:

"Recently I had an informal talk with a friend who works at one of the big Canadian banks. I asked him if he noticed any changes in the mortgage business. He said it’s still going strong. Interestingly though he also mentioned that he noticed an interesting phenomenon... if the mortgage was $600k or higher (most of the time this resulted from clients rolling in other kind of debt into their mortgage payments) the principal appears to have remained at the same level for the last 2-3 years. He noted that these $600k+ clients appear to be paying the principal over the years but after a while they ask that some line of credit with $30k-60k on it be rolled in the mortgage which bumps the principal back to previous years’ values. I asked what would happen if the clients can’t pay… does the bank take the property into foreclosure? The way he answered caught me a little off guard. It felt like he never quiet thought the process through. He said that the bank will work quite hard to 'help' the client continue paying. He seemed to think that the foreclosure procedure was the solution of last resort."

What I find striking is that I have also raised this point with colleagues who work at some of the big banks and I get a similar, perplexing response.

No one really seems to know for sure because no one has really addressed this question.

Everyone assumes that banks won't be foreclosing because it is assumed the banks won't gain by foreclosing. That to do so (foreclose) wouldn't be in the bank's interests because it would cause a glut of inventory that will crash the housing market.

But will this stop the banks?

One thing we know for sure is that there are foreclosures happening in BC and elsewhere in the country. Did the banks avoid foreclosing on these people?

Nope.

So why do you think they will avoid foreclosing on you when the time comes?

Remember... the vast majority of these mortgages carry CMHC insurance (which is why the banks were willing to make these stupid loans in the first place). If the banks foreclose, they don't lose a penny on the loan. They could flood the market with properties, drive market prices dramatically downward, and they won't care.

They could sell the $500,000 house to anyone who will give them anything - say $200,000 - and all the bank does is turn around and hold out their hand to CMHC for the $300,000 they lost on the transaction.

If we were to have a rash of people caught in large underwater positions on their mortgages, what is the incentive for the banks to avoid the foreclosure process (and as you rationalize why they will do this - ask yourself why they didn't do it to the people who are currently being foreclosed on)?

As it is, the foreclosure process in BC is already long and arduous (taking over a year plus to complete). Banks have a responsibility first and foremost to their shareholders. It you are in a financial bind, why will banks make it worse by renewing bad loans?

Yet the vast majority of people you talk to are convinced the banks will "work very hard to make sure you keep your property" and will utilize foreclosure as a last resort. They are also convinced that the government will step in if these conditions evolve and pressure the banks not to foreclose to protect the economy. Many are convinced CMHC will be instructed to guarantee underwater mortgage renewals so long as they are renewals.

I suspect a great many homeowners in Greater Vancouver are going to be supremely shocked at the difference between the bank's definition of 'last resort' and their own.

I further suspect they will be stunned at the indifference of government to the financial hardships caused by a collapsing real estate market when CMHC offers no such support for massive underwater mortgage renewals.

Whocouldaknown?

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Thur Post #2: Housing mania leaves Canadians over-indebted, economy vulnerable to pullback

2011-12-29T15:50:00.000-08:00

Earlier today we talked about how precarious the debt situation is for a friend's landlord (see Thur Post #1 below).

Now the Vancouver Sun expands on how tedious the debt situation is for Canadians in general.

According to a report released today by the Canadian Mortgage and Housing Corporation, the record level of household debt in this country is a "serious issue."

And what prompted this exclamation?

As of March 2011, Canadians owed more than a trillion dollars on their mortgages.

That's Trillion with a "T".

The CMHC reported that housing-related spending of about $330 billion a year in 2010 has risen by 67% since 2001 and now comprises 20.3% of Canada's gross domestic product in 2010.

These statistics underline the importance of that debt load, and what might happen to the economy if for any reason Canadians crack under its burden.

CMHC figures show that mortgages made up about 68% of total household debt in 2010. Consumer credit, which makes up the other 32%, has been growing faster than mortgage debt over the past two decades.

"Concerns expressed about household indebtedness have been largely driven by the total household debt-to-disposable income ratio," the report says.

"The major risk in the mortgage market is impairment in a household's ability to pay, often due to job loss. Recession or other adverse economic scenarios, such as rising interest rates, could certainly pose a challenge for some Canadian households."

Subprime was the trigger in the United States. Our's may well be debt piggies who can no longer keep their heads above water.

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Thur Post #1: A 12% correction is no big deal, right?

2011-12-29T12:36:00.000-08:00

Last week TD Bank came out and forecast a "larger-than-average price and sales correction" for the housing market in Vancouver next year projecting a sales drop of 15% and a home-price decrease of 12%.

The mere fact that they are making such a forecast is significant on it's own. Warnings of an overblown market have moved from the fringe of the blogosphere to the mainstream with only the staunchest of the bulls denying the inevitable.

The question now is... by how much will it correct?

When the US market collapsed in 2006, it was a small segment of the market - the subprime sector - that started the domino's falling.

But no one saw it coming because the subprime sector was considered such a small segment of the mortgage market that even if it did collapse, no one believed the repercussions would be felt let alone have a significant impact (see the portion of video below at the 5:12 mark where economist Ben Stein chastises Peter Schiff about the significance of the subprime market).

As it turned out, subprime was but the first of a number of domino's that fell... triggering a full scale collapse.

Fast forward to today. TD is predicting a 12% correction in the Greater Vancouver market. But what will be the repercussions of that first domino falling?

As we have documented over and over, the biggest concern in Canada is the huge debt load being carried by Canadians. Many local blogs have long speculated on just how significant a factor the overextended homeowner will be when the market starts it's unwind.

A close acquaintance of mine lives in the Vancouver suburb of Surrey (an area that respected blogger Garth Turner recently predicted would see a 30% correction if the national market tanks 15%).

A staunch housing bear himself, my close acquaintance rents the house he is currently living in. The home was recently assessed at a value of $450,000 and the landlord is the quintessential poster child of the over-extended, amateur Vancouver landlord.

Owning her own home in Coquitlam (another Vancouver suburb) plus two rental homes in Surrey, she constantly struggles to make ends meet.

Recently a spat of repairs were required on the house my acquaintance lives in.

First, the garage door sustained damage. When arrangements were made for an assessment from a repairman, the landlord asked my friend to pay the $80 charge (which would be deducted from the next month's rent) because she no longer had a credit card.

Next, the dishwasher failed. A plumber was called and he replaced the garburator (a repair that had been put off since summer) as well as the dishwasher. And while the landlord arranged a cash payment for these (delivering the money to my friend to give to the plumber on the day the work was to be done), the plumber later confided the landlord had been in tears on the phone as they discussed the best place to secure the 'lowest' price on a new dishwasher.

I'm sure you won't be surprised to learn that all repairs seemed to be "under the table" with no apparent HST tax paid.

There are other repairs that are required at the house but are "on hold" because the landlord admits to cash flow problems.

The landlord has told my friend that the house was a gift she received from her parents over 13 years ago.

So does that mean the property is mortgage free?

In the 3 years my friend has been at this house, he has accommodated 3 requests to have the property assessed for HELOC applications. In the most recent visit (always by the same assessor), the assessor let slip that he had also been doing the same on her two other properties. She has maxed out the available equity on this house (about six years ago this money was used to purchase the second rental home), the second rental home and her own house.

Now, with TD Bank expecting a market correction of 12%, where will this landlord wind up?

This landlord (not unlike many others in the Lower Mainland) have been using their homes as personal ATM machines. And the money they have taken out against their properties is spent.

This particular landlord struggles to maintain basic repairs on the homes and is in a personal financial situation where she no longer has access to credit cards.

What will a 12% drop in property values mean to this landlord?

On the one Surrey home (assessed value $450,000), a 12% correction is a loss in $54,000 in mortgaged asset value. A 15% drop translates to a loss of $67,500. If we were to realize Garth Turner's prediction of a 30% drop - the loss on this house would be $135,000.

Without continued price appreciation, not only is the HELOC ATM most assuredly closed to her for future withdrawals but any major repair or incident will be devastating to family finances.

If the other two homes are of equal value, she is facing a total drop of $162,000/$202,500/$405,000 in asset value (based on drops of 12%/15%/30%), none of which is equity. Are the banks going to blindly renew mortgages on these three properties when she could be underwater by almost half a million dollars on all three combined?

At what point does the straw break the proverbial camel's back?

How many more are in similar circumstances?

Without a dramatic turnaround in the economy, how can these people avoid any other fate besides default, bankruptcy and foreclosure?

Anecdotal evidence suggests there is a strong likelihood that a higher percentage of Greater Vancouver homeowners are in this situation vis-a-vis the greater mortgage market than there were subprime mortgage holders in the US mortgage market.

A 12% or 15% correction does not sound like much, but given the dynamics of the Vancouver market it could be devastating.

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The bailouts continue... you're just not hearing about them

2011-12-28T10:23:00.000-08:00

A while back, US Republican candidate Ron Paul commented on the ongoing bailouts of Europe by the US Federal Reserve:

The Fed's latest actions in cooperating with foreign central banks to undertake liquidity swaps of dollars for foreign currencies is another reason why Congress needs enhanced power to oversee and audit the Fed. Under current law Congress cannot examine these types of agreements. Those who would argue that auditing the Fed or these agreements with central banks harms the Fed's independence should reevaluate the Fed's supposed independence when the Fed bails out Europe so soon after President Obama promised US assistance in resolving the Euro crisis.

And today the Wall Street Journal reported that former Dallas Fed Vice President, Gerald Driscoll has come right out and accused the Fed of bailing out Europe courtesy of "incomprehensible" currency swaps, and implicitly accusing Bernanke of lying that he would not bail out Europe even as he has done precisely that.

The Federal Reserve's Covert Bailout of Europe
When is a loan between central banks not a loan? When it is a dollars-for-euros currency swap.
America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.
The Fed is using what is termed a "temporary U.S. dollar liquidity swap arrangement" with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or "swaps" dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.
Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman's collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.
The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.
The ECB is entangled in an even bigger legal and political mess. What the heads of many European governments want is for the ECB to bail them out. The central bank and some European governments say that it cannot constitutionally do that. The ECB would also prefer not to create boatloads of new euros, since it wants to keep its reputation as an inflation-fighter intact. To mitigate its euro lending, it borrows dollars to lend them to its banks. That keeps the supply of new euros down. This lending replaces dollar funding from U.S. banks and money-market institutions that are curtailing their lending to European banks—which need the dollars to finance trade, among other activities. Meanwhile, European governments pressure the banks to purchase still more sovereign debt.
This Byzantine financial arrangement could hardly be better designed to confuse observers, and it has largely succeeded on this side of the Atlantic, where press coverage has been light. Reporting in Europe is on the mark. On Dec. 21 the Frankfurter Allgemeine Zeitung noted on its website that European banks took three-month credits worth $33 billion, which was financed by a swap between the ECB and the Fed. When it first came out in 2009 that the Greek government was much more heavily indebted than previously known, currency swaps reportedly arranged by Goldman Sachs were one subterfuge employed to hide its debts.
The Fed had more than $600 billion of currency swaps on its books in the fall of 2008. Those draws were largely paid down by January 2010. As recently as a few weeks ago, the amount under the swap renewal agreement announced last summer was $2.4 billion. For the week ending Dec. 14, however, the amount jumped to $54 billion. For the week ending Dec. 21, the total went up by a little more than $8 billion. The aforementioned $33 billion three-month loan was not picked up because it was only booked by the ECB on Dec. 22, falling outside the Fed's reporting week. Notably, the Bank of Japan drew almost $5 billion in the most recent week. Could a bailout of Japanese banks be afoot? (All data come from the Federal Reserve Board H.4.1. release, the New York Fed's Swap Operations report, and the ECB website.)

More and more balls are being thrown in the air.

The question remains... how long can the ponzi juggling act be maintained?

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Chinese Central Banker Declares That 'Gold Is The Only Safe Haven Left'

2011-12-27T11:08:00.000-08:00

Apparently People's Bank of China official Zhang Jianhua declared yesterday that: "No asset is safe now. The only choice to hedge risks is to hold hard currency - Gold."

Zhang, the bank's research director, recommended buying the dips and said: "The Chinese government should not only be cautious of the imported risk caused by rising global inflation, but also further optimize its foreign-exchange portfolio and purchase Gold assets when the Gold price shows a favorable fluctuation."

China's $3.2 trillion in foreign reserves are currently invested one-third in U.S. treasuries 20% in euro-denominated assets and only 1.8% in Gold, according to China Daily.

Presumably China's Gold holdings are about to change significantly.

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Merry Christmas to All

2011-12-25T00:01:00.000-08:00

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Twas the night before Christmas...

2011-12-24T00:01:00.000-08:00

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

Holiday cheer to all the realtors, bloggers, R/E watchers and interested parties in precious metals and economic policy.

I enjoy this blog and I enjoy the emails/comments you send and post. If you pop by today, take a moment to leave a comment. I would love to hear from you.

To those who so diligently send me links, thoughts and comments, it is greatly appreciated despite the fact I may not necessary respond personally to each one.

Happy Christmas to all...

The best of the season to you and your families...

And to all a good night.

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Naysayers

2011-12-23T12:21:00.000-08:00

Seems like everyone is jumping on the 'housing correction' bandwagon.

The latest is TD Bank who, in a report released this week, say that "the Canadian housing market in 2012 will be a 'tug-of-war,' with low interest rates hauling hard on one end of the rope, and economic uncertainty joining forces with slow income and employment growth to pull back on the other. Ultimately, we expect the economic side of the equation to win out over the near-term."

TD sees a double blow coming. The economy suffering in 2012 and then higher interest rates in 2013, both of which will knock the stuffing out of the bloated housing market.

And how will it affect our little hamlet on the wet coast?

"Among the 12 major markets profiled in this report, Calgary and Edmonton ought to lead the pack. Solid economic fundamentals and the absence of a recent run-up in prices support our call. Toronto and Vancouver do not appear to be as lucky — we have them experiencing a greater-than-average correction in both sales and prices over the next two years."

Yesterday we noted that Garth Turner sees up to a 15% correction nationally with Surrey, a suburb of Vancouver, taking as much as a 30% hit.

Meanwhile the Globe and Mail is urging people "not to drink the housing market kool-aid."

In an article the doesn't pull any punches you are told straight out that "the affordability gauges used by the banks – i.e., people who make money selling mortgages – are too slack. They let people buy more house than they can comfortably afford while meeting their savings obligations. If your mortgage and all your monthly debt payments would exceed 30% of your monthly pretax income, then back off and keep saving. Worried that the price of houses will keep rising and you’ll never be able to afford to buy in? Won’t happen. When people like you are priced out of the market, the market must fall.”

When you combine all of this with Bank of Canada Governor Mark Carney's warnings this week, I don't think it can be spelled out any plainer than that for you.

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To plunge or not to plunge?

2011-12-22T14:07:00.000-08:00

Will Canadian Real Estate plunge dramatically over the next few years or not?

Recently Garth Turner opined:

"Most commentors decry my estimate of a coming 15% reduction in the national average, followed by a lengthy period of real estate decline. They want bloody intestines. They want it now. Phoenix is their idea of a good market (prices off up to 80% in some hoods). They relish the thought of screaming Boomers in white golf shoes clinging to a shard of granite c-top while a front-end loader turns their McMansion into landfill. As appealing as that may be, it won’t happen here... What took years to swell will take as long to contract. Remember, the US housing market peaked in the last few months of 2005, and is still correcting more than six years later

It seems many of our delusional visitors have no idea what 15% means. First, this average number would translate into a 0% change in, say, La Broquerie or Chicoutimi (or Fredericton and Thunder Bay), but something closer to 20% in Brampton and 30% in Surrey. Given local conditions, there’d even be individual neighbourhoods exceeding that. As for a comparison with US prices, it’s simply a myth they have plunged 50% across the country."

Turner's excellent post on the issue can be read here.

On the other end of the spectrum is this article by Seeking Alpha titled: Phoenix Phenomenon: Why Real Estate Everywhere Will Eventually Drop Over 50%.

"In cities like Atlanta, Detroit, Las Vegas, Minneapolis, Orlando, Phoenix, and Tampa-St. Petersburg, housing prices have fallen sharply and had lost more than half of their value in many neighborhoods... The question is whether (these) cities are the exception to the rule, or simply experienced their pullbacks earlier than most other places. In other words, is Orlando the anomaly, or will most of the remainder of the United States, Canada, Australia, China, Brazil, and the rest of the world eventually behave like Orlando?"

Personally I'm willing to bet Vancouver will write it's own story and that the story - ultimately - will be just as horrific as Pheonix or Orlando.

However, because of our bankruptcy laws and process, the unwind will be maddenly slow.

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Tues Post#2: Federal Reserve bailout by the numbers

2011-12-21T13:14:00.000-08:00

In the first week of December we talked about how Bloomberg had uncovered that the US Federal Reserve bailouts of the banks was much higher than previously known. According to documents released through the Freedom of Information Act, the bailout given to America's big banks was far bigger than the Federal Reserve let the public, and even members of Congress, know.

The US Federal Reserve basically provided free loans of $7.7 Trillion to wall street banks so that they could turn around and buy US Treasuries and made a profit on the interest difference - about $13 Billion (a profit which comes off the backs of the US taxpayers, of course). This is how the Federal Reserve is helping banks make money in this massive liquidity squeeze.

The youtube clip is set up to prevent embedding but you can view it by clicking here.

Another excellent clip involving Alan Grayson, former US Representative, who points out that when combined with the earlier revelations ($16 Trillion reported earlier), the Fed has bailed out the banks to the tune of $26 Trillion while all over America people are being kicked out to their homes via foreclosures.

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Tues Post #1: Part of the Plan

2011-12-21T01:30:00.000-08:00

Yesterday we posted that when the housing bubble began to burst in the United States in 2005/2006, the ruling federal Conservative government in Canada moved heaven and earth to shield our economy by protecting the real estate industry.

Cheap credit, artificially suppressed interest rates and government policy were used to fuel and protect the real estate boom in the hopes that the Great Global Recession would pass before the impact him home in the Land of the Maple Leaf.

How important has Real Estate been to the Canadian economy?

In 2010 the Canada Mortgage and Housing Corporation widely discussed the importance of the housing market for the Canadian economy in the CHMC publication 'Canadian Housing Observer'.

The CMHC’s numbers show that real-estate-related economic activity in 2009 contributed more than $300 billion to the Canadian economy.

That accounts for more than 20% per cent of Canada’s total gross domestic product.

Not only did new residential constructions and sales of current houses positively stimulate the economy by creating jobs, creating higher wages, creating investment, and creating government revenues but far more important to the government was the wealth effect motivated by increasing housing prices.

The housing bubble strengthened consumer confidence and, as a result, consumers spent more.

This was crucial for the Canadian economy. While the world was going through the Great Global Recession, this 'wealth effect' allowed Canada to get by without experiencing any real pain.

In an average recession, the economy starts to rebound after 3-5 years.

So the hope has been to get us through the worst of the recession and then allow growth in our resource based economy to mitigate the debt overhand.

The problem is that this was no ordinary recession.

As many in the blogosphere have noted, this economic crisis began with its financial system and as Bank of Canada Governor Mark Carney noted last week, “recessions involving financial crises tend to be deeper and have recoveries that take twice as long.”

And that's the problem... the recovery is not going to come in time.

Our nation's plan of "channelling cheap and easy capital into unsustainable increases in consumption" is just that... unsustainable.

It's forced Carney to publically address what, until now, has been a topic confined to the realm of the blogosphere. To wit that the “debt super cycle” in which debt fuels consumer spending as a driver of the economy is an era which“is now decisively over.”

This public admission is stunning for those who have spent any amout of time watching the statements of public officials.

It's your best evidence that the time of reckoning is rapidly approaching.

Which begs the question... how will it all play out?

As we posted back in 2009 in 'The Anatomy of a Bubble', no model can predict the timing, highs or lows of any bubble.

But all bubbles - be they real estate, stock market or whatever - tend to follow a pattern traced in human psychology.

And when any given bubble 'unwinds', it usually takes as long to wind down as it took to wind up.

Vancouver's real estate market has taken over 15 years to blow up into it's current state. As a result one could logically expect that the decline will take years, not months, to play out.

Ideally officials like Carney want to see a gradual unwind. That's the plan.

But can you engineer an orderly unwind?

Things don't always go 'according to plan.' The variable is the unknown... events that upset the plan.

I mean let's face it. If things went according to plan, the Recession would be over by now, wouldn't it?

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Do you hear what I hear?

2011-12-20T03:08:00.000-08:00

It's Christmas time in the city and the scarcity of posts from your dutiful scribe is a direct consequence of imbibing in the holiday spirit prevalent at this time of the year.

There's a lot going on and time simply doesn't permit delving into all the topics I would like to cover.

But I would be remiss if I didn't take a moment to reference an incredible speech given recently by Mark Carney, Governor of the Bank of Canada.

As the Globe and Mail noted, "Mr. Carney delivered a discourse so intelligent in its analysis and perceptive in its recommendations that it stands as the best speech delivered by any public figure in Ottawa in a very, very long time."

Carney says that he believes that the Western world stands at a point of “rupture.” For decades, countries borrowed beyond their means – leveraged themselves with accumulations of debt. “That era,” Mr. Carney proclaims, “is now decisively over.”

For many faithful readers, this is not news. However hearing such candor from the likes of Carney is... and it gives you a glimpse of the seriousness and gravity of the situation we are in.

As this blog says ad nauseum, the 2008 Financial Crisis was a severe financial earthquake whose depth and breadth we still do not fully appreciate.

Now... three years later, it is only becoming apparent.

Debt, particularly Sovereign Debt, is the issue of the coming decade.

Carney talks about the “debt super cycle” which occurred all around the world. It's that debt which fuelled consumer spending, not productive investments.

Excessive private debt wound up on the public ledger. The more households and governments borrowed for consumption, the less productive the economy became, which, in turn, means the overall debt burden was less sustainable.

Everywhere in the Western world, a long period of deleveraging – that is, reducing debts – has begun, or must begin.

The global economy, Mr. Carney predicts, risks entering a “prolonged period of deficient demand.” In Europe, there’ll be fiscal austerity, high unemployment and tight credit; in the U.S., personal and government debt will hang over the economy for years. The U.S. economic crisis began with its financial system, and Mr. Carney (agreeing with many others) notes that “recessions involving financial crises tend to be deeper and have recoveries that take twice as long.”

When countries do what Western ones have done and borrow abroad to fund internal consumption, their situations become unsustainable.

Canada, Mr. Carney warns, is falling into that very trap, because “channelling cheap and easy capital into unsustainable increases in consumption is at best unwise.”

Canadians have been running a net financial deficit for more that a decade, borrowing more than they’ve earned. Canadians’ household debt ratio is now worse than the Americans or the British, Mr. Carney says.

“Our demographics have turned, our productivity has slowed, and the world is undergoing a competitive deleveraging. We might appear to prosper for a while by consuming beyond our means. Markets may let us do so for longer than we should. But if we yield to this temptation, eventually we, too, will face painful adjustments.”

I would suggest that Carney has identified exactly what has been happening for the past five years.

When the housing bubble began to burst in the United States in 2005/2006, the ruling federal Conservative government in Canada moved heaven and earth to shield our economy by protecting the real estate industry.

We've had the zero down, forty year mortgage. The ability to raid the RRSP fund for down payments. The Home Reno Tax Credit. Emergency interest rates. First-time buyer’s closing cost credit. Regulations that permit liar loans. Regulations that permit zero-down payments with cash back from mortgage lenders. And CMHC increasing loan value on their books from just over $100 million to well over $700 million while assuming all lender risk.

Cheap credit, artificially suppressed interest rates and government policy have attempted to fuel and protect the real estate boom in the hopes the Great Global Recession would pass before the impacts him home in the Land of the Maple Leaf. In short our government gambled... much like the Trudeau government gambled on oil in the 1970s.

This isn't to excuse Carney's role in all of this, as the blogosphere constantly points out.

But the fact the at the Governor of the Bank of Canada is now completely dispensing with the malarkey about how splendidly Canada has done during the recession - on a regular basis - is a significant development.

Regrettably the average Canadian isn't hearing him.

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Ron Paul predicting the economic mess created by the bursting of the housing bubble back in 2001

2011-12-15T23:39:00.000-08:00

More on the situation in precious metals when I can.

In the meantime, I invite you to check out this speech by Ron Paul, current candidate for the US Republican Presidential nomination, which he gave on September 6, 2001.

Paul foresees many of today's problems (including the bursting of the housing bubble and the debt problems triggered by derivatives) as early as 2001.

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The Gold/Silver Rehypothecation scandal: HSBC Sues MF Global Over Disputed Ownership Of Physical Gold/Silver

2011-12-13T09:21:00.000-08:00

If you follow Gold and Silver, a great deal of interest is being focused on an interesting development in the MF Global issue which will have a significant impact on the precious metals.

For years you have heard how the 'gold bugs' have advocated that you hold actual phyiscal Gold and Silver bars as opposed to certificates which 'represent' Gold and Silver.

It has been said that as much as 99 times as much “paper” or digital gold is bought on commodities exchanges such as COMEX, as there is traded in actual delivery of physical Gold and Silver.

What does this mean?

Simply put... there is not enough actual Gold and Silver in the world to match up to all the 'paper' claims for the metal. Iif all parties “stood for delivery” it would be impossible for the warehouses and the short players to actually meet their obligations, and “someone” would be left standing without a chair.

The amount of physical Gold and Silver that the COMEX delivers on a daily basis is negligible compared to the massive historical short positions that have existed for decades.

For example, during a two-week span across last January and February, COMEX arranged for the physical delivery of 543,500 troy ounces of gold with their contracted warehouse depositories, a figure that represents an average of just 38,786 troy ounces of gold per day. At this rate of daily delivery, it would take the COMEX more than two years to deliver all the gold represented by the current net commercial short position should the holders of long contracts ask for settlement in physical delivery.

Through the use of futures markets, the Commodities Futures Trading Commission (CFTC) has granted bankers a mechanism to perform alchemy and turn paper into Gold on the COMEX by allowing them to establish obscene short positions that represent 25% to nearly 40% of annual Gold production at times while simultaneously allowing them to renege on their fiduciary responsibility to actually physically possess the Gold represented by their short positions. In other words, the CFTC has allowed Gold to operate under the principles of the fractional reserve banking system on the COMEX futures markets.

In Silver the situation is even more obscene.

Since the Great 2008 Financial Crisis, the demand for physical Gold/Silver has ramped up exponentially prompting many observers (including this blog) to focus attention on how the demand for phyiscal has stressed the COMEX system.

For those dubbed 'Gold bugs' or 'Silver bugs' the real issue has always been, “If I asked for physical delivery of an amount of Gold or Silver that I should be able to receive, would I receive it?”

If you were India, China or the United Arab Emirates and you wanted to buy 200 tonnes of gold at the price established in futures markets, but you knew that there was no possible situation whereby 200 tonnes of gold would ever be delivered to you via the futures markets, what would you do?

Would you buy 200 tonnes of gold in the futures markets only to know that you would suffer a default of this delivery and likely be forced to pay a much higher price in the future or would you try to arrange to buy 200 tonnes of gold NOW from the IMF or another Central Bank?

Of course, you would choose the latter tactic.

The fact that Gold/Silver cannot be printed out of thin air is the essential quality that makes it a form of money much more sound than the Euro, the dollar, the Yen or any other form of fiat currency.

This concern of the 'Gold/Silver bugs' has been derided and dismissed for years.

However, tens of billions of dollars of Gold/Silver exist only in digital form on the COMEX and the CFTC has allowed bullion banks to indeed achieve alchemy with gold (and silver) in the futures markets. By allowing these mechanisms ,that have absolutely zero to do with physical supply and demand of gold and silver, to persist bullion banks can suppress the price of paper gold and paper silver in futures markets.

But in the end, they will never be able to perpetually suppress the price of real physical gold and real physical silver. There will come a time when the prices for real physical gold and real physical silver completely sever the already tenuous umbilical cord they maintain to the suppressed prices of gold and silver established by the agent bullion banks of the US Federal Reserve and the Bank of England in futures markets.

Which brings us to MF Global.

Last week we made a post about MF Global, Rehypothecation and Canadian Banks. It turns out that in investment banking, assets deposited with a broker can be hypothecated such that a broker may sell securities if an investor fails to keep up credit payments or if the securities drop in value and the investor fails to respond to a margin call (a request for more capital).

Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings.

This practice of re-hypothecation runs into the trillions of dollars and is perfectly legal.

It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds. In the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated.

When MF Global went bankrupt news immediately spread that investors like Gerald Celente, who was heavily invested in paper futures contracts, got screwed.

His so-called 'gold' held at MF Global was instantly rendered a "General Unsecured Claim" and Celente may or may not receive a pennies on the dollar equitable treatment post liquidation.

What was less known was the fate of physical gold in the hands of the very same insolvent MF Global financial syndicate.

Last week Bloomberg broke a stunning story whereby HSBC was suing the MF Global brokerage trustee to establish who was the rightful owner of gold bars worth about $850,000 and silver bars underlying contracts between the brokerage and a client.

In it's court filing HSBC wrote, "Five gold bars and 15 silver bars underlie eight Comex contracts between the brokerage and client Jason Fane of Ithaca, New York, London-based HSBC."

Both parties (Jason Fane and MF Global) have asserted claims to the bars, creating difficulties for HSBC, which is storing them. Jason Fane claims he deposited the bars with MF Global for storage. And MF Global has used the bars for collatteral in it's own dealings (rehypothecation).

HSBC has asked a judge to decide who the rightful owner is.

“HSBC has received conflicting instructions regarding ownership and disposition of the property. Accordingly, HSBC is exposed to multiple liabilities with respect to the disposition of the properties.”

Fane wrote HSBC after the bankruptcy, asking the bank to transfer the bars to his account at Brink’s, according to a copy of his letter filed in court. The trustee wrote HSBC saying the gold and silver was “customer property,” (property of MF Global, a customer of HSBC) and the bank shouldn’t turn it over to Fane.

MF Global's liquidation trustee James Giddens was basically saying Fane could not have his Gold and Silver back. The trustee claims MF Global rehypothecated Fane's Gold and Silver as collateral when it purchased CDS contracts. Thus the trustee will be taking the delivery of the said Gold and Silver due to it's SENIOR creditor status.

The crux of this suit is whether or not MF Global was rehypothecating, or lending, or repoing, that one physical asset that it should not have been transferring ownership rights to under any circumstances.

This is at the heart of the whole commingling situation: was MF Global using rehypothecated client gold to satisfy liabilities?

The thought alone should send shivers up the spine of all those who have been deriding Gold/Silver bugs, who have been warning about precisely this for years.

The implications could be staggering.

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The next 10 years will be very unlike the last 10 years

2011-12-09T07:19:00.000-08:00

Came across this creative youtube clip the other day and I thought I would share it with you.

Don't agree with all of it, but there are some interesting points made which I do agree with.

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Capital Account: William K. Black on MF Global and Jon Corzine Culpability

2011-12-08T22:22:00.000-08:00

Capital Account's Lauren Lyster interviews Bill Black over Jon Corzine & the MF Global scandal on the day Corzine, former CEO of the now bankrupt MF Global, testifies on Capitol Hill.

Corzine claims he is clueless about how and where the possible $1.2 billion dollars of his client's money is missing.

How has all of this happened three years after the financial crisis when Wall Street was supposed to be reined in? Capital Account explains the MF Global issue.

Capital Account also explores how the golden boys of Wall Street have their Goldman tentacles spread over the MF Global case and that the head of the CFTC - MF Global's regulator - has recused himself from the MF Global probe because he worked with Jon Corzine at Goldman Sachs.

Capital Account interviews William K. Black, a former regulator who during the Savings and Loan crisis oversaw more than 10,000 criminal referrals, 1,000 felony convictions, and where hundreds of bankers went to prison.

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Are alarm bells sounding in the financial community about CIBC and Royal Bank?

2011-12-07T21:46:00.000-08:00

Back in August, the website Zero Hedge sparked a debate about the soundness of Canadian banks.

The issues raised about Tangible Common Equity (TCE) were quickly dismissed by Canadian authorities, but the issue has been raised again with a slight twist.

In a post tonight, Zero Hedge strikes again zeroing in on something called Re-hypothecation which lies at the heart of the whole MF Global scandal.

In investment banking, assets deposited with a broker will be hypothecated such that a broker may sell securities if an investor fails to keep up credit payments or if the securities drop in value and the investor fails to respond to a margin call (a request for more capital).

Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings. The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds.

In the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated.

By 2007, re-hypothecation had grown so large that it accounted for half of the activity of the shadow banking system.

Prior to Lehman Brothers collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. With assets being re-hypothecated many times over (known as “churn”), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation.

In its quarterly report, MF Global disclosed that by June 2011 it had repledged (re-hypothecated) $70 million, including securities received under resale agreements.

The off-balance sheet treatment means that the amount of leverage (gearing) and systemic risk created in the system by re-hypothecation is staggering.

Re-hypothecation transactions are off-balance sheet and are therefore unrestricted by balance sheet controls. Whereas on balance sheet transactions necessitate only appearing as an asset/liability on one bank’s balance sheet and not another, off-balance sheet transactions can, and frequently do, appear on multiple banks’ financial statements.

What this creates is chains of counterparty risk, where multiple re-hypothecation borrowers use the same collateral over and over again.

Essentially, it is a chain of debt obligations that is only as strong as its weakest link.

With collateral being re-hypothecated to a factor of four (according to IMF estimates), the actual capital backing banks re-hypothecation transactions may be as little as 25%. This churning of collateral means that re-hypothecation transactions have been creating enormous amounts of liquidity, much of which has no real asset backing.

So what does all this have to do with CIBC and Royal Bank?

With weak collateral rules and a level of leverage that would make Archimedes tremble, firms have been piling into re-hypothecation activity with startling abandon. A review of filings reveals a staggering level of activity in what may be the world’s largest ever credit bubble.

Engaging in hyper-hypothecation have been

Goldman Sachs ($28.17 billion re-hypothecated in 2011),
Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets),
Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging),
Oppenheimer Holdings ($15.3 million),
Credit Suisse (CHF 332 billion),
Knight Capital Group ($1.17 billion),
Interactive Brokers ($14.5 billion),
Wells Fargo ($19.6 billion),
JP Morgan($546.2 billion),
and Morgan Stanley ($410 billion).

That's right, CIBC and Royal Bank have over $125 Billion of collateral backing up its derivatives book which is actually client collateral!!!

When the crunch came for MF Global, their clients collateral was seized and is now gone. It is being suggested that MF Global's bankruptcy has already set off a chain of events which not even all the world's central banks can halt.

Back in August, Canadian banks defended themselves against the concerns of TCE. And anyone looking through the balance sheet of Canadian banks could turn up no alert signals.

Was it because hundreds of billions of dollars worth of debt exposure was off the books?

Reuters is reporting on the MF Global Re-hypothecation scan here. It explains the whole issue very well. From the article:

A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients.

After reading all this, do you feel safe with your money at CIBC or Royal Bank?

Look for lots of interest in Canada to be generated by this latest Zero Hedge post.

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Deflation Before Inflation? - Mike Maloney

2011-12-06T14:02:00.000-08:00

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Ron Paul, unlike the average US Presidential politician, lays out exactly what he will do

2011-12-05T23:58:00.000-08:00

Ron Paul's latest ad in his quest for the Republican Presidential nomination in 2012.

Is there any doubt why this man makes the establishment uncomfortable?

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Fri Post #2: Jon Stewart and the secret $7.7 Trillion bank bailout

2011-12-02T11:50:00.000-08:00

Last night Jon Stewart explored the US Federal Reserve's secret $7.7 Trillion bailout of the banks that was revealled last week.

This is how the Federal Reserve is helping banks make money in this massive liquidity squeeze.

Stewart's comedy piece is perhaps one of the most succinct analysis of what is wrong with the US Federal Reserve and how they are raping the American Taxpayer.

The clip cannot be embedded here so follow the link above or click here to watch it (clip link is via Canada's Comedy Network. Not sure if it is viewable outside of Canada. Canadians cannot watch clip on US's Comedy Central so you may have to source the clip if you are outside Canada).

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Fri Post #1: Vancouver Sun - 'We’ve been down this path before'

2011-12-02T00:01:00.000-08:00

Frank Giustra is a Vancouver business executive with interests in the mining and filmmaking industries, and a noted philanthropist.

Yesterday, in the Vancouver Sun, he had an OpEd piece about the massive bailout in Europe this week.

That sentiments like his are now appearing in the mainstream media demonstrate the turning tide for public opinion on precious metals.

For your consideration...

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

We’ve been down this path before

As civilizations mature, they tend to make the same mistakes. We are in the middle of one of those mistakes right now

The type of economic restructuring both America and Europe need is so difficult and painful that, even if the current political systems were functioning, it would still take many years and the kind of courage and sacrifice that does not seem to exist.

“What has been will be again, what has been done will be done again; there is nothing new under the sun.” Ecclesiastes 1:9

If, as an investor, you are looking at the U.S. and Europe, and are confused by the barrage of sombre news relating to economic issues — such as stubbornly high unemployment, collapsing housing prices, soaring government-debt levels, waning consumer confidence and a precarious banking system — I don’t blame you. As far as I can tell, so are the legions of experts, media and politicians, those we have traditionally trusted to explain such complex economic and financial matters to us. And why have all the herculean efforts to save us from these maladies failed so miserably, despite the fact that we seem to be drowning in remedies?

It seems as though America and Europe are going down for the count. As Canadians, we have a solid financial system and a stable government that functions as it was designed to do. And yes, we Canadians can take comfort that we are somewhat shielded from the profligate and irresponsible policies of our American and European friends, but given their sheer size and our inter-connectedness, we can’t completely escape the collateral damage when the stuff eventually hits the fan.

As the above Ecclesiastes quote (generally attributed to King Solomon) suggests, history is replete with examples of repetitive behaviour. Observing the behaviour of today’s policy-makers, I suspect this quote is as valid today as it was more than two millennia ago.

We are in an unholy mess and however loudly the sane few may plead, the chances it will get turned around without disaster striking are slim indeed. The type of restructuring both America and Europe need is so difficult and painful that, even if the current political systems were functioning, it would still take many years and the kind of courage and sacrifice that does not seem to exist. One of these days, some unforeseen event, akin to the child in Hans Christian Andersen’s The Emperor’s New Clothes declaring “But he isn’t wearing anything at all!” may serve as the tipping point that brings the entire financial system to its knees.

To get a proper understanding of the current situation, we should start by ignoring all the noise propagated by the experts, media and elected officials.

Our global financial system is based on the very simple and fragile concept of confidence. So you can’t really blame the policy-makers and politicians for not telling the public the “entire” truth; feeding us constant reassurances, peppered with a little mendacity. And to make things worse, it’s just human nature for us, the recipients of this information, to reject the idea that the worst can happen, hence our willingness to find reassurance in the misinformation we are fed. But folks, the worst CAN happen.

I doubt the citizens of Imperial Rome ever considered that their empire, which stretched from the Atlantic Ocean to the Caspian Sea, would eventually collapse on itself from the sheer weight of effort and resources needed to maintain it, or that 16th-century Spaniards ever thought their high standard of living, sustained by the plundered riches of the New World, would disintegrate once the supply of gold dwindled.

Or that the upper-class 19th-century Brits leading up to 1918 ever fathomed that the sun could cease to set on lands ruled by the British Empire. History has shown that when great nations mature and over-extend themselves, they revert to the paths of least resistance: borrow and/or print money. They all did it and they all failed; this time will be no different.

If Einstein’s definition of insanity — doing the same thing over and over again and expecting different results — holds true, we should move to have all of America’s and European policy-makers locked up in padded cells.

This hubris — holding on to time-worn ideas about what made a nation great in the first place, but ignoring the hard sacrifice that went with it — has prevailed throughout history and is as relevant today as it was for every great nation that came before America and the European Union.

Still, the “experts” continue to reassure us that America was built on a foundation of entrepreneurial spirit; we can get ourselves out of any mess. (At least the Europeans know better than to preach such fantasy.) I sense that some of those ideas don’t hold up as well as they once did, especially as the world outside of America has become highly competitive.

At some point in the evolution of a great nation must come a time when the simple math of mounting debt, lack of productivity and printed money plays havoc with ingrained beliefs. This is one of those times in history.

Therefore, as much as I would love to provide solutions to this mess-in-waiting, I would rather give some thoughts as to how to protect yourself.

Consider the following precaution as a condom for your portfolio or savings: protection against STDs (savings’ total destruction).

The bottom line is that the money needed to bail out Europe and to fund America’s spiralling debt and future unfunded obligations is in the tens of trillions. IT DOES NOT EXIST. It has to be created by printing money in massive quantities, and despite all the rhetoric you will hear against such policies, in the end it’s the path of least resistance. Printing money is an invisible tax on savings, much easier to initiate, than, say, raising taxes or cutting back on services and entitlements.

However, there is a lag on its negative effects, a perfect policy tool for elected officials who inevitably kick the can down the road to future governments. Policy-makers in most democracies live in a 24/7 campaign mode, which prevents them from making difficult, long-term and most certainly unpopular decisions. Simply said, we operate in a system not conducive to decisive action.

Witness last week’s dismal failure by the U.S. Congressional Super Committee to reach agreement after months of bitter negotiating on what was essentially a ridiculously minuscule reduction of the deficit over the next decade and you get the picture.

There will be a quantitative easing three (QE3) in the U.S. and the European Central Bank (ECB) will eventually follow suit in printing money in American-style amounts, despite Germany’s resistance to date.

If the world continues to print money, currencies will be debased against “tangible things” such as gold, farmland, exclusive real estate, rare art and collectibles, select equities to list a few. Therefore, having your savings invested in cash, bonds, money and markets, could mean a complete destruction of those savings by runaway monetary inflation.

Having said that, timing is an issue you must weigh carefully. There is a chance that another financial crisis such as we experienced in 2008 would cause the value of real assets to go down and, by definition, make cash holdings more valuable for a short period of time, until further “printing” reverses the trend once more.

I would recommend owning plenty of gold and, depending on your available resources, select real estate and collectible art, which works well for wealth preservation, and having an adequate pool of cash, which would only be used to acquire additional “real assets” in the event of another crisis.

It’s your wealth, your life savings; you are the only person who can protect it.

No one else really cares.

Wake up and smell your future.

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Thurs Post #2: Concern over Canadian bank exposure to overleveraged consumers

2011-12-01T15:34:00.000-08:00

One refrain you have heard constantly during the inflating of our housing bubble in Canada is that 'Canada is different... Canadian banks did not lend money to those who couldn't pay it back.'

That, as this blog as insisted over and over again, is a crock.

Our banks permit liar loans - loans where a self-employed person can 'declare' their annual income to qualify for a mortgage.

Our banks offer cash back for mortgages (as much as 7%) which effectively means we have zero down mortgages. You can take out a mortgage, receive 7% back (which covers the 5% down payment) and this allows you to be PAID to buy a house.

And most significantly, CMHC is absorbing all lender risk.

Take away CMHC and there is no way twenty-something couples would qualify for a 5% down mortgage at the same rate as people with money. Without access to this easy credit, the housing bubble would collapse.

As these measures have pushed up home values, Canadians have pigged out on an orgy of debt from HELOC's and credit cards fueled by the value of their houses.

Now, according to a report by Moody’s Investors Service, concerns are being raised about Canadian bank exposure to overleveraged consumers.

Observers are asking a question that would have been almost unthinkable a year ago: Would the big banks take a hit if the debt crisis spread here and consumer defaults spiked?

The biggest single asset on Canadian bank balance sheets is residential mortgages, more than 30% of which are insured by the Canada Mortgage and Housing Corp., essentially shifting the risk of default onto the shoulders of the government.

But banks also hold substantial uninsured assets such as credit card debt, and that leaves them vulnerable.

According to David Beattie, Moody’s analyst and author of the report, the Royal Bank of Canada is the most susceptible with 24% of its total managed assets made up of uninsured loans. Next is Bank of Nova Scotia at 21%, CIBC at 20%, Toronto-Dominion Bank and National Bank of Canada both at 18%, with Bank of Montreal the most protected at 14%.

“Canadian household debt as a share of personal disposable income stood at a record 150.8% at the end of June this year.” said Mr. Beattie. “We are concerned that, while taking advantage of low interest rates, consumers are also taking on debt the may not be able to service when rates inevitably go up.”

We haven't begun our downturn yet. And people have no idea how closely tied Canadian mortgage debt and consumer debt is.

As the Financial Post notes, the European debt crisis is already having a negative impact on the global economy.

The fear is that a significant rise in unemployment could leave many households unable to meet their obligations despite the record low interest rates.

Analysts are uncertain how Canadians would react in such a situation, whether they would stop paying their mortgages — as many Americans did when U.S. economy collapsed three years ago — or whether it would be credit card debt or auto loans that would take the hit.

Another area of uncertainty is the makeup of the banks’ consumer loan portfolios. There is limited detailed information on the various categories of loans, making it difficult to guage Canadian banks’ true exposure.

Certainly this blog suspects that if real estate turns in Canada, the resulting fallout will be catastrophic.

Perhaps that's when the ruling federal Conservative government in Canada moved heaven and earth to protect the real estate industry when the US market started going under in 2006.

Cheap credit, artificially supressed interest rates and government policy have attempted to fuel and protect the real estate boom in the hopes the Great Global Recession would pass before the impacts him home in the Land of the Maple Leaf.

In short our government gambled... much like the Trudeau government gambled on oil in the 1970s.

If it blows up... it is going to be really, really ugly.

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A great video presentation by Chris Martenson

2011-12-01T07:43:00.000-08:00

In this video Chris Martenson, economic analyst at http://chrismartenson.com and author of 'The Crash Course', explains why he thinks that the coming 20 years are going to look completely unlike the last 20 years. In his presentation he focuses on the so-called three "Es": Economy, Energy and Environment. He argues that at this point in time it is no longer possible to view either one of those topics separately from one another.

Since all our money is loaned onto existence, our economy has to grow exponentially. Martenson proves this point empirically by showing a 99.9% fit of the actual growth curve of the last 40 years to an exponential curve. If we wanted to continue on this path, our debt load would have to double again over the next 10 years. By continually increasing our debt relative to GDP we are making the assumption that our future will always be wealthier than our past. He believes that this assumption is flawed and that the debt loads are already unmanageable.

Martenson explains how exponential growth works and why it is so scary that our economy is based on it. In an example he illustrates how unimaginably fast things speed up towards the end of an exponential curve. He shows that an exponential chart can be found in every one of the three "E's" for instance in GDP growth, oil production, water use or species extinction. Due to the natural limitations on resources, Martenson comes to the conclusion that we are facing a serious energy crisis.

This energy predicament is namely that the quantity of oil as well as the quality of oil are in decline. He shows that oil discoveries peaked in 1964 and oil production peaked 40 years later. Martenson also shows how our return on invested energy is rapidly declining -- the "cheap and easy" oil fields have already been exploited. In 1930 the energy return for oil was 100:1 or greater. Today it is already down to 3:1 and newer technologies such as corn-based ethanol only provide a 1.5:1 return. Martenson predicts that the time in between oil shocks will get shorter and shorter and that oil prices will go much higher.

Not only oil but also other natural resources are being rapidly used up as well. At the current projected pace of use, known reserves for many metals and minerals will be gone within the next 10 to 20 years. The energy needed to get these non-renewable resources out of the ground is growing exponentially. So we live in a world that must grow, but can't grow and is subject to depletion. The conclusion out of all this is that our money system is poorly designed and that we need to rethink how we do things as quickly as possible.

After finishing his presentation Chris Martenson answers questions regarding a rise in efficiency, alternative technologies and oil prices. He also responds to questions regarding electricity, shale gas, gold, silver, platinum, palladium, and uranium and the race for global resources.

This video was recorded on November 16 at the Gold & Silver Meeting 2011 in Madrid.

Martenson talks about Gold and Silver in the Q&A just after the 1:01 mark.

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Wed Post #2: Inevitable - Part Deux

2011-11-30T20:12:00.000-08:00

Back on March 8, 2010 we posted that the swirling economic ill winds continue to blow strong in Europe and we ignore what is going there at our own peril.

We wrote that there was an inevitable shift occurring in the great economic crisis of 2008 - 2010 (now 2011).

The first wave caused individual people and companies to face bankruptcy. The looming second wave now threatens entire governments.

Sovereign Debt is the key issue of this decade.

And unlike the Russian financial crisis of 1998, in which Russia was allowed to default on their debt, or the Argentine economic crisis of 1999-2002, when Argentina declared default in 2002, the main players in the European Debt Crisis - the PIIGS nations - will not be allowed to default.

The reason that European Sovereign Debt cannot be allowed to fail and default is because the five largest US banks hold trillions of dollars of credit default swap Over The Counter (OTC) derivatives guaranteeing that garbage debt against failure.

If European Debt is allowed to fail, the Western financial world implodes.

Ergo... Sovereign Debt cannot be allowed to fail.

That is why this blog has been such a staunch proponent of precious metals. The only way to stop the implosion of the Western financial world is to engage in Quantative Easing to infinity.

Today is seems we can now clearly see the inevitable starting to play out.

Early this morning Forbes wondered aloud if a big European bank come close to failing last night?

European banks, especially French banks, rely heavily on funding in the wholesale money markets. Did a major bank have difficulty funding its immediate liquidity needs?

The question was asked because last night The US Federal Reserve, the Bank of England, European Central Bank, the Bank of Japan, the Swiss National Bank, and the Bank of Canada moved in a coordinated action to provide liquidity to the global financial system.

Peter Schiff summarized what these actions mean:

Today’s unprecedented announcement by the world’s most powerful central banks was a loud and clear bell ringing to buy precious metals. The move, disguised as an attempt to help the fragile state of the global economy, is in reality a move to prop up failing banks in Europe and the US.

By reducing interest rates paid for dollar swaps, central bankers are in effect increasing the quantity of global dollars in circulation.

This is the pure definition of inflation: increasing the money supply. And today it was increased profoundly.

Schiff contends this may be one of the most important economic events of the year.

As Goldman Sachs made all too clear today, this is merely the beginning as more and more inflationary actions have to be undertaken by central banks to save banks from being crushed by untenable debt loads.

Whether they succeed in overturning the deflationary tsunami is unknown. What is certain is that they will bring fiat currencies to the verge of viability (and beyond) in trying.

Q.E. to infinity has begun.

Sovereign Debt cannot be allowed to fail as the US dollar will weaken, inflation will rise, and Gold/Silver will soar.

It is as inevitable as the fate of this mouse...

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Wed Post #1: An interesting proposal for Silver Miners by Eric Sprott

2011-11-30T09:30:00.000-08:00

Eric Sprott, and Sprott Asset Management, had an intriguing message for Silver mining companies in his latest update.

Since we focus on Silver investing on the blog, you might find it it worthwhile reading.

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

Silver Producers:
A Call to Action

By: Eric Sprott and David Baker

As we approach the end of 2011, the silver spot price has admittedly endured a tougher road than we would have expected. And let’s be honest – what investment firm on earth has pounded the table on silver harder than we have? After the orchestrated silver sell-off in May 2011, silver promptly rose back to US$40/oz where it consolidated nicely, only to drop back below US$30 within a two week span in late September.

The September sell-off was partly due to the market’s disappointment over Bernanke’s Operation Twist, which sounded interesting but didn’t involve any real money printing. Like the May sell-off before it, however, it was also exacerbated by a seemingly needless 21% margin rate hike by the CME on September 23rd, followed by a 20% margin hike by the Shanghai Gold Exchange – the CME’s counterpart in China, three days later.

The paper markets still dictate the spot market for physical gold and silver. When we talk about the "paper market", we’re referring to any paper contract that claims to have an underlying link to the price of gold or silver, and we’re referring to contracts that are almost always levered.

It’s highly questionable today whether the paper market has any true link to the physical market for gold and silver, and the futures market is the most obvious and influential "paper market" offender.

When the futures exchanges like the CME hike margin rates unexpectedly, it’s usually under the pretense of protecting the "integrity of the exchange" by increasing the collateral (money) required to hold a position, both for the long (future buyer) and the short (future seller). When they unexpectedly raise margin requirements two days after silver has already declined by 22%, however, who do you think that margin increase hurts the most?

The long buyer, or the short seller?

By raising the margin requirement at the very moment the long contracts have already received an initial margin call (because the price of silver has dropped), they end up doubling the longs’ pain – essentially forcing them to sell their contracts. This in turn creates even more downward price pressure, and ends up exacerbating the very risks the margin hikes were allegedly designed to address.

When reviewing the performance of silver this year, it’s important to acknowledge that nothing fundamentally changed in the physical silver market during the sell-offs in May or mid-September. In both instances, the sell-offs were intensified by unexpected margin rate hikes on the heels of an initial price decline. It should also come as no surprise to readers that the "shorts" took advantage of the September sell-off by significantly reducing their silver short positions.

Should physical silver be priced off these futures contracts?

Absolutely not. That they have any relationship at all is somewhat laughable at this point. But futures contracts continue to heavily influence spot prices all the same, and as long as the "longs" settle futures contracts in cash, which they almost always do, the futures market-induced whipsawing will likely continue. It also serves to note that the class action lawsuits launched against two major banks for silver manipulation remain unresolved today, as does the ongoing CFTC investigation into silver manipulation which has yet to bear any discernible results.

Meanwhile, despite the needless volatility triggered by the paper market, the physical market for silver has never been stronger. If the September sell-off proved anything, it’s the simple fact that PHYSICAL buyers of silver are not frightened by volatility. They view dips as buying opportunities, and they buy in size.

During the month of September, the US Mint reported the second highest sales of physical silver coins in its history, with the majority of sales made in the last two weeks of the month.

Reports from India in early October indicated that physical silver demand had created short-term supply issues for physical delivery due to problems with airline capacity.

In China, which reportedly imported 264.69 tons (7.7 million oz) of silver in September alone, the volume of silver forward contracts on the Shanghai Gold Exchange was more than six times higher than the same period in 2010.6.

It was clear to anyone following the silver market that the physical demand for the metal actually increased during the paper price decline. And why shouldn’t it? Have you been following Europe lately? Do the politicians and bureaucrats there give you confidence? Gold and silver are the most rational financial assets to own in this type of environment because they are no one’s liability. They are perfectly designed to protect us during these periods of extreme financial turmoil.

And wouldn’t you know it, despite the volatility, gold and silver have continued to do their job in 2011.

As we write this, in Canadian dollars, gold is up 23.4% on the year and silver’s up 6.8%. Meanwhile, the S&P/TSX is down -12.3%, the S&P 500 is down -5.1% and the DJIA is up a mere +0.26%.

So here’s the question: we think we understand the value and great potential in silver today, and we know that the buyers who bought in late September most definitely understand it,… but do silver mining companies appreciate how exciting the prospects for silver are?

Do the companies that actually mine the metal out of the ground understand the demand fundamentals driving the price of their underlying product?

Perhaps even more importantly, do the miners understand the significant influence they could potentially have on that demand equation if they embraced their product as a currency?

According to the CPM Group, the total silver supply in 2011, including mine supply and secondary supply (scrap, recycling, etc.), will total 1.03 billion ounces.

Of that, mine supply is expected to represent approximately 767 million ounces.

Multiplied against the current spot price of US$31/oz, we’re talking about a total silver supply of roughly US$32 billion in value today. To put this number in perspective, it’s less than the cost of JP Morgan’s WaMu mortgage write downs in 2008.

According to the Silver Institute, 777.4 million ounces of silver were used up in industrial applications, photography, jewelry and silverware in 2010.

If we assume, given a weaker global economy, that this number drops to a flat 700 million ounces in 2011, it implies a surplus of roughly 300 million ounces of silver available for investment demand this year.

At today’s silver spot price – we’re talking about roughly US$9 billion in value.

This is where the miners can make an impact.

If the largest pure play silver producers simply adopted the practice of holding 25% of their 2011 cash reserves in physical silver, they would account for almost 10% of that US$9 billion. If this practice we’re applied to the expected 2012 free cash flow of the same companies, the proportion of investable silver taken out of circulation could potentially be enormous.

Expressed another way, consider that the majority of silver miners today can mine silver for less than US$15 per ounce in operating costs. At US$30 silver, most companies will earn a pre-tax profit of at least US$15 per ounce this year. If we broadly assume an average tax rate of 33%, we’re looking at roughly US$10 of after-tax profit per ounce across the industry.

If GFMS’s mining supply forecast proves accurate, it will mean that silver mine production will account for roughly 74% of the total silver supply this year.

If silver miners were therefore to reinvest 25% of their 2011 earnings back into physical silver, they could potentially account for 21% of the approximate 300 million ounces (~$9 billion) available for investment in 2011.

If they were to reinvest all their earnings back into silver, it would shrink available 2011 investment supply by 82%. This is a purely hypothetical exercise of course, but can you imagine the impact this practice would have on silver prices?

Silver miners need to acknowledge that investors buy their shares because they believe the price of silver is going higher. We certainly do, and we are extremely active in the silver equity space. We would never buy these stocks if we didn’t. Nothing would please us more than to see these companies begin to hold a portion of their cash reserves in the very metal they produce. Silver is just another form of currency today, after all, and a superior one at that.

To take this idea further, instead of selling all their silver for cash and depositing that cash in a levered bank, silver miners should seriously consider storing a portion of their reserves in physical silver OUTSIDE OF THE BANKING SYSTEM.

Why take on all the risks of the bank when you can hold hard cash through the very metal that you mine? Given the current environment, we see much greater risk holding cash in a bank than we do in holding precious metals. And it serves to remember that thanks to 0% interest rates, banks don’t pay their customers to take on those risks today.

None of this should seem far-fetched. One of the key reasons investors have purchased physical gold and silver is to store some of their wealth outside of a financial system that looks increasingly broken.

The European banking system is a living model of that breakdown. Recent reports have revealed that more than €80-billion was pulled out of Italian banks in August and September alone. In Greece, depositors have taken almost €50-billion out their banks since the beginning of 2010.13 Greek banks are now completely reliant on ECB funding to stay afloat. The situation has deteriorated to the point where over two thirds of the roughly 500 billion euros that banks have borrowed from the ECB are now being deposited back at the central bank.

Why? Because they don’t trust other banks to stay afloat long enough to get their money back.

Silver miners shouldn’t feel any safer banking in the United States. Fitch Ratings recently warned that the US banks may face severe losses from their exposures to European debt if the contagion escalates.

There’s very little at this point to suggest that it won’t. The roots of the 2008 meltdown live on in today’s crisis. We are still facing the same problems imposed by over-leverage in the financial system, and by postponing the proper solutions we’ve only increased those risks.

We don’t expect the silver miners to corner the physical silver market, and we know the paper games will probably continue, but the silver miners must make a better effort to understand the inherent value of their product.

Gold and silver are not traditional commodities, they are money.

Their value lies in their ability to retain wealth in environments marked by

negative real interest rates,
government intervention,
severe economic uncertainty,
and vulnerable banking institutions.

Silver’s demand profile is heightened by its use in industrial applications, but it is the metal’s investment demand that will drive its future performance.

The risk of keeping all of one’s excess cash in a bank is, in our opinion, considerably more than holding it in the more enduring form of money that silver represents. It’s time for silver producers to embrace their product in the same manner their shareholders already have.

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Tues Post #2: Metro Vancouver Real Estate achieves a 'New Paradigm'

2011-11-29T19:08:00.000-08:00

If you have followed the topic of real estate bubbles, you have seen the above graph (click image to enlarge).

Titled 'The Main Stages of a Bubble', it is a representation of the stages that all bubbles (real estate or otherwise) travel through.

As we watch our Real Estate bubble in Vancouver, one has to wonder if we are now approaching the end of the third stage of the bubble process; the Mania Stage.

The Mania Stage has four basic phases: Enthusiasm, Greed, Delusion and New Paradigm.

Many real estate bears, salivating in 2008/2009 that the bubble might have been bursting, thought we had seen the end of the Mania Phase.

But watching events over the past 18 months, many will surely say the current market qualifies as delusion bordering on a new paradigm.

Have we indeed made that transformation?

How else to describe the belief by some economist's that the 'threat' of a bubble forming in Metro Vancouver has dissipated?

A Conference Board of Canada report released today quotes senior economist Robin Wiebe as saying not only has “the threat of a bubble largely dissipated” in Metro Vancouver “but, really, there never was one.”

See? There never was a bubble. Our market has achieved a New Paradigm.

Perhaps this explains why, in the current mania, we see the asking price of this Shaughnessy Mansion almost double from $17 million to $31 million.

Or why we see this downtown Penthouse condominium, which sold last year for $18.1 million recently relisted for a stunning $28.8 million (click on image below to enlarge MLS screenshot of listing).

The chutzpah for these types of increases is emboldened by the belief we have achieved that 'New Paradigm'. And the new paradigm viewpoint has been further reinforced with the proliferation of articles, like this one, explaining why the influx of Chinese money won't dissipate.

For those who study Bubbles, it has always been difficult to truly appreciate how pervasive and engulfing the Mania Phase can be.

People still look back at Holland's tulip mania in the 1600's with a sense of bewilderment. Long considered the first recorded speculative bubble, the peak of tulip mania saw single tulip bulbs selling for more than 10 times the annual income of a skilled craftsman.

Peering back across the gossamer waves of time, it's often difficult to comprehend how the enthusiasm for tulip bulbs could beget the all-consuming greed that leads to the delusional prices which then entrap a nation into believing that somehow a new paradigm could be created in the price of tulips.

By the time our current situation bursts, residents of the Village on the Edge of the Rainforest will be experts on just how a inexplicable Mania can completely grip a populace.

People will say "it's just real estate" the same way we now look at them as "just tulip bulbs."

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Tues Post #1: In Australia they've started blaming the buyers for "unrealistic expectations"

2011-11-29T08:01:00.000-08:00

When we hear or see auctioneering we always think of insolvency.

But in Australia it is commonplace to put your home up for auction before giving a mandate to estate agents. The auction of houses and land is not considered as a last resort.

In the Land of Oz, over 85% of real estate is sold by auction.

And no day is more important on the Auction calandar than the last Saturday at the end of November - the last weekend of spring in the Southern Hemisphere and traditionally the most popular day to buy and sell real estate via auction.

Known as 'Super Saturday', this particular day is considered the high point of the real estate sales year and is significantly hyped.

Anticipation was keen for this year's 'Super Saturday' as property owners and real estate agents had hoped the lead-up hype would jolt what has been a lifeless market so far this year into action.

But it wasn't just property owners and real estate agents who were looking forward to 'Super Saturday'. Those hunting for real estate 'deals' were out in force.

But 'deals' of desperation were not forthcoming as the slumping Australian market is not quite at that point yet.

With clearance rates for residential properties in Sydney and Melbourne way below expectations, buyers kept a tight grip on their wallets and only about half of all homes being put to auction sold under the hammer.

It lead the Australian news to proclaim Super slow sales on real estate market's 'Super Saturday'

It shouldn't come as a surprise. With articles proclaiming that many current homeowners are facing a problem of negative equity as a result of declining Aussie real estate values, potential buyers have become vultures. Who wants to catch a falling knife?

And an interesting dynamic is developing.

The failure of last weekends 'Super Saturday' is prompting auctioneer's to blame the potential buyers.

"Buyers were being unrealistic about property prices, auctioneer Damien Cooley of Cooley Auctions said. "We're seeing a lot of cases where an agent may quote a price such as mid to high $400,000s and buyers are turning up expecting to pay in the low $400,000s. A year ago buyers would have automatically felt they had to pay five to 10% more than what was being quoted."

Oh the horror!!

But buyer aprehension is justified.

According to SQM Research, an independent property advisory and forecasting research house which specialises in providing accurate property related advice, research and data to financial institutions, property developers and real estate investors, the Aussie real estate contraction is far from over.

"The tide hasn't turned," SQM Research director Louis Christopher said. "The worst is still in front of us. There is a huge overhang of stock for the market to work through and it is going to get worse before it gets better."

I wonder how long it will take the Real Estate industry here to blame 'unrealistic buyers' when our market turns and the bidding wars become a distant memory?

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Mon Post #2: Ron Paul explains how America shifted away from 'debt' money after the Civil War and can do it again

2011-11-28T20:48:00.000-08:00

Ron Paul continues to lay out his platform calling for the end of the Federal Reserve and returning America to sound monetary policy.

"We know what to do - we did it once after the Civil War period, we went from a paper standard back to the gold standard, and the event wasn't that dramatic. But today the big problem is that both the conservatives and liberals have an big apetite for big government for different reasons, therefore they need the Fed to tie them over and monetize the debt. So if you don't get rid of that appetite it's going to be more difficult, but the transition isn't that difficult. You have to get your house in order; you have to balance the budget, you have to not run up debt, and you have to promise not to print any more money..."

"I am quite convinced that the system we have will not be maintained - that's what these last 4 years was all about, and that's what the turmoil in Europe is all about. The question is are they going to move toward a constitutional form of money. or are we going to go another step further into international money - instead of having an international gold standard based on the market, are we going to go toward a UN, IMF standard where they are going to control with the use of force another fiat standard. I consider that a very, very dangerous move."

Paul's comments come a day after more secret Fed bailouts were publicized.

Bloomberg reported yesterday that Secret Fed Loans Gave Banks $13 Billion.

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

Is there anyone who still really believes we shouldn’t be taking a closer look at the Federal Reserve’s activities?

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Mon Post #1: Events in Europe, QE and Gold/Silver

2011-11-28T17:02:00.000-08:00

To say that we live in interesting times is nothing short of an understatement.

Sovereign Debt will be the issue of this decade and the situation with the PIIGS (Portugal, Ireland, Italy, Greece, Spain) in Europe dominates the headlines again this past weekend.

A stunning article appreared in the UK newspaper, The Telegraph, which reported that Britain's Foreign Office has given instructions to embassies and consulates to begin contingency planning to help expats should the crushing debt of the PIIGS collapse the Euro.

Even more incredibly, a senior minister has revealed that Britain is now planning on the basis that a Euro collapse is not just a possibility, but that it is only a matter of time.

A senior minister has now revealed the extent of the Government’s concern, saying that Britain is now planning on the basis that a euro collapse is now just a matter of time. “It’s in our interests that they keep playing for time because that gives us more time to prepare,” the minister told the Daily Telegraph.

Meanwhile Société Générale (SocGen), a large European Bank and a major Financial Services company that has a substantial global presence, has come out its Multi Asset Portfolio Scenario/Strategy guide wherein the French bank makes the simple case that the worse things get, the stronger the response by global central banks will be.

"A major liquidity crisis should not occur this time, as we think we are on the eve of major QE in the UK, US and (a bit) later on in the EZ."

How big will QE3 be?

According to SocGen, the Fed will preannounce it in the January 2012 FOMC statement and that the monetization will last from March 2012 until the end of the year and will buy a total of $600 billion.

Many analysts believe the actual total will be well greater, probably in the $1.5 trillion range as the Fed will finally say "enough" to piecemeal solutions and grab the bull by the horns.

What really stands out is SocGen's investment advice:

"Buy gold ahead of QE3 as money creation has a strong impact on prices... Gold is highly sensitive to US QE, as every dollar of QE goes into M0, triggering the debasement of the USD."

SocGen sees Gold going to $8,500/oz so as...

"to catch up with the increase in the monetary base since 1920 (as it did in the early 80s)."

Older readers will recall that was a time when Gold went from $35/oz to $850/oz.

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What we cannot seem to see

2011-11-25T16:22:00.000-08:00

I read a great quote today:

"Many of the world’s financial and economic woes since 2008 began with the bursting of the biggest bubble in history. Never before had house prices risen so fast, for so long, in so many countries..."

That's how a recent Economist article, 'House of Horrors 2: The bursting of the housing bubble is only half over', begins. And it makes a statement that few in Vancouver truly understand. It bares repeating:

"Never before had house prices risen so fast, for so long, in so many countries"

Vancouver's house prices are not a reflection of inherent value. They are a by-product of a world-wide debt phenomena that was deliberately created. Click the image below to enlarge and read a critical quote uttered by economist Paul Krugman on August 2, 2002:

In America, US President George Bush almost singlehandedly, through cheap rates, lax regulation, government housing subsidies, presidential boosterism and financial engineering, managed to get the home ownership rate to 70% as part of a deliberate strategy in expand the economy. A bubble was created BY DESIGN.

In Canada, Prime Minister Stephen Harper added fuel to the bonfire.

In the last six years we’ve had more pro-real estate initiatives than in the quarter-century prior to that.

We've had the zero down, forty year mortgage. The ability to raid the RRSP fund for down payments. The Home Reno Tax Credit. Emergency interest rates. First-time buyer’s closing cost credit. Regulations that permit liar loans. Regulations that permit zero-down payments with cash back from mortgage lenders. And most significantly, CMHC absorbing all lender risk.

Cheap credit, artificially supressed interest rates and government policy have fuelled this real estate boom.

You must understand this... our sky-high real estate prices are not a reflection of real value but a by-product of a deliberate strategy to create a bubble and inflate the economy.

In many countries the bust of the boom created by these policies have started. But as the Economist notes:

"The bust has been much less widespread than the boom. Home prices tumbled by 34% in America from 2006 to their low point earlier this year; in Ireland they plunged by an even more painful 45% from their peak in 2007; and prices have fallen by around 15% in Spain and Denmark. But in most other countries they have dipped by less than 10%, as in Britain and Italy. In some countries, such as Australia and Canada, prices wobbled but then surged to new highs. As a result, many property markets are still looking uncomfortably overvalued."

Many here think that because our bubble has not burst yet that we are not really in a bubble and that our housing prices are not artificially inflated, but are a reflection of 'true value'.

They are wrong. We ARE in a credit inflated bubble, a bubble that is part of a world wide phenomena. And that bubble is unsustainable.

As the Economist concludes, the worldwide housing bust is only half over and the full impact is yet to begin in many countries.

Canada is one of those countries.

We are, as the Economist notes, "more overvalued than America was at it's peak."

Unfortunatly most of us cannot seem to see that.

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Who will bail out the US Federal Reserve?

2011-11-24T14:48:00.000-08:00

Came across an interesting editorial by James Rickards, senior managing director of Tangent Capital and author of the book 'Currency Wars'. Rickards asks some interesting questions about how the US Federal Reserve funds itself.

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From Occupy Wall Street to the halls of Congress there is anger at bailouts orchestrated by the U.S. Federal Reserve. These bailouts have not been limited to banks but include brokers, money market funds and foreign corporations. The Fed has released details grudgingly and some disclosures were forced by the Dodd-Frank legislation. Gradually the bailouts have been revealed as if a veil were slowly being drawn to display a densely formed mosaic. The bailouts have enriched stockholders, bondholders and CEO’s while unemployment remains at depression levels and forty-six million Americans survive on food stamps.

But what if the Fed itself needed to be bailed-out? The Fed may be a central bank, but it is still a bank with a balance sheet and capital. A balance sheet has two sides consisting of assets and liabilities. The Fed’s assets are mostly government securities it buys and its liabilities are mostly the money it prints to buy them. Capital consists of the assets minus the liabilities.

The Fed has capital of about $60 billion and assets approaching $3 trillion. If the Fed’s assets declined in value by just 2 percent, that decline applied to $3 trillion in assets produces a $60 billion loss—enough to wipe out the Fed’s capital. A 2 percent decline is not unusual in today’s volatile markets.

The Fed is well aware of this problem. In 2008, the Fed met with Congress to discuss propping up its balance sheet by issuing its own bonds as the Treasury does now. By getting permission from Congress to issue new Fed Bonds, the Federal Reserve could tighten monetary conditions when the time came without having to sell the bonds on its books and realize losses. Sales of the new Fed Bonds would replace sales of the old Treasury bonds to reduce the money supply. This way, the losses on the old Treasury bonds would stay hidden.

In 2009, Janet Yellen, now a member of the Fed board, went public with this request in a New York speech. Regarding the power to issue new Fed Bonds, Yellen said, “I would feel happier having it now.” Yellen seemed eager to get the program under way, and with good reason. The Fed’s looming insolvency was becoming more apparent by the day as it piled more leverage on its capital base.

This bond scam was shot down on Capitol Hill, and once it failed, the Fed needed another solution quickly. The answer was a deal struck between Treasury and the Fed that did not require approval from Congress.

The Fed earns huge profits every year on the interest received on Treasury bonds the Fed owns. The Fed normally pays these profits back to the Treasury. Behind closed doors, the Fed and Treasury agreed that the Fed could suspend the repayments and keep the cash. The amount the Fed would usually pay to the Treasury would be set up as an IOU.

Now as losses on future bond sales arise, the Fed does not reduce capital, as would normally occur, instead they increase the amount of the IOU to the Treasury. In effect, the Fed is issuing private IOUs to the Treasury and using the cash to avoid appearing insolvent. As long as the Fed can keep issuing these IOUs, its capital will not be wiped out by losses on its bonds. Corporate executives who played these kinds of accounting games would be sent to jail. Americans might be outraged to know that the Treasury is a public institution while the Fed is privately owned by banks, so this accounting sham is another example of bilking the taxpayers to enrich the banks.

The United States now has a system in which the Treasury runs huge deficits and sells bonds to keep from going broke. The Fed prints money to buy those bonds and loses money owning them. Then the Treasury takes IOUs back from the Fed to keep the Fed from going broke. This arrangement resembles two drunks leaning on each other so neither one falls down. Today, with its 50-to-1 leverage and investment in volatile securities, the Fed looks more like a poorly run hedge fund than a central bank.

Even this Treasury lifeline to the Fed may not be enough in the long run. If the Fed begins a new round of money printing and the Treasury continues with trillion-dollar plus deficits, there may come a time when even the credit of the Treasury and Fed are called into question and the money printing circus grinds to a halt. At that point the Fed could “phone a friend” at the IMF and be bailed out by a kind of IMF funny money called “special drawing rights” or SDR’s, or the Fed could use its nuclear option and go back to the gold standard using the gold in Fort Knox. Given the limited amount of gold and the huge amount of paper money that would have to be backstopped, the new gold price would be $7,000 per ounce or higher. These kinds of spikes in the price of gold during money crises have happened before – in 1930’s and the 1970’s. Those crises were forty years apart and the last one was forty years ago so a new crisis in the near future would be right on time.

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To our American friends...

2011-11-24T03:35:00.000-08:00

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Ron Paul on the US Federal Reserve: "It is immoral"

2011-11-22T21:20:00.000-08:00

Congressman Ron Paul (and candidate for the US Republican 2011 presidential nomination) delivered a speech for the National Association of Home Builders at the 29th Annual Cato Monetary Conference yesterday.

The key topics were the US monetary policy and the US Federal Reserve.

"I think there is no doubt that the Federal Reserve is immoral, it's unconstitutional, it's a disaster and we don't need it... The Federal Reserve is an institution that was created by the Congress and the Congress has been totally derelict in their duties as far as oversight of the Federal Reserve."

In the middle of an election campaign, here you have a man who is speaking consistently with everything he has said about monetary policy for the last 30 years. He refuses to pander to the electorate and change his opinions to garner votes. Ron Paul tells you exactly how it is in this excellent speech.

This is the man who 'should' be the next president of the United States.

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If at first your house doesn't sell... double the asking price!

2011-11-22T02:13:00.000-08:00

Time for another tale from the Bubble Zone.

As noted last week in the Vancouver Sun newspaper, a house has just gone on the market at 3390 The Crescent for $31.9 million.

The Crescent lies at the heart of one of Vancouver's most upscale neighbourhood's: Shaughnessy. The street itself is a circular road with a lovely park in the middle. And 3390 is a palatial white house that sits on an acre sized lot where The Crescent meets Osler Street.

The house itself contains 10,516 sq. ft of space spread over three storeys. There are six bedrooms, eight bathrooms and five fireplaces, along with a wine cellar, a games room, a gym and staff quarters.

With a backyard pool, a koi pond, a greenhouse, and large, beautifully landscaped grounds; the home is 'palatial' in every sense of the word.

But what makes this mansion stand out is it's selling history. The current owners bought the home in April 2004 for $6 million.

Last year the home was listed for sale for $17.9 million, but there were no takers at that 'bargain' price.

And we say 'bargain' price because after looking at the high prices mansions are commanding in Shaughnessy (a house that sold last year on Angus Drive for $5.7 million was recently assessed at $9 million), the owners decided to raise the asking price from $17.9 million to $31.9 million.

That's right... the home failed to sell so they doubled the asking price.

Who says there's a disconnect in our real estate market?

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Steve Forbes: The Dollar Will Be Re-Linked To Gold within 5 years

2011-11-19T00:01:00.000-08:00

Steve Forbes makes a number of very good points about monetary policy, what he terms “the most boring subject in the world” and goes on to predict that, within the next five years, the U.S. dollar will again be linked to gold.

His discussion of time and money and how the government shouldn’t be in the business of manipulating either is particularly intriguing.

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Time to bail on Gold and Silver... right?

2011-11-18T01:12:00.000-08:00

It's been interesting to watch the mainstream media coverage of Gold and Silver the last few months.

Every time gold undergoes a significant correction, the gold bears come out of the woodwork to proclaim that the gold 'bubble' has finally burst and we're about to see a massive sell-off.

The viewpoint is propagated despite the fact that the global debt crisis goes hand in hand with monetary inflationism. Governments faced with either significantly cutting bloated spending levels and raising taxes always choose currency debasement as the easy way out.

The notion that Gold and Silver are in a bubble, either from a fundamental or technical perspective, simply does not stand to reason.

And one only has to look at what Central Banks around the world are doing to frame those assertions properly.

As noted in yesterday's Globe and Mail newspaper, Central Banks are going on a Gold Rush.

Official net purchases of Gold by Central Banks exploded in the recently completed third quarter of 2011. Central Banks purchased 148.8 tonnes of Gold, more than double the entire amount of government buying in 2010 according to a report by the World Gold Council, a London-based industry association.

The surge is startling to some because until last year, Central Banks had been net sellers of gold for two decades. But this year they are adding to stockpiles at what the Gold Council reckons is a record pace, reflecting deep concern about the longer-term viability of the U.S. dollar and the euro as stores of value.

“We are seeing what now looks like unprecedented levels of central bank buying,” said Marcus Grubb, managing director, investment, at the Gold Council. “We do believe this is a long-term trend. This is not just short-term, tactical buying.”

Do you think they would be buying if Gold and Silver were in bubbles perched on highs that were about to plunge dramatically?

Of course this news came yesterday which happened to be a day when both Gold and Silver plunged dramatically. Silver was down over $2.00 and has left some scratching their heads in bewilderment.

The blog, The Golden Truth, made note of Silver's steep decline yesterday and pointed the finger at one culprit: JP Morgan.

As faithful readers of this blog know all too well, JP Morgan is is hopelessly short COMEX silver futures and by the explicit admission of one of the CFTC directors, JP Morgan manipulates the silver market illegally.

And Silver watchers this week have seen some stunning developments occurring in the COMEX markets.

Two days ago, in a move which raised eyebrows throughout the precious metals trading community, JP Morgan moved 1.1 million ounces of silver from the the "eligible" bin and into the "registered" bin. This amount represents nearly 50% of JPM's "eligible" silver

(The COMEX inventory of gold and silver is reported on a daily basis and breaks out the inventory between "eligible," which is metal being "safekept" at the COMEX by investors who have taken delivery, and "registered," which is the metal that has been certified by the COMEX to meet its delivery standards and is being held for the purposes of delivery.)

The author of The Golden Truth, having studied the COMEX open interest and inventories for nearly 10 years, believes that the outright size of this inventory move by JP Morgan is unusually large and would suggest that JP Morgan is anticipating the probability of having to deliver a lot of silver for the December delivery month (of which JP Morgan is likely short at least 17k of the current 34k open interest, or 85 million ounces.)

Many analysts, seeing these developments, have been bracing themselves for another smackdown of the precious metals.

This is because, with 9 trading days left until the "first notice" day (November 30th) for December silver deliveries, the open interest for December remains extraordinarily high.

In order for the December open interest to get down to a level which represents just the total amount of registered silver - roughly 33 million ounces - the December open interest will have to bleed down to 6600 contracts. This is a big liquidation in just 9 days.

When you combine this with JP Morgan's recent inventory behavior, the implication is that delivery supply could get very tight this month.

To drive down the open interest, it is crucial that the spot price of Silver comes down precipitously.

As The Golden Truth notes:

The key here is to understand that the action between now and first notice day for December delivery has nothing to do with market fundamentals or outright global demand for silver and everything to do with JP Morgan's ability to try and force the silver market lower to protect its short position AND the unwillingness of our Government to enforce the laws in place to prevent this kind of market manipulation. Furthermore, the key to trading and investing in silver when the market goes through phases like this is to either hold what you got and don't watch the intra-day volatility or buy the down-spikes aggressively and take some profits on the rebound, but make sure you take full advantage of this market inefficiency and wealth-enhancing opportunity and increase your overall holdings.

Look at what is happening in Europe right now. Do the fundamentals suggest flight from the precious metals?

Yes, liquidity issues are prompting a sell off in the only assets that are performing well (Gold/Silver) in order to access cash, and that is part of the reason for the sell-off, But close inspection of the sell-off times and amounts have got JP Morgan's manipulation fingerprints and style M.O. all over them.

The Golden Truth makes a keen observation:

One of these days the market is going to blow up in JP Morgan's face because they won't have enough physical supply of silver to meet delivery demands and we'll be reading about JP Morgan the same way we are reading about MF Global, only it will be many multiples more severe. It will potentially be catastrophic to the U.S. dollar and any remaining faith thereof. You want to make sure you have as much of your paper money moved into gold and silver because when the market does blow up like that, the end-game will be near and gold and silver will undergo a breathtaking move higher. I would suggest that behavior like we are seeing by JP Morgan this week indicates that the "blow up" event is getting closer.

And that is all you need to know about what you should be doing with your investment funds right now.

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What's wrong with this picture?

2011-11-17T00:22:00.000-08:00

Did you ever play Monopoly as a kid and, as the designated banker, succumb to the temptation to simply remove some money for yourself if you were strapped for cash?

Wouldn't it be great if you could do that in real life? Solve your money problems by simply creating more cash for yourself?

That's basically what the United States is doing.

As CNSNews.com notes, at the close of business on Tuesday the debt of the US federal government exceeded $15 trillion for the first time - with the largest single owner of the publicly held portion of that debt being the US Federal Reserve.

Over the past year, as the Federal Reserve massively increased its holdings of U.S. Treasury securities and entities in China marginally decreased theirs, the Fed surpassed the Chinese as the top owner of publicly held U.S. government debt.

In its latest monthly report, the US Federal Reserve said that as of Sept. 28, it owned $1.665 trillion in U.S. Treasury securities. That was more than double the $812 billion in U.S. Treasury securities the Fed said it owned as of Sept. 29, 2010.

Meanwhile, as of the end of this September, entities in mainland China owned $1.1483 trillion in U.S. Treasury securities, according to data published today by the U.S. Treasury Department. That was down slightly from the $1.1519 trillion in U.S. Treasury securities the Chinese owned as of the end of September 2010, according to the same Treasury Department report.

Thus, at the end of September 2010, the Chinese owned about $339.9 billion more in U.S. Treasury securities than the Fed owned at that time. By the end of September 2011, the Fed owned about $516.7 billion more in U.S. Treasury securities than the Chinese owned.

Perhaps the most astonishing statistic is that since Barack Obama has been President, the US debt has gone from $10,626,877,048,913 on January 20, 2009 to $15,033,607,255,920 as of yesterday. That's a stunning increase of 41.5%, or $4.4 trillion.

No wonder the US Federal Reserve is now the largest holder of debt. Who else, besides the ones who are printing the currency, is there to buy it?

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Keeping the balls in the air

2011-11-16T11:22:00.000-08:00

The email inbox overflows from yesterday's posting on the political attack video about Vancouver's Mayor Moonbeam, clearly striking a nerve on various sides of the civic political spectrum.

Today, however, we switch gears and go back to world's debt problems.

As we have commented before, debt will be the issue of this coming decade... specifically Sovereign Debt.

The ticking time bomb in this mess is the financial product known as 'derivatives', vehicles which Warren Buffet labeled as "financial weapons of mass destruction".

I am fond of saying that what we experienced in 2008 was a deep, financial earthquake - the repercussions of which we do not fully appreciate nor understand.

I maintain that viewpoint even today.

The chain of events set into motion in 2008 still has a long way to play out. A massive amount of private and public debt has accumulated and the system needs to allow this debt to unwind, no matter how painful this process will be (and it will be painful).

We cannot have meaningful recovery until this happens.

But Western governments have not allowed this to happen. They have intervened to prevent the pain.

The slate needs to be wiped clean but the problem is eliminating all these debts, deficits and unfunded social entitilements will trigger the gorilla in the room: the $600 trillion of derivatives created by the banks.

This is why the Euro zone and the PIIGS is such an important topic.

Bloomberg hilighted this today by reporting that JP Morgan and Goldman Sachs have disclosed to shareholders those two banks alone have have sold protection on more than $5 trillion of debt globally (much of it dependant on the debt of Greece, Italy and Spain).

Bloomberg notes, "as concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in such a scenario, giving only net numbers or excluding some derivatives altogether."

The banking system has enabled the creation of an unsustainable mountain of debt.

What we have watched since 2008 has been nothing more than a complex juggling act that has - so far - failed to deal with the root of the problem: eliminating the debt.

The crisis that looms on the horizion will be the biggest event in our lives and understanding/preparing for it will be the most important step you will ever take.

Future generations will look back upon the 25-year period after 2008 in a way that dwarfs the 25-year period that followed 1929.

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Mayor Moonbeam

2011-11-15T18:26:00.000-08:00

For those who don't live in British Columbia, the cities and municipalities of our fair Province will be heading to the polls this coming Saturday for civic elections.

And while this blog doesn't support any party or individual, we had to chuckle at this creative youtube vid about the current Vancouver civic election issues and it's Mayor, Gregor Robertson (who has been dubbed 'Mayor Moonbeam' for many of his policies).

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CNBC announces Ron Paul 'surges' into tie for lead in Iowa Republican Presidential Race

2011-11-15T18:11:00.000-08:00

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