Is a much worse Financial Crisis looming on the horizon?

Everywhere there are signs the economy is headed for a double-dip recession and Macleans has a great article on the looming worldwide economic condition.

And it's ramifications could be horrific for Canada.

People finally seem to have woken up to the fact that the breadth and depth of the 2008 Financial Crisis is much deeper than was first understood and that the crisis hasn't been resolved.

In short, the world has too much debt. And you can't solve a debt problem by adding more debt, which is all we have done.

It seems that the goal of central banks and Government over the past 2½ years has been a return to economic growth driven by ever-increasing home-ownership rates, a booming finance and investment sector and everyone using their home like an ATM machine.

Now that the bills are now coming due, the world finds itself mired in a long and painful process to unwind all that debt.

Gary Shilling, author of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation, observes that, “with the rally in stocks and commodities, most people thought we were going back to the good old days we knew and loved, and that 2008 was just a bad dream. But that was just a bear market rally, and now we’re going back to reality. There is just no such thing as an easy fix in an age of deleveraging.”

The U.S. economy is in a far more precarious position than it was before the credit crunch of 2008. Unemployment remains alarmingly high, at 9.1 per cent. The average time it takes for Americans to find new jobs has spiked to 40.4 weeks, the longest duration since records were first kept in the 1940s. It turns out the recession was also deeper than first thought. At the end of July, the U.S. Commerce Department revised down growth data, showing the U.S. not only shrank more than earlier believed, but economic output has yet to reach pre-recession levels.

All eyes are on Europe right now. 

London is burning. Greece is in receivership, nobody wants Italian bonds and France’s AAA rating is at risk, before long the spotlight will swing back to America’s failed states, beginning, as always, with California.

All signs are pointing to California facing a new budget gap.  Many other state and local governments in America are also showing serious signs of stress. Just days before S&P downgraded Uncle Sam’s debt in Washington, the Rhode Island city of Central Falls defaulted on its debt after municipal budget-cutting negotiations failed. Last Wednesday, Jefferson County in Alabama was expected to file for bankruptcy, which would make it the largest municipal bankruptcy in U.S. history.

Suddenly Meredith Whitney’s prediction of “hundreds of billions of dollars of muni defaults” for the upcoming year seems all the more plausible, with California leading the way. 

And China, the booming economy that is supposed to be everyone's economic saviour, is a source of concern, too.

When the 2008 crisis hit and American consumers stopped buying Chinese exports, Beijing instituted a huge US$620-billion spending program. The measures unleashed an orgy of construction projects across the country, but also sparked what has been described as history’s largest housing bubble, while driving up prices for consumers.

“They’ve already had to introduce a big stimulus package a couple of years ago, so it’s going to make it harder to go back to the same playbook again,” Brian Jackson, economist at Royal Bank of Canada in Hong Kong, told the Wall Street Journal.

Shilling believes China’s economy could be headed for a hard landing. It that happens he believes the bubble in commodity prices will burst. Already such signs are showing. Over the past three months, prices for oil, copper and cotton have slumped, and while commodity bulls insist the drop is temporary, Shilling believes it signals something worse. “It’s like those old cartoons where Wile E. Coyote runs off the cliff and for a moment he’s standing on air,” he says. “Then he realizes there’s no ground beneath him and - wham.”

If that happens, some fear Canada’s resource-dependent economy and stock market will get hit hard.

“The recovery thus far in Canada was, to a large extent, relatively better than other countries, and that’s because of commodity prices and a hot housing market,” says David Madani, an economist with Capital Economics. This time around, though, there are concerns that China’s cooling economy and a drop in raw material prices would have a big impact on Canada. Already there is talk in Alberta about the possibility of big oil sands investments being shelved if oil prices stay below US$85 a barrel.

Our unstoppable housing market almost single-handedly pulled Canada through the 2009 recession.

But Madani fears a commodities pull-back combined with a European/American/Chinese double-dip recession could set the state for a catastrophic Canadian situation.

During a June speech in Vancouver, Bank of Canada governor Mark Carney suggested the rush among Canadians to take advantage of rock-bottom interest rates to buy homes has not only ruined the balance sheets of many households, but has actually impeded growth by diverting resources from other parts of the economy.

Our soaring debt-to-income ratios have left the number of Canadian households vulnerable to an economic shock at a nine-year high.

“If we see housing go into a slump, an external shock like falling commodity prices could be what ultimately tips things over the edge,” says Madani.

And if that happens, Canada will not weather the next stage of the downturn the way we did in 2008.

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Some Sunday musings

A few random thoughts first thing this Sunday morning.

Yesterday we noted how the chief economist for RBC Global Asset Management, Eric Lascelles, argued that by the time many current mortgage holders renew their mortgage that the impact of higher interest rates will be mitigated by three years of rising household incomes.

It is fitting that on the day his comments were covered that shocking GDP figures were released showing that Canada's gross domestic product unexpectedly fell by 0.3 percent in May and that the U.S. economy grew at a meager 1.3 percent in the second quarter.

More importantly growth for the first quarter was revised sharply lower.

And just as data from the first quarter in the US was 'revised' lower, analysts are already looking at the second quarter data and figure that it's not accurate either and will be downgraded as well.

• "Just as Q1 2008 was eventually shown as the start of the great recession so will Q2 2011 in subsequent revisions."

So much for three years of rising household incomes.

Speaking of conditions stagnating, former Chinese central bank adviser Yu Yongding repeated his call for China to reduce its Treasury holdings as the American debate about the debt limit drags on. Speaking to reporters at a briefing in Mumbai on Friday Yu said:

• “U.S. bonds are not safe, but people think they are safe. That is a mirage.”

In March, Yu said that China, the biggest foreign holder of Treasuries with $1.16 trillion of the securities, should halt purchases because of the risk of an eventual default. In June, he predicted that credit agencies would limit the severity of any downgrade of the U.S. rating to avoid investor panic.

As China, Russia, Japan et al slow their purchases of US Treasuries, the US Federal Reserve will have no choice but to launch some form of QE3 to monetize the US debt. Increasingly the US economy (and by extension: Canada's economy) look to be entering the same decade plus malaise that Japan is dealing with.

There was an excellent analogy offered in the comments section over at Vancouver Condo Info yesterday about the actions our governement took during the first phase of the financial crisis (2008-2011):

• "The low emergency rates were supposed to be used as a spare tire, while the regular tire was to get fixed. But they couldn’t afford the repair, and could not buy a new tire as the credit card was maxed, so they ran the spare tire so long the tread is worn and can’t get any traction."

The economy has stalled and conditions are not improving. As the real estate market turns, the impact on Lower Mainland homeowners with high mortgages is going to be severe.

Our friends over on VREAA documented a poignant comment yesterday which represents the situation shared by many who have bought in the last five years in the Lower Mainland.  Calling into the Bill Good radio show, a caller said:

• “I work long hours to be able to pay for a house. I drive long distances to get to and from work. I barely do anything in my expensive house other than sleep and go back to work each day. And on top of that [speaking about the upcoming additional gas tax] every time I turn around I’m being taxed for something else.”

Bill Good replied that he thought the caller was "speaking for thousands of people right now.”

Indeed he is.

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The Great Reckoning (... what'd I do?)

In April of 2009, Statistics Canada conducted a survey on financial capability.

The survey found that more than 1/3 of Canadians said they were either struggling or unable to keep up with their finances.

And you can bet your bottom dollar, dear blog reader, that a good portion of the other 2/3's (the ones that said they were not struggling to keep up with their finances) are probably in the blissfully ignorant camp.

Self-assessment scales need to be taken with a grain of salt. Most of us will report that we are good drivers. Not all of us are.

As I have said time and time before, the story of Canadian Real Estate is going to be the story of interest rates. And those rates are going to be going up. The only question is... how high are they going to go?

Over the past week I have tried show that the current economic 'recovery' is all based on massive amounts of government stimulus. That western governments were within hours of a complete meltdown of the world's financial system and - in a desperate attempt to prevent a nuclear meltdown - the braintrusts of our national finances responded with knee-jerk reactions to halt a complete financial collapse.

Now they are struggling with the repercussions of those moves.

Worse... key members of that braintrust now admit that they made key mistakes that lead us to this precipice in the first place.

This is important since the 'emergency measures' taken in September/October 2008 were based on the those very flawed strategies, strategies which were once again drawn upon and taken to the extreme in the heat of potential disaster.

In Canada our own 'braintrust' made several catasrophic moves that are going to wreak havoc on our country in the years ahead.

When the 2007 real estate crash swept across the United States, Canadians smugly looked down at their noses at our American cousins and exalted in the superiority of our Canadian banking system.

But as we would come to learn, our Canadian banks barely escaped their own meltdown in 2008.

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

When the recession started to appear in Canada, and real estate values began dropping here; government moved quickly to intercede.

If asset prices could be protected, it was rationalized, our nation could weather the recession and minimize the fallout.

To achieve this 'asset protection', Canadian Banks received $65 billion in liquidity injections from the Insured Mortgage Purchase Program. This is the official way of saying the Canadian Government, through CMHC, purchased insured mortgages from Canadian banks to provide additional liquidity on the asset side of their balance sheets.

The Bank of Canada then our Canadian Banks with an additional $45 billion in temporary liquidity facilities and there was also assistance from the Canada Pension Plan through the purchase of $4 billion in mortgages prior to the IMPP program for a total government expenditure of $114 billion.

But real estate values in Canada were plunging nothwithstanding. Que the next phase of the 'asset protection' strategy.

The CMHC was ordered by the Federal Government to approve as many high risk borrowers as possible to prop up the housing market (with entry level buyers) and keep credit flowing.

• In 2008 some 42% of all high risk applications were approved, a 33% increase over 2007.
• Between the beginning of 2007 and 2009 Canadian Banks increased their total mortgage credit outstanding listed on their books by only 0.01% -- possibly the smallest amount of change in post WWII history.

This bit of financial magic to securitized all these mortgages by the CMHC is the only reason credit continues to flow to our real estate industry.

And it worked. Canadians jumped on the cheap, easy money and continued with a debt orgy that started in 2001.

• The Canadian mortgage securitizaton market has grown from $100 billion in 2006 to $295 billion by mid-June 2009.
• CHMC plans to expand securitization of debt to $370 billion by the end of 2009 as per the conservative government request.
• CMHC indicates in its plan that it will insure $813 billion via a combination of mortgage insurance and mortgage-backed securities (MBS) by the end of 2009.
• According to CHMC figures from 2008 and 2007 it is clear that CMHC has drastically exceeded their planned figures. It is expected that $812 billion is more than likely to be a minimum target.
• At these rates of progression the Government of Canada will in effect be insuring well over $500 billion in securitized mortgages and lines of credit by the end of 2010. The Canadian Government will also have issued over $600 billion in outstanding mortgage insurance.

Make no mistake, the moves that the Canadian Federal Government took in 2008 forestalled the US financial meltdown from spreading to Canada.

By preventing the collapse of our real estate market; our financial system did not follow the path of our American cousins.

But at what cost?

Last Thursday we outlined the gigantic hole that Canadian households have plunged themselves into.

Debt held by Canadians is at an all-time high. Especially mortgage debt.

The policy of emergency interest rates and the moves to 'support' the Canadian banks can only succeed it there is a dramatic increase in the economic fortunes of the world economy.

But as I have outlined before, in order for the world economy to properly restructure we must still undergo a tremendous amount of deleveraging.

This will be a drag on any economic rebound for years to come.

Meanwhile, when the central banks start tightening monetary policy to mop up excess liquidity and stave off inflationary expectations and when capital markets start pushing back against massive government deficit funding and corporate debt rollovers, interest rates will have nowhere to go but up.

And, with it, will go mortgage servicing costs.

This process will not fully play out for 15 - 20 years, which means we will see very high interest rates for most of that period.

Since 2001 Canadians have been like the kids in the movie Ferris Bueller's Day Off. We have skipped class and finacially partied, having a grand old time.

At the end of that classic movie, Cameron Fry is left to deal with the ultimate reckoning from the reckless adventures of our heroes.

And while the movie glosses over that reckoning for Fry, that won't be the case for the 1/3 of Canadians say they are either struggling or unable to keep up with their finances when interest rates are at the lowest point in our nation's history.

Will Canada become a nation of Cameron Fry's?

When interest rates shoot up, Canadians are going to be caught in a debt vice of historic proportions. If 1/3 of Canadians are either struggling or unable to keep up with their finances now, what's it going to be like when the posted 5 year bank rate sits at 15%?

I distinctly remember a family friend, in the early 1970s, declaring that "the government will never allow mortgage rates to go over 10% because it would inflict too much financial harm on the people!"

By the end of the decade that family friend (as well as my parents) had to renew their home mortgages at 19% and 22% respectively.

How many are rationalizing in a similar delusional way today?

How many will be wiped out trying to service debt at interest rates at half of those 1980s levels?

How many will be uttering that infamous line... "what'd I do?"

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Apparently it's only a bubble... if the bubble bursts (note: G&M link repaired)

Okay... let me get this straight.

A senior bank executive, who spoke to the Globe and Mail on condition of anonymity, said, "we're not in a bubble yet, or a credit crisis."

But he then goes on to explain that the heads of the country's six largest banks have privately told federal government policy makers that they fear the wide-ranging economic fallout of a U.S. style binge-and-collapse in housing hitting Canada.

Say wha???

Now don't get me wrong. That's exactly what this blog has been saying for the past 14 months. But why, if the bankers don't believe we are in a bubble or face a looming credit crisis, are they worried?

The answer is simple - we are in one. That's exactly why they're worried.

It makes me wonder how all those perma-bulls, who have been deriding the likes of us contrarians, feel about the fact that our nation's banking elite is now sounding alarm bells?

Even the freakin' Wall Street Journal has come out and pinpointed the danger Canada is facing, a danger we all can see as plainly as the noses on our faces.

To wit: that household debt in Canada — largely mortgages — was 1.42 times disposable income during the second quarter of 2009, a record high. And because Canadian banks typically reset adjustable-rate mortgages every few years, those who are buying now at low rates will likely see major increases soon.

“This is exactly what happened in the U.S., when affordability had moved way out of whack with prices,” quotes the WSJ.

So what's wrong with this picture? I mean, why are the Canadian banks concerned?

You and I both know they aren't threatened by any collapse in home mortgages when these significant rate hikes kick in.

The vast majority of their housing mortgages are CMHC insured. So even though Canadian mortgages account for 40% of the loans of the six largest banks, and comprise the biggest chunk of their portfolios, Canadian banks face little risk of direct loss because of federal government mortgage insurance.

So again... what gives?

"It's not the potential of big losses on mortgages that scares banks," says Peter Routledge, an analyst at Moody's Investors Service. "But if there were a spike in foreclosures in Canada, as has happened in the United States, consumers would likely struggle to make payments on other loans that aren't insured, such as credit card debt."

"Imagine instead of a few hundred people in Toronto in any particular month being foreclosed upon, it's a few thousand. The impact on the broader economy would be significant," said Mr. Routledge.

Ahhh... the truth is revealed.

Our omnipresent (that's omnipresent, a latin term for 'weasel') Canadian banks know damn well that the future holds a dramatic upswing in interest rates, a development that will have crushing impacts on real estate.

But that's not what bothers them. Somehow these brain surgeons have only now realized that they have screwed themselves along with the rest of us - despite CMHC carrying the can on all this mortgage debt.

And now they desperately want to try and put the brakes on things before real estate spirals hopelessly out of control and comes crashing down.

Not because a collapsing real estate market will hurt the Canadian public, but because a hurt Canadian public will default on credit card and other uninsured debt.

Marvelous.

But I've got news for them... it's already too late. There are already so many Canadians who have jumped on the low-rate money gravy train (either by max'ing out on their purchases or by extracting from the home ATM) that the looming significant interest rate hikes will begin the domino process that dooms our bloated real estate bubble.

But it's nice to finally see these weasels recognize and acknowledge what they have done, even though the only reason they are speaking up is because it dawned on them they aren't as protected with CMHC insurance as they originally thought.

Interest Rates

So once again the story is all about interest rates.

Adding to the chorus of warnings is this one from Tim Bond of Barclay's.

Bond has been remarkably accurate in predicting the strength and length of the current global equity rally. He claimed that analyst estimates and high levels of bearishness would lay the foundation for a continuing equity rally - and he was right.

But yesterday he did an abrupt about-face.

“Fiscal dynamics point towards higher government bond yields in many economies, including the UK and US. History is unequivocal in linking fiscal deterioration to higher yields. This point is clearly becoming recognized by investors. As a result, a contagious process has started, during which risk premia in bonds, equities and currencies adjust higher to reflect the fiscal situation. This process is unlikely to remain confined to southern Europe, but will eventually embrace all those economies with sizeable budget deficits.”

That means Canada and, especially, the United States.

And what does Bond see on the horizon?

1)The majority of the G20 is a fiscal mess. 2)Demographic trends of the G20 are highly negative, and 3) Containing the long-term government debt problem will be painful.

Most alarming to Bond, however, is the close relationship between high debt levels and rising rates. In studying 6 developed nations over the last 20-30 years, Bond found that a 1% change in deficit/GDP caused a 32 bps increase in 10 year rates. Based on this, Bond says we are due for a substantial rise in global interest rates.

Not just an uptick, but a 'substantial' rise. Don't be surprised to see a return to late 1970s style rates.

It's coming.

And no five year fixed rate renewal is gonna save any Canadian family with a large mortgage - the time span of those high rates will easily surpass that period.

Bond sees it coming.

And the heads of the six major Canadian Banks see it too.

And if you read this blog all last year; you saw it coming as well.

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On another note... only two days to go.

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Delusional

Last Autumn, when the markets were melting down, I made an observation that I still hold to today.

What occurred in 2008 was a significant financial earthquake and we still do not completely appreciate the full repercussions of what occurred.

I believe that statement holds true today.

It's one of the primary reasons I am still extremely bearish on the outlook for real estate in the world's most bubbly city: Vancouver.

On Tuesday we saw financial markets tumble as credit-rating agencies slashed Greece and Dubai government related debt.

Looming on the horizon will be downgrades to similar debt issued by the United Kingdom and the United States.

It has too.

The fiscal imbalances and accumulated debt that has built up from trying to rescue our economy from the financial crisis is piling onto an already massive amount of government debt.

As David Rosenberg, chief economist and strategist at Gluskin Sheff in Toronto, said yesterday, "Anybody who thinks we are through this credit collapse is delusional. It is ongoing."

That message was echoed by this week on CNBC by Meredith Whitney, a former analyst at the investment bank Oppenheimer & Co. Inc.

Whitney, who has her own firm now, is renowned for calling out the problems with banks' toxic assets before the issue became widespread.

And what she forecasts for 2010 is anything but positive.

Whitney said that she believes government is running out of ways to help the economy as the US faces major issues regarding credit and employment.

"I think they're out of bullets," she said.

Whitney keyed in on the main reason that all the improvement we are seeing is, in fact, a false recovery. Despite being able to borrow at near-zero percent interest, banks are not taking that money and putting it back into the marketplace.

Consumer lending dropped 1.7% on an annualized basis in October, the ninth straight monthly decline. Whitney noted that consumers are "getting kicked out of the financial system" as the stimulus money is cycled to the banks bottom line and feeds a speculative frenzy in the stock market.

"What's so frustrating is you have an administration that is arguing such a populist (ideology) and not appreciating all the unintended consequences that the consumer and small businesses have far less credit," Whitney said.

With consumer spending making up about 70% of gross domestic product, the inability of even credit-worthy consumers being able to be able to borrow will put a severe headlock on future growth.

And that means there will be no economic recovery - at least not on a scale both the United States and Canada need to see.

"I have 100% conviction that the consumer is not getting any better and there's not more liquidity," Whitney said.

"I don't think you can cut taxes enough to stimulate demand," Whitney said. "For a 2010 prediction, which is so disturbing on so many levels to have so many Americans be kicked out of the financial system and the consequences both political and economic of that, it's a real issue. You can't get around it. This has never happened before in this country."

When you combine a failed 'immaculate economic recovery' with a need to service massive amounts of government debt, you soon realize that we are in the midst of a huge paradigm shift in North America.

The average Joe simply does not appreciate what our economic future holds for us.

As Rosenberg said, "Anybody who thinks we are through this... is delusional.

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Economic Recovery?

Yesterday we said, "It's not hard to see that if we don’t get a dramatic recovery in the economy, Canada is going to be in deep trouble." And on the weekend 'economic recovery' was the main topic of discussion at our Rainforest Roundtable.

Despite the belief in the mainstream media that the economy is starting to turn around, we just don't see it happening.

Why?

Because access to credit in the United States, our largest trading partner, is being denied at an accelerating pace.

Large, well-capitalized companies have no problem finding credit. But small businesses, on the other hand, have never had a harder time getting a loan.

According to prominent banking analyst Meredith Whitney, available credit to small businesses and consumers has contracted by trillions of dollars since the onset of the credit crisis over two years ago.

Small-business credit has contracted at one of the fastest paces of any lending category. Small business loans are hard to find, and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year.

Unfortunately for small businesses, credit-line cuts are only about half way through. Home equity loans, also historically a key funding source for start-up small businesses, are not a source of liquidity anymore because more than 32% of U.S. homes are worth less than their mortgages.

Why do small businesses matter so much?

In the US, small businesses employ 50% of the country's workforce and contribute 38% of GDP. Without access to credit, small businesses can't grow, can't hire, and too often end up going out of business.

What's more, small businesses are often the primary source of this country's innovation. Apple, Dell, McDonald's, Starbucks were all started as small businesses.

Whitney notes that, as is true in most recessions, banks' commercial lending portfolios shrink as creditworthy customers pay down their debts and the less-worthy borrowers are simply denied loans. Banks, in other words, want to lend only to those that don't want to borrow. Challenging as that may be, in the last cycle small businesses at least had access to their credit cards.

Small businesses primarily fund themselves through credit cards and loans from local lenders.

But in the past two years, credit-card lines have been cut by over $1.25 trillion. During the same time, 10% of all credit-card accounts have been cancelled. According to the most recent US Federal Reserve data, small business lending is down 3%, or $113 billion, from fourth-quarter 2008 peak levels — the first contraction since 1993.

Credit cards are the most common source of liquidity to small businesses, used by 82% as a vital portion of their overall funding. 79% of small businesses surveyed tell the Small Business Association that credit-card lending standards have tightened drastically and their access to credit lines has decreased materially.

Whitney believes that the US is only in the early stages of the second half of this credit cycle. She expects another $1.5 trillion of credit-card lines to be removed from the system by the end of 2010. This includes not only the large lenders reducing exposure but also the shuttering of several major subprime credit-card lenders. Beginning in the fourth quarter of 2007, lenders began reducing available credit by zip code. During the past four quarters, lenders have cut "inactive" accounts (whether or not the customer viewed the account as a liquidity vehicle).

The next phase will likely be credit-line cuts as lenders race to pre-emptively protect themselves from regulatory changes associated with the Credit Card Accountability, Responsibility and Disclosure Act, passed in May of this year, and the 2008 Unfair and Deceptive Acts and Practices Act.

The relationship between the United States and Canada is the closest and most extensive in the world. It is reflected in the staggering volume of bilateral trade - the equivalent of $1.5 billion a day in goods.

But when your biggest customer can't buy your goods, it doesn't bode well for your 'economic recovery'.

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Scolding the consumer isn't working.

Bad, bad consumer.

Apparently the scolding isn't working.

On the weekend, The New York Times headline said it all: "Americans stop buying; trade deficit declines"

And for an economy that is 70% dependent on consumer spending, that's a huge problem.

Americans have been the world's champion consumers. Just lend them money and they will spend it. A least that's the way the world economy is supposed to function.

But when Americans stop spending it brings a hush to the entire planet.

The malls go quiet... trucks slow down... ships are idled... and finally factories are shut down. Clerks, drivers, stevedores and assembly line workers all go home.

From the Times, "For the first eight months of the year, the United States trade deficit with China is down by about 14% or $20 billion, compared with one year ago. The nation's trade deficit with Japan has shrunk by almost 20%, and its deficits with Mexico, Canada and the European Union are down more than 40%."

Any wonder the BC government is looking at a massive deficit?

"The huge shift stems mainly from the staggering collapse in trade. With credit markets frozen and Americans facing the highest unemployment in more than 30 years, the United States suddenly stopped shopping overseas at anywhere near the volumes that had become normal."

This despite the fact the US federal government is going into massive amounts of debts trying to get consumers to spend again.

They've given their citizens tax rebates, incentives, loans, and bribes. They've run a federal deficit three times higher than the previous record. And they have put at risk a sum of money equal almost to the entire US GDP.

Still those hardheaded consumers won't consume like they're supposed to.

Suddenly, it's the 'Age of Thrift.'

And if the consumer credit party is over, what will replace it?

Is it possible for North American businesses to grow and prosper under these conditions?

Sure it is.

North America has great businesses with great brands. And as the dollar falls, the solution is to gain global market share in some sectors.

But 70% of the economy is consumer spending. Until that changes, the North American economy is hostage to US consumer spending. When consumers stop consuming, the North American economy's wheels stop turning.

And in the contradition lies the ultimate solution.

Americans will have to cut back on their spending and it will be time for the rest of the world to do some of the buying for a while.

And since the United States has less than 5% of the world's population, it is the logical next step.

But rebalancing the world's economies won't happen overnight. Nor even in a couple years. It will take a long, long time.

In the process, North America has a very painful readjustment ahead of it. A readjusment that will affect all sectors of our society.

And real estate values are going to be very much a part of that 'painful' readjustment, even here in North America's most bubbly real estate city.

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"Eye"

US Federal Reserve Chairman Ben Bernanke recently testified to Congress that he foresaw a “jobless recovery” on the horizon.

Jobless recovery?

How can an economy burdened with double-digit unemployment recover without new jobs?

In recent decades there have been some jobless recoveries from mild recessions, but they were built upon asset booms.

Today we face a very deep recession as the asset boom has collapsed (althought in the Village on the Edge of the Rainforest this is still pending). A jobless recovery in an economy based on 72% consumer spending is an oxymoron. Unless our economy can go through a needed and painful reorganization, in which the industrial sector is revitalized, recovery from this recession will have to be based upon consumer demand.

But with unemployment in the US increasing at over 500,000 workers a month (and 45,000 in Canada), with wages dropping, and with hours worked declining, it is hard to see consumer demand rising convincingly enough to provide the engine for a rebound.

Meanwhile, U.S. Treasury debt is exploding, the U.S. dollar falling, and unemployment rising.

Added to this conundrum, credit remains tight, despite the injection into the banks of vast amounts of Fed funds at zero percent. And, for the first time, banks are being paid interest on the reserves required to be held at the Fed. Paradoxically, this hidden taxpayer boost to banks’ earnings is one of the prime reasons for tight credit. What bank would lend to corporations or individuals, incurring risk, when it can lend to the Fed – at considerable profit – without risk?

With the consumer still in shock and denied credit, why do some indicators appear positive?

The short answer for this is massive deficit and stimulus spending by our federal governments.

That's why some consumers have ‘handout’ money to spend. And it’s no surprise that after a massive sell-off, certain retailers are refilling their inventories, causing the Purchasing Managers’ Index to rise.

But looking ahead, there is a $3.4 trillion commercial mortgage problem due to face the US banks in September and a huge wave of residential mortgage defaults to come.

When you combine this with the various pressures on consumers, it appears to me that we aren't on the cusp of any recovery, but that we are actually in the ‘eye’ of an economic hurricane.

When jobs fail to materialize and credit remains frozen, look for corporate earnings to remain depressed. This reality can only be ignored for so long.

US equities have just come off their best July since 1989. Overall, the market is up over 8% for the year. But history has a parrallel to today.

March 1989 also saw a huge run up. It was followed by an even stronger rally in July, during which volume dried up. It appears the same is happening now. What came next in 1989 was a big sell-off in September, followed by an even greater one in October.

Don't look now, but history tends to repeat itself.

Also, consider the fundamental picture. We have rallied 48% from the March lows on the back of what? Good earnings? Good employment figures? Good spending figures? Expanding GDP?

No.

We have rallied based on one of the largest and most concerted propaganda campaigns ever waged, supported by government stimulus. But no government can stimulate forever. The bottom line is this, if Americans and Canadians do not return to work, THERE IS NO RECOVERY.

Compounding all of this is another job-loss statistic.

According to Seeking Alpha, 13 million Americans will lose their benefits by years' end. And these Americans are not returning to work because they are losing their benefits, they are exhausting their benefits.

There are 30 million people in the United States on food stamps. There are only 200 million working-age Americans (age 15-64). Unemployment has been estimated by many good economists as being around 20%. Unfortunately for these people, their nanny-government lifeboats are slowly running out of air.

Those 3 million people who lost their jobs in the second half of last year? Once you factor in their dependants, that equals 10 million people who have no income and no savings.

And how about the other 4 million others who lost their jobs in the first half of this year? They will be next. The numbers get so depressing, I hate to even count them up.

As I have said before, unemployed people don't spend money. They don't buy technologies, or durables, or even pay their mortgage. US bankruptcies are up 600% in this recent downturn. And that includes the time after Congress affected new rules to make bankruptcy harder.

So who is going to pay for anything when they are struggling to buy groceries?

If the equity averages are already rallying on the back of these horrible stats, there is nowhere to go but down when the real truth sets in.

When the realization comes, look for another round of collapses. I see the stock market crashing below 5,000 on the DOW.

Particularly if autumn heralds a rise in interest rates.

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Vancouver: North America's most bubbly city?

Mark my words, dear reader. The dog days of summer, 2009 will go down in history as the pinacle of our housing folly.

In the same week that we find out that July broke all time sales records for real estate in the Village on the Edge of the Rainforest, Stats Can informs us that the July job loss number were five times worse that most analysts were predicting as 45,000 net workers were officially pushed to pogey.

The unemployment rate stayed steady at an 11-year high of 8.6%, but that's only because discouraged unemployed people, mainly youth, gave up searching for a job.

“[It's a] classic sign of discouraged workers throwing in the towel,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.

An economy can still grow if employment stagnates. But an economy can't muster growth if jobs are being destroyed. The all-important consumer spending power will never jump start things under these conditions.

As we predicted several months ago, tourism jobs have been hit hard given the recession in the U.S. and Canada, border issues, fall-like weather in July in most of the country, and the high cost associated with the Canadian dollar.

But it's the private sector that is taking the heaviest blow. Employment fell by 75,000 positions, bringing total job losses since last October to 436,000.

July's private-sector losses were the worst since the record-breaking decline in January. A 35,000 rise in self-employment partially offset the drop, but economists tend to be leery about self-employment numbers in the depths of a recession because self-employment is often a last resort.

The self-employment gain “is not necessarily a good thing as it underscores the lack of opportunity in the formal job market,” said Charmaine Buskas, senior economics strategist at TD Securities Inc. “And as workers have fewer job prospects and bargaining power, wages have obviously suffered.”

Since October, the work force has contracted by 2.4%, all in full-time work. Most of the losses have been in manufacturing, construction, transportation and warehousing.

And yet, in the Village on the Edge of the Rainforest, we have a huge wave of first time homebuyers entering into bidding wars for real estate. They are assuming mortgages with record low downpayments and 35-year amortizations only because they can take advantage of dirt cheap, manipulated mortgage rates.

35-year amortizations on mortgages where only 5% is used as a downpayment (which is pretty much the norm with all new buyers)mean that the principal is barely touched with monthly payments

If housing prices drop by as little as 8%, anyone of these new home buyers who have bought in 2009 could end up in an underwater position - just like that.

And with a worsening job picture, a private sector being decimated by the economy, a federal finance minister who warns the country to "prepare for even more job losses", it all adds up to a precarious position where all it will take is a little push for our bubble to burst in a spectacular fashion.

Sound crazy? Well how's this for a sign of the crazy times? BCTV (or Global), the undisputed king of private broadcasting in BC, just reported that it's parent company defaulted on an $18.5 million US interest payment to bondholders.

This in not an environment that can support a rising real estate market.

Spectacular fashion... mark my words.

(P.S. For those keeping track there were three bank failures in the United States today bringing the year's total to 72)

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Transformation

If Real Estate is to keep it's bubbly levels, the economy MUST recover and recover quickly.

But as faithful readers of this blog know, I am not optomistic about that occurring.

One of the main reasons is that fact that I believe our economy is going to be forced to undergo a major, painful transformation.

Currently 70% of our economic output depends on consumer buying. No buyers, no recovery.

Which is why the Canadian and American federal governments have been pumping 'stimulus' into the economy at a furious pace. Historic low interest rates are designed to encourage Canadians and Americans to get back into buying.

The problem is that we are at the end of the credit boom – certainly the nine-year boom and maybe the 60-year boom. Has any society ever created so many ways for people to go into hock?

In 2003, Americans had 1.46 billion credit cards, or five per person. Home mortgages total $9 trillion, and some initially don't require borrowers to repay all their annual interest. In 1946, households had 22 cents of debt for each dollar of disposable income. Now they have $1.26.

Behind these numbers lies a profound social upheaval: the “democratization” of debt. Everyone gets to borrow. But this process may now have reached its limits.

The biggest boon has been the expansion of homeownership, up from 44% of households in 1940 to 69% today. (Three-quarters of household debt consists of mortgages.) At heart our appetite for credit reflects a continental optimism. We presume that today's debts can be repaid because tomorrow's incomes will be higher.

The origins of today's credit culture date to the 1920s with the advent of installment lending for cars and appliances (stoves, refrigerators, radios), says economist Martha Olney, author of “Buy Now, Pay Later.” Attitudes changed. In the 19th century, “it was thought that only irresponsible families bought on credit,” she says. “By the 1920s, it was only foolish families that didn't buy on credit and use it while they were paying for it.” In the mid-1920s, 60% to 70% of cars were sold on one-to two-year loans.

After World War II, credit became part of the mass market. In 1958, Bank of America introduced a credit card that (in 1976) was renamed Visa. The combination of aggressive merchandising and government laws prohibiting racial and ethnic discrimination in lending led to a huge expansion of borrowers. One reaction to the anti-discrimination laws was the use of impersonalized computer-driven credit scores to determine loan eligibility. Now, U.S. businesses buy 10 billion FICO scores annually.

Credit is about more than selfishness and impatience. “Once consumers step onto the treadmill of regular monthly payments, it becomes clear that consumer credit is about much more than instant gratification,” writes historian Lendol Calder in his book “Financing the American Dream.” “It is also about discipline, hard work” – the attributes necessary to repay the debt and borrow more.

Ironically, our optimism feeds our stress.

The trouble is that no society can forever raise its borrowing faster than its income – which is what we've been doing. Sooner or later, debt burdens become oppressive. One reason for thinking we've passed that point is that the last spasm of credit expansion was partly artificial. To soften the 2001 recession the Federal Reserve embarked on an audacious policy of easy credit. From December 2001 to November 2004, it held its key short-term interest rate under 2%.

A real-estate bonanza ensued. From 2000 to 2005, sales of new and existing homes increased by nearly 40%. In hot metropolitan markets, prices more than doubled over five years. Nationally, the increase was 57%.

The frenzy depended heavily on low interest rate mortgages. In 2005, about half of new home loans had variable interest rates (often with low, introductory teaser rates) or required only interest payments.

What the Fed giveth, the Fed taketh away. And between June 2004 and 2006, the US Federal Reserve raised short-term interest rates from 1% to 5.25%.

And that's what caused the bubble to break in the most bubbly US cities. This forced real estate prices to drop a bit, which triggered the first subprime mortgages to default, and the dominos started to fall.

This turn of the credit cycle could signal signals a dramatic change.

The end of the decades-long rise of personal debt to income is going to have profound reprecussions.

It's not just that debt service (which is at aa historic high, nearly 19% of disposable income) has been stretched too far, credit standards have been stretched too far as well. And those standards are in the process of being pulled back.

In additiona much recent debt has been contracted at artificially low interest rates. As rates rise, buying will drop.

Toss in rising unemployment, and a contraction of the credit cycle in unavoidable.

For an economy that is 70% dependent on consumer buying, that becomes a death knell. Without that prop, the current economy cannot function and it cannot be resuscitated.

And if it can't be resuscitated, it must be restructured. A major, painful transformation may be our only option.

It won't be pretty.

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San Diego in 2004 mirrors Vancouver in 2008

"America's finest city."

That's what San Diego calls itself. And with good reason. The wonderful city's bay-side location and perfect climate make it a very attractive place to live.

And the parallels to Vancouver don't end there.

From 2001 through 2008, more than 8,000 condominium units were built in downtown San Diego. That's double the number of downtown units constructed over the same period in Los Angeles, a city three times its size.

San Diego was a construction boom town, drawing on it's scenic beauty and temperate climate.

Flush with easy credit, developers and home buyers were eager to invest.

At the height of the frenzy, hopeful purchasers queued up outside sales offices to plunk down deposits. There were occasional arguments over who was first in line. No one wanted to miss out with condo values riding an elevator to the sky.

Near the peak, in May 2004, median resale prices of downtown condos hit $647,500, a 56% increase in just three years, according to San Diego research firm MDA DataQuick.

The Los Angeles Times even profiled one savvy flipper who made a $91,000 profit in less than two months in 2005 by reselling a 560-square-foot studio for $340,000.

"There was a little bit of a mass hysteria mentality. . . . People thought they would be priced out of the market," said Bradford Willis, 47, who signed a contract in 2004 to purchase a $341,000, one-bedroom condo in a planned luxury development. Willis said he bought on speculation because there was little existing inventory on the market at the time, much of it priced above $500,000.

Sound familiar?

And now? Nowhere, nowhere is the real estate collapse more dramatic than in downtown San Diego.

Irrational exuberance has long since given way to buyer's remorse. Median resale prices for downtown units stood at $370,000 in June. That pricey 560-square-foot studio? It was foreclosed and resold this year for $162,000, down more than half from its 2005 sale price.

Downtown San Diego, a 2.2-square-mile area, is now awash in condos. About 400 new and occupied ones are listed for sale, and more than 450 are in some stage of foreclosure and will eventually be put on the market. An additional 1,000 units that were under construction when the market soured are slated to be completed this year, adding to the glut and putting further downward pressure on prices.

So far this year, 159 new homes have been sold downtown, according to DataQuick. At that pace, it would take several years to sell all the units recently completed or being finished this year. Developers are holding units off the market.

But haven't Vancouver condo builders been smarter?

Nor really. They just have the good fortune that the full effects of the busting bubble have not hit Vancouver yet.

Take Nat Bosa, prominent Vancouver condo builder, for example. He is one of the developers who led the condo charge in downtown San Diego. The LA Times notes that Bosa overestimate San Diego's potential, betting too heavily on the urban revival triggered by the 2004 completion of the Petco Park baseball stadium, home to the San Diego Padres.

San Diego has been a disaster for Bosa.

In Vancouver it is the urban revival of the yaletown/expo lands and the trigger of the Olympic Games hype. Is Bosa several years removed from a similar disaster here?

For some developers in San Diego, rather than dump units at fire-sale prices, developers are converting their projects to rentals, at least until the market improves.

Again, sound familiar?

The bubble started to burst in San Diego in November of 2005. By May of 2006, prices started to rise again. From November of 2006 to May of 2007, prices fell a little more and then plateau'd/rose until November 2007...

It was only at this point, in November of 2007 - two years after the bubble started to break - that the market truly plunged downward.

Vancouver is only a year into the start of it's break.

The only thing that will prevent Vancouver from suffering a similar fate is a dramatic recovery in the economy and buyers becoming flush with cash and easy credit.

Do you think that's going to happen?

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An International Perspective.

There is a annual worldwide investment symposium that has chosen Vancouver as the site of their convention this year. Coincidently they are in town just as the Bank of Canada has declared the recession over.

Care to guess how that declaration is being greeted?

Ian Mathias, managing director of Agora Financial, reported from the symposium on his website yesterday...

"07/24/09 Vancouver, British Columbia. 'The Recession Is Over,' reads the headline of The Globe and Mail today. The staff leaves the paper in front of our rooms here at that Fairmont Vancouver. When we cracked the door open to retrieve the rag, the headline caught our eye… and we thought of just tossing it back in the hallway. If there is any one single theme of this year’s Investment Symposium, it’s that despite the warm feelings and 'green shoots' of summer, this contraction is far from over.

'I think this is really serious, and it’s just beginning,' Doug Casey said during his presentation yesterday. 'Forget about the green shoots. They are weeds. This is the biggest thing since the Industrial Revolution. Stocks will be a good value when dividend yields are around 10%'.

'Real estate? Way too early. Bonds? The bond market is much bigger than the stock market. Interest rates are being artificially depressed. They have to go back up to higher levels to encourage people to save and get out of debt. When interest rates assert themselves, the bond market will collapse, which isn’t good for the stock market, or real estate, either.'

So what’s Doug doing? Going long precious metals, shorting U.S. Treasuries and buying real estate in Thailand and Argentina.

'We are looking for eight signs before we get bullish again,' added Eric Roseman in his presentation:

1) Unemployment must stabilize
2) Home prices must stabilize
3) Domestic consumption must rise
4) Bank lending must grow
5) Toxic assets and bank balance sheets must be fixed
6) Auto sales must stabilize
7) Credit spreads must narrow
8) The dollar has to decline

'Only the last two have occurred. That gives us a very bearish outlook going forward.'

By the way, what did the G&M mean in their 'recession is over' headline? Heh, the Canadian central bank predicted that the economy would grow 1% in the current quarter. Forgive us, but our faith in central bank forecasts ran out a long time ago."

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The Recession Is Over... supposedly!

Bank of Canada Governor Mark Carney came out today and declared that "the recession is over".

Oh boy, oh boy.

Guess we will be wrapping up the blog, throwing everything we have into real estate purchases, and getting back on the bubble gravy train.

Right?

But wait... isn't this the same Mark Carney who insisted, back in 2008, that Canada would not be hit by a recession in the first place?

Wasn't this the same Mark Carney that said our country wouldn't feel the same economic pain that was hitting the United States?

So what we actually have, then, is great news from the brilliant minds who never saw this coming, did nothing to prevent it, then denied it was happening.

And if the bank's new forecast proves correct, Canada's first recession since the early 1990s lasted three quarters, making it one of the shortest downturns on record. The shortest recession ever in the midsts of the greatest worldwide economic downtown since the Great Depression.

Riiighttt.

And Carney's prescient comments hearlding the end of the recession come out on the same day we are told that we are on the verge of a commercial real estate crisis.

Touted as "the other real estate bubble", investors are being warned that commercial real estate’s decline is a significant issue facing the economy because it may result in more losses for the financial industry than residential real estate. This category includes apartment buildings, hotels, office towers, and shopping malls.

It seems that US banks have been charging off (effectively assigning to the write-off bin) their commercial real estate loans at the fastest pace since the late 1980s. As the economy has struggled, developers and landlords have had to rely on a helping hand from the US Federal Reserve in order to try to get credit flowing so that they can refinance existing buildings or even to complete partially constructed projects.

From Vancouver to Manhattan, we are seeing rising office vacancies and declines in office rents. The issue for the financial sector is that the loans on their books have had to be written down to reflect the sorry state of commercial real estate. Though the US banking industry has for the most part turned in a stream of impressive profitability this quarter, the concern amongst investors is how much more of these loans are going to have to be written off.

The insurance industry is also impacted by the commercial real estate situation. Some of the leading insurance companies have invested about 10-12% of their assets in commercial mortgages. If the value of commercial properties were to continue to decline, then the write downs in mortgage loans on the books of these companies would severely impact their shareholders – not to mention their customers.

And the economy?

I see another 'revision' in Mark Carney's future.

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Two profiles: US Banks, CMHC

Two snapshots of institutions on either side of the 49th parallel for you today.

First we start with with our favorite whipping post, the US Banks.

As our Prime Minister commented on last year, the recovery will not begin until the US Banking system stabilizes.

So what's the outlook?

Yesterday there were four more bank failures on Bank Failure Friday bringing the total to 57 for the year. Unfortunately that may only be a drop in the bucket compared to the tsumani of failures on the horizon.

A report in Forbes.com (see article here), notes that the banking industry is bracing for continued losses from consumer loans due to the rising unemployment rate and an expected wave of commercial real-estate losses.

At a Senate Banking Committee hearing in Washington on Thursday, Sen. Jim Bunning (R-Ky.), repeated a comment relayed to him by Federal Deposit Insurance Corp. Chairman Sheila Bair that another 500 banks could fail "unless something dramatic happens."

So much for stabilizing.

Meanwhile there is the Canada Mortgage and Housing Corporation (CMHC).

As I have already stated the Canadian goverment, in a desperate attempt to prevent a repeat of the US real estate collapse, has thrown massive fiscal stimulus and ultralow interest rates at the Canadian economy in a desperate attempt to supercharge real estate and forestall the collapse of values.

Not only could such a development put the Canadian economy is jeopardy, but the Canadian goverment could be facing a supreme risk as well.

Consider... Canada’s housing insurance agency, run by Ottawa and accountable to the Minister of Finance, provides endless amounts of cheap insurance for high-ratio loans (with minimal down payments). In doing so, CMHC allows Canadian banks to pass off the risk of these home loans to the federal government.

Presumably this allows them to be more willing lenders.

Currently CMHC guarantees about $630 billion in mortgages, an amount of equal in size to half the Canadian economy.

Half! That's an astonishing amount of money.

And what assets stand behind this? Down payments worth about $8 billion (plus the book value of the real estate).

So what happens if the real estate bubble bursts and asset values crash? For starters it will mean that up to 98% of its liabilities will not be covered. Moreover Canada will be facing a situation worse than that which faced US mortgage giants Freddie Mae and Fannie Mac, which lost 90% of their market value.

Some of you have asked why the government is moving heaven and earth to keep the real estate market afloat. That's why.

But as economic recovery takes longer and longer to come into play, we have a situation where the current average home price can only be supported at artificially-low interest rates. And our Canadian banks only make those loans because they are backstopped by a federal government now running its worst-ever deficit.

Over $600 billion in mortgage risk belongs to the taxpayers – and Ottawa is already tapped out. So what is going to happen when interest rates rise?

What we have is Canada's own little subprime crisis in the making. The Bank of Canada has ushered in interest rates that are comparible to the US subprime-style teaser loans.

I say this because the Bank of Canada knows that these rates will be doubled or tripled in the years ahead. Yet, by dropping their key lending rate to the lowest point ever, they have created a situation that allows 3% mortgages to further inflate house values.

And just like the US subprime teaser-rates, when the mortgages reset at the higer rates... a wave of defaults and foreclosures will result.

When that first wave hits, the banking system will seize up, credit will stop dead in it's tracks, and the goverment will be pushed to the brink of insolvency.

A series of dominos are building. And when they start to tumble, the result is going to be devestating.

The housing crisis has not been avoided in Canada. It's only been delayed as officials pray for a swift economic recovery that is not coming.

One only has to look at the US Banking system's failure to stabilze for that evidence.

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Who ya gonna trust?

Canadian Real Estate Association president Dale Ripplinger tells us “the worst of the recession may be behind us.”

On the basis of this heady news, "potential buyers who moved to the sidelines late last year when economic uncertainty peaked are returning to the housing market."

The government engineered cheap mortgage rates have created a mini real estate frenzy and, according to the CREA, prices have just reached a new all-time high, surpassing the record set in the second quarter of 2008.

To these shills, er... economists... buying at the peak right now is the thing to do because tomorrow there will be a new peak.

So, faithful reader, who are you gonna trust? These salesmen... or your own logic.

Is the recession behind us?

There will be no recovery in Canada until there is recovery in the land of our largest trading partner, the United States.

And what is happening in America?

The US Bureau of Labor Statistics preliminary estimate for job losses for June at 467,000, which means 7.2 million Americans have lost their jobs since the start of the recession. The cumulative job losses over the last six months have been greater than for any other half year period since World War II, including the military demobilization after the war. The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.

The first major mistake these 'salesmen' are making is viewing this recession like previous ones.

This isn't like past recessions. If you are going to compare circumstances you have to compare this recession to those that started with the bursting of a giant speculative bubble. When you do you, see slow recoveries. The reason you see slow recoveries is that asset values at bottom are so low that investor confidence returns only gradually.

But even those who predict a more gradual recovery as investors slowly tiptoe back into the market, will be proven to be wrong.

This recession is very deep.

And in a recession this deep, recovery doesn't depend on investors. It depends on consumers who, after all, are 70% of the U.S. economy. Consumers have been crushed in this recession and until they start spending again, you can forget any recovery.

The problem is, consumers won't start spending until they have money in their pockets, or until they feel reasonably secure.

They don't have the money, and it's hard to see where it will come from.

In recent times, Americans found myriad ways to fuel spending, even as incomes stagnated: borrowing against the once rising price of their homes and tapping plentiful credit cards.

No longer. They can't borrow like that because one out of ten home US owners is under water - owing more on their homes than their homes are worth. American homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings.

The paycheck has returned as the primary source of spending, and pay is eroding even for those who have jobs. This process is nowhere near complete, and, until it is, the economy will barely grow, if at all, and may well oscillate between sluggish growth and modest decline for the next several years until the rebalancing of the excessive debt has been completed. Until then, the private economy will be deprived of adequate profits and cash flow, and businesses will not start to hire. Nor will they race to make capital expenditures when they have vast idle capacity.

US unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can't are hunkering down, as they must.

Meanwhile in Canada unemployment is also rising quickly, over 2 million people are out of work and household debt equals almost 140% of disposable income.

A new federal report warns our budget deficit will top $50 billion for at least a couple of years, and then Ottawa’s finances will be in the red for a decade. This, says economist Dale Orr, will add $200 billion to the federal debt, wiping away what 15 years of the GST and higher taxes were supposed to eliminate.

Don't you remember those times?

Our immediate future will be one of slashed government spending. And as our goverment must borrow more and more, interest rates will soar back to double digit rates as the mushrooming debt becomes more expensive to finance.

Economic growth alone (if there is much) won’t balance the books so governments will have to raise taxes – BC is already pounding the war drums on cutting services in health care due to lack of funds.

And this economy can't get back on track because the track we were on for years -featuring flat or declining median wages and mounting consumer debt - simply cannot be sustained.

Low interest rates and government stimulus can only delay an economic reckoning until the economy begins to recover. But that economy won't "recover" because it can't go back to where it was before the crash.

It means there is still a lot of "economic adjustment" ahead of us, regardless of what these polished R/E salesmen... err... economists may say.

In other words, there are many more reasons today to expect the downturn to continue than to expect a turnaround.

You only have to look at what is happening around us to see this yourself.

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"Blue Horseshoe Loves Anacott Steel"

There are days I like to pick up three or four newspapers and put my feet up in the backyard and simply read.

Today was one of those days. And it is amazing to see the similarity in news articles sometimes.

You can understand it for a major event, but it never ceases to amaze me when I see it for something like real estate.

Don't get me wrong, I understand what is happening. About 10 years ago I got a major lesson in 'public communications' when I took on a cause I cared about. I found it fascinating to watch the intimate behind-the-scenes moves that a major government bureaucracy undertook as it artfully managed both the press and their political masters.

And I was a quick study. The reality is that most reporters are lazy. Once you recognize this, and you tailor your information to spoon feed those journalists you develop a successful relationship with, PR truly becomes a game.

Almost weekly a comment was made here, a phone call there, and suddenly what I said today would appear in tomorrow's newspapers written by someone else.

It is truly an artform.

And that's what public relations has become... an artform.

The problem comes when you tread that very fine line between artful public relations and machiavellian manipulation.

Yesterday I posted an article on David Lereah. For those who do not know, David Lehreah was the chief economist for the US National Association of Realtors. David was the consumate machiavellian PR hack who did more than issue rosy forecasts. He regularly trumpeted the infallibility of housing as an investment. In countless interviews, on TV and in even in his fateful 2005 book, "Are You Missing the Real Estate Boom?", Lereah tirelessly pumped the housing market.

Lereah was so successful at prodding wary consumers into committing to making housing purchases that Time Magazine named him as one of the '25 People to Blame for the Financial Crisis'.

A dubious distinction to be sure.

But as one of the 'blog dogs' posted in response to yesterday's post... this is old news.

What makes him relevent, tho, is his forthright acknowledgement as a corporate shill on the part of the Real Estate Industy. Under the guise as a 'market economist', Lereah pumped the Industy as any other high pressure salesman would in many other fields.

Understand... he promoted a product (real estate), as a salesman, hidden under the guise of a fancy title (chief economist). And in doing so he dangerously treaded that fine line between promotion and deception.

It's important you understand this.

Because what is happening in Real Estate in British Columbia and Canada now is no different from what was going on in the United States in 2007.

A mere year after the US real estate market had begun a spectacular downward slide, Lereah pulled out all the stops as he manipulated the national media to promote the idea that "it appears we have established a bottom" to the real estate crash. And this was done in a desperate attempt to restore 'consumer confidence' and halt the downward slide.

A great many Americans dived into the housing market as they blindly followed the advice of Lereah and the National Association of Realtors... and in doing so, those Americans committed a catastrophic financial mistake.

Picking up the Globe and Mail newspaper today, I read headlines trumpeting a "Phoenix-like rise' in the real estate market. The Industry is giddy and proclaiming that "in Canada, buyers are back, sales are surging, and prices are edging up."

"Canada appears to have skirted the clutches of a lengthy, painful downturn. We can quibble about how stong and early the recovery will be, but the worst is over", says Michael Gregory, a senior economist at BMO Nesbitt Burns.

It isn't.

Faithful readers know I have written about this phenonmenon often.

In a desperate attempt to prevent a repeat of the US experience, the Canadian government has thrown massive fiscal stimulus and ultralow interest rates at the Canadian economy in a desperate attempt to supercharge real estate and forestall the collapse of values... a domino that would devestate the Canadian economy.

And lo-and-behold, a year after the start of the collapse in Canada, Canadian economists are making the exact same claims as the famous David Lereah was just over one year into their collapse.

You will recall it started back in February when Canadian R/E Industry shills started putting out stories on how first time buyers were diving into the market to take advantage of historic low interest rates - and how their peers were being 'left behind'.

Phone calls were make and virtually the same, identical stories were appearing in newspapers in Vancouver, Calary, Edmonton, Winnipeg, Toronto and Montreal, but tailored to profile individual couples in each market.

Each newspaper came out with these stories on almost the same day.

It has been a highly organized and coordinated campaign specifically targeted to manipulate 'consumer confidence' and it is being done with a level of skill that would have made Gordon Gekko (from the movie Wall Street) proud.

I can almost hear the phone call now... "Blue Horseshoe loves Vancouver Real Estate."

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Email: village_whisperer@live.ca
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