It's not the news per se that's important... it's how you spin it.

Managing perception.

The concept has become so crucial in modern society that managing perception has become an art form.

Commodities trader Jim Sinclair is famous for deriding all the MOPE he sees in the press today.  That's the acronym he utilizes for all official attempts to put lipstick on the pig of a declining economy: the Management of Perspective Economics (MOPE).

Blogger Charles Hugh-Smith wrote about the practice last month and noted immediately in his post why the great game of perception management is so important:

"The economy will expand if you believe it is expanding - because you'll be 'animal spirited' into buying a lot of stuff on credit that you can't afford."

Smith observes that economists speak of these magical "animal spirits" that fuel economic expansion, but that this is simply a colorful term for perception management: when people perceive others reaping outsized gains in profits or pleasure from taking risky bets and freely spending borrowed money, then they will feel an overpowering urge to follow the herd and leverage their capital (if any) and disposable income (if any) into risky bets and zealous over-consumption, i.e. "animal spirits."

Conversely, when said risky bets blow up and participants have lost their ever-loving derrieres by following the herd, then "animal spirits" quickly dissipate as the herd thunders off a cliff to its financial demise.

The task of the financial/political/media Status Quo is to convince people to overlook the abundant evidence of economic deterioration and focus on heavily juiced "evidence" of robust "growth."

The game plan is this: if the Status Quo can convince you that the economy has righted itself and from here on in everything will get better and better, every day and in every way, then we will abandon financial rationality and start buying homes we can't afford on credit, cars we can't afford on credit and boatloads of stuff from China that we don't need on credit (of course looking cool is a "need," i.e. having an iPad to carry around).

In other words, believing it is so will make it so.

Which brings us to the latest media reports of February's Real Estate results.

The Vancouver Sun headline blares, "Metro Vancouver market balanced, board says: Price for residential properties up six per cent in a year according to report"

The article regurgitates the press released cranked out by Real Estate Board of Greater Vancouver (REBGV) president Rosario Setticasi. It heralds a "pre-spring hike in sales.",

Pre-spring hike in sales?

Haven't we been hearing constantly about how real estate sales are tanking in the Lower Mainland the last 2 months? How is it that we have a "pre-spring hike in sales?"

According to the REBGV:

“With a sales-to-active-listings ratio of over 18%, we see fairly balanced conditions in our marketplace as we move into the traditionally busier spring season. Sales reached 2,545 in February, a 61.4% increase over the 1,577 sales in January.

Wow! A 61.4% INCREASE in sales!!

With a headline like that and opening statements like that, it certainly appears like the market is rip-roaring hot, right? I mean sales are up over 61.4%... holy crap!

Of course that's the perception you're supposed to gleam from glancing at the article.

Dig a little deeper and you see that those 'rip-roaring' February sales actually constitute a DECLINE of 17.8% from the 3,097 sales that were recorded in February 2011.

Which means compared to last year, February 2012 was dismal. Yes they were a huge improvement over a disastrous January 2012, but they were still atrocious.

How atrocious?

The February 2012 sales in Metro Vancouver were the third lowest February total in the region since stats began to be gathered in 2002.

But the headlines and the press statements don't shriek sales are down 17.8% from last year, do they? Nor do they proclaim that February sales were the third lowest total in the last decade.

Of course not! Instead you are fed the line that sales are UP 61.4% from last month.

Then there is the benchmark price.

Not only are such measures highly skewed in a market with low sales volumes (as several sales of high end homes completely distort the averages) but this month's benchmark price comes on the heals of the industry radically changing the way the benchmark is calculated.

With that change put in place during the middle of last month, the REBGV is happy to tell you that the the benchmark price for detached properties increased a whopping 10.5% from February 2011

But as Garth Turner noted two weeks ago, the CREA changed the way the numbers are crunched so that the public accepts a new House Price Index that now masks the evolution of a national housing decline.

Gone will be average prices, replaced by a benchmark number – expressed relative to 2005 pricing, and taking into account property differences and the social aspects of a piece of real estate.

"It’s an even better tool for local real estate boards to mask evolving market realities, hide the early signs of a correction and remove raw data from the hands of consumers. It’s bad enough that the public MLS already omits vital information, such as the number of days a house has been on the market, price changes during a listing or previous sales history. But now being given a broad, homogenized index-based McNumber for a wide area is nothing but soma for the masses."

So don't listen to all that negative press you've been deluged with the past month or so.

It's a shiny happy world out there in bubble land.  Open that wallet. Plunge yourself into debt. It's a great day to buy a house...

... all you need is the right perspective.

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Email: village_whisperer@live.ca
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'Some Things You Should Know About China' - Charles Hugh Smith

I read an excellent post about China by American blogger Charles Hugh Smith on his blog Two Minds.

It is reprinted here and is worth your time to check out.

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Some Things You Should Know About China

If all you know about China comes from PBoC and Central Government reports and analysts' financial statements, then you know very little about China or how it actually works.

I know it's tough to think about anything but the fast-melting ice cream cone that is Europe, but there are some things you should know about China. All the reassurances you've been reading about China's "soft landing" and its "they know what they're doing" central government are probably false. Here's why: very little in China is as it seems on the surface, or as it's presented to the Big Noses (Westerners). There are three reasons for this.

Before I explain, let me stipulate that I am not passing judgment on what's "good" or "bad" about China, or any other nation. Each country functions in its own peculiar way, and there are always productive and counterproductive elements to each nation's way of doing things. But it is important not to gloss over reality and accept illusion as truth.

1. Old cultures are far more opaque than young cultures. All sorts of traditions and foibles get embedded into the culture as time progresses, and these features manifest themselves in the economy, finance and the machinery of governance.

What this means is that it takes a lot of time to truly understand the inner workings of old cultures and their economies. Sure, you can get a report from the central bank, or buy a villa there, and make some superficial acquaintances. All these things will foster your hubris that you "really know" how the country works.

You don't, and you won't, until you've married into a family there, lived there for years, if not decades, and actually done business there, on the ground, with your own capital and contacts. If all you know about China comes from PBoC and Central Government reports and analysts' financial statements, then you know very little about China or how it actually works.

Quite frankly, you'd be better off going to the zoo with the proverbial dartboard and having the chimpanzees toss some darts at it; those prognostications will be equally valid, and you'll be outside in the fresh air (unless you're actually in China) instead of some glitzy dining room gorging yourself on yet another wasteful banquet.

The same is true of Italy, France, Greece, and many other old countries. The attitudes, governance and actual mechanics of the economy are not transparent in any of these old cultures. Take the television tax in France. If you don't know about it, and how it's evaded and grudgingly paid, then what do you know about how things actually work in France?

I once received an email from British reader who was outraged by my comments on black-market labor in France. He had a house in Brittany, and he knew the people, and there was no black market labor there. It took me a while to stop laughing, for this is the typical "visitor who thinks he's a real resident" syndrome which you find everywhere.

We all want to be insiders, of course, and we all want to be accepted by the locals. And so we construct a thin veneer of working knowledge and delude ourselves that we've "gone native" by defending our adopted land vigorously, lauding its ancient culture, and so on.

The new arrival falls in love, and their romance lasts from a few months to a few years. Eventually the way things actually work becomes evident, and start grinding away at the love affair. After a long time, the outsider-resident become cynical, or even bitter; what a bloody unholy mess this place is, beneath the phony surface sold to tourists. The 20-year resident listens with a wry smile to the newcomer gush over the ancient ways and glorious food, etc., but keeps his mouth shut. Why spoil romance? Reality will do so soon enough.

This is how you can live in, say, Japan, for twenty years, and be accepted--as a gaijin. Until you die or leave. In other words, you will never be accepted in the way you might hope. You will be accepted as part of the landscape, but you will never become Japanese. Being accepted is the sort of thing we expect as Americans, because America is a young country and being here and liking American sports, or reviling certain teams even if you are disinterested in the sport, is enough: hey, you're an American now.

Which brings us to point 2:

2. Immigrant nations require a certain level of functional transparency; if they lack this requisite level of transparency in how things actually work, then they quickly become two-tier societies and economies filled with the resentment of second-class citizens.

This is why old cultures have so much trouble with immigration, and why America is one of the more transparent places to live and work in the world. In the dynamic parts of the American landscape and economy, say Silicon Valley and similar hotbeds, then we've got places to go, things to do, people to see and wealth to create, and we don't have time or interest in explaining arcane cultural rules to a huge spectrum of people with a non-native grasp of English. So we keep things fairly transparent. Having a lot of tangled cultural anacronysms that have to be hidden lest "people get the wrong idea" (i.e. discover the truth) just gums things up and wastes time and money.

So we don't have much of that. Nobody cares where you're from, or what caste you are, or anything like that. As long as you do your work without being a real pain in the rear-end, are pleasant to your neighbors and workmates, keep your pitbull chained, etc., then you are good to go. Many if not most of the people you interact with also know English as a second language, and since that's burden enough for all of us, we dispense with all the insider stuff. America is on most levels a WYSIWYG culture: what you see is what you get.

Places like China and Japan are on the opposite end of the spectrum: they are not immigrant cultures. Very few nations have a culture that is adapted not to tradition and an opaque mindset but to getting on with immigrants from everywhere. This is one reason people want to come to America; they lose their baggage here and can be themselves, because nobody cares, we're busy with other things, and it doesn't take 15 years to figure out how things actually work here. If it did, the whole thing would grind to a halt and that would be really annoying.

In other words: I've got another meeting, so let's cut to the chase and get this done, OK? Talk to legal, talk to accounting, get it signed and do what you agreed to do. If you can't or don't, you're out and we're not interested in complicated nuances and back-door sub rosa stuff. Those are time-sinks and we're in a hurry here.

3. China, and other Asian cultures, are built around "face". This requires a public facade, to maintain face and cloak the private, back-door reality. In general, Asian people do not like criticizing their country, as this is experienced as a loss of face.

I cover this in my longish essay from 2005, China: An Interim Report: Its Economy, Ecology and Future.

Here's how "face" works. If you marry a "local" in China, Japan, Thailand, etc., then they will eventually, obliquely and with reluctance, tell you some of the unsavory details of how life actually works. Maybe. If they do, they will not like it if you repeat these "we lose face" realities to other Big Noses. You will have to do so in private, in a hushed voice.

As a result, there are always two doors in Asia: the front door, carefully arranged to present a face-enhancing image to the outside world, and the back door, where everything important actually takes place.

A typical front door in China is the banquet with the glad-handing mayor. The back door is for his mistress, the cash "commissions" from various deals and the cover-up of the face-damaging deaths in the local factory. Bad business, that; we lost face. Go take care of it with cash, threats, promises or whatever is required to bury it and restore face.

This is how you get top-ranked American officials who travel the world constantly, flitting from meeting to meeting, "getting down to business in heart-to-heart talks" (cynical guffaw), staying a night or two in a fancy resort or hotel, and then being whisked away to another country. (That's the burden of Empire; you have to fly a lot. On the plus side, you soon accumulate a list of amusing cocktail-party stories of quaint locals, strange foods and night-time visits to embassies in quasi-dangerous places.) If you live in D.C., you know lots of people like this. If you can brag about your multiple visits to Afghanistan, you might even be one.

But this sort of tourist-slash-water-carrier-for-the-Empire doesn't really know anything about the countries he or she lands in for "power lunches." They don't know the lingo, the geography, the history, the culture or what passes through the back door.

This is also how we get superficial opinions passed off as analysis. There is an amazing amount of claptrap written about China in the Western media, seemingly most of it by people who have never been there or visitors who have no contacts others than PR flacks, denizens of Shanghai bars or official handlers.

Take, for example, the constantly repeated idea that "China can easily keep its workforce busy on big infrastructure projects." That is repeated as if it was an undeniable truth.

Have any of the people repeating this as fact ever actually watched a building project under construction in China? Things are pretty efficient there, despite all those photos you've seen of thousands of peasants planting trees in the desert, etc. The number of people required to toss up a highrise is remarkably small. Given the workforce of hundreds of millions, even a thousand-kilometer rail line doesn't take that many workers.

Then there's the reality that all the low-hanging fruit of useful infrastructure has already been built. Now it's the really marginal stuff, classic malinvestment.

Then there's the reality that nothing gets maintained in China. A lot of new stuff gets built but nothing that's already built gets maintained. So all sorts of things start falling apart and stop working. The basic idea is that when it starts looking bad then we'll tear it down and build something new. That is a mindset built on limitless resources and money, neither of which is actually limitless.

The other opinion presented as fact is that China is transitioning from a "capital investment" economy to a consumer economy. The fact is that only 35% of the official economy is consumer-driven. But the other fact is that everybody who can afford anything in China already has it.

When I was there in 2000, there was already a glut of TVs. Our friend's amah already owns a car, and she isn't paid much even by Chinese standards. It sits in a garage, rarely taken out, because she doesn't really need a car; it's simply a status symbol. Everyone with enough money to do so has already bought a car.

As for real estate: Our friends' friends already owned three rental flats each five years ago. No-nothing Westerners mindlessly talk about the 700 million peasants who need housing, but this just reveals their bottomless ignorance. Chinese families were offered their own flats for a dirt-cheap price decades ago by the central government. Most families have owned their own flat (not the land, that's 100% government-owned) for years before the bubble.

The 700 million low-wage people in China might like a $200,000 flat, but they can't afford one. They're living on $13 a month in rural villages, or making a few hundred dollars a month in a factory or other low-wage position. Claiming that there is an endless demand for costly housing in China is like saying the demand for more McMansions is endless in the U.S. because 20 million poor people south of the border want a luxury home.

The reality is that everyone who could afford a flat in China already owns one, or two or three. Those who don't own one cannot buy one, not this year or next year or in ten years. Their income is 1/40th the cost of the flat, and the price of the flat dropping in half doesn't meaningfully change the equation.

Chinese consumers with money have already bought everything they could possibly want, and purchased Coach bags for their boss's wife (you can forget the promotion if you don't pony up a legitimate Coach bag for the Missus, or perhaps Number One mistress; be sure to include the receipt and official Coach bag to show it's legit).

Those without this kind of income have seen their purchasing power decimated by high inflation in essentials like food. To save face, the government issues statistics that "prove" inflation is dropping. This is as reliable as the bogus unemployment number in the U.S., you know, the one that keeps dropping because the government stops counting millions of people in the workforce, not because the number of people with real jobs is rising.

The only sources who actually know what's going on in China are in local government. Another fantasy Westerners lap up is that the central government actually knows what's going on, and even more laughable, knows how to "fix" everything. If you don't even know what's happening, how can you fix the problem?

Westerners also don't understand "corruption." They think in terms of bribes that could be suppressed by some new rules. That is beyond laughable, for corruption isn't bribes, it's the warp and woof of how things work in China. They don't understand that pirated goods are crushed by bulldozers for a show of face; nothing changes behind the facade presented for show.

There is a lot of anger and resentment in China, especially among young people. This will not go away because some new railway is built, or a new mall opens.

Occasionally a glimpse of the back door makes it into the mainstream media. Here are some recent examples worth reading

Swimming Naked in China With the Chinese government tightening credit, the massive leakage from the formal banking sector into the ‘shadow system’ ultimately risks sinking the country’s financial system.

Why We Should All Be Very Skeptical on China

And most importantly: Top of Chinese wealthy's wish list? To leave China

"Among the 20,000 Chinese with at least 100 million yuan ($15 million) in individual investment assets, 27 percent have already emigrated and 47 percent are considering it, according to a report by China Merchants Bank and U.S. consultants Bain & Co. published in April."

The Western resident of Beijing (married to a Chinese woman, with two children) who posted this on his blog added, "Everyone with money has a escape plan."

Here's a simple question for China bulls and all those writing about how infrastructure projects, an omniscient central government and rampant consumerism are going to keep China's growth engine humming for years to come: if the future's so bright, then why does everyone with money have a bug-out plan, two passports and a house in Vancouver, New York or Los Angeles?

If you can't answer that, then you need better sources.

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Email: village_whisperer@live.ca
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Please read disclaimer at bottom of blog.

Fantasy

So this blog has talked a lot about Silver lately.

As I have repeated ad nausem, the interest in precious metals is simply an extension of the interest in the housing bubble in Real Estate that has been our primary focus these past two years.

The financial system created a housing bubble, that bubble is in the process of collapsing (although Australia and Canada have delayed the effects to date), the response to the fianancial crisis of 2008 has been Quantative Easing, QE is triggering massive currency induced cost-push inflation, and QE will also trigger a massive increase in interest rates.

QE is also nothing more than a way to continue the ponzi scheme that is government debt... hence the huge increase in Silver/Gold and the reason Silver/Gold has yet to see massive growth in values.

Those have basically been our central themes. The nadir of Real Estate as an investment is over and the next great opportunity is precious metals, especially Silver.

On the real estate front here in the Village of the Edge of the Rainforest, there have been a wave of bearish real estate articles.  We have had the Globe and Mail newspaper come out with "Signs point to a severe housing correction in Canada", the National Post commenting on how - in the midsts of a federal election campaign - "Parties are silent on possible housing bubble", more IMF warnings about "Canada's growing debt burden", Canadian Business Magazine commenting that: "Housing: Real Insanity", and a great story on VREAA about how an afternoon TV news story by Vancouver's most prominent local TV station was promoted as 'a housing bubble' feature during the noon newscast and then quickly changed to a story about 'a steady climb' in the evening news story. That station is infamous in Vancouver as being very pro-R/E.

We're at the height of denial now in Vancouver.

On the interest rate/government debt theme, I'd urge you to check out this excellent commentary on the looming spectre of rising interest rates by Charles Hugh Smith.

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Why QE2 won't work - Part 1

I tend to shy away from long posts because people often don't read them.

Today is an exception and I hope you will bear with me.

Charles Hugh Smith has put together a great analysis on his website about why QE 1 & 2 will fail. This is a somewhat condensed version of that analysis.

I hope you will find this of value and useful as you search for guidance in your financial decisions. As always, please read the disclaimer at the bottom of this blog.

- Whisperer

The Original QE Plan

The US Federal Reserve's supposed goal with Quantitative Easing after the disaster of 2008 was "get the economy on its feet again" by stabilizing employment and prices.

To achieve this objective the Fed injected "liquidity" into the banking sector, enabling banks to borrow essentially unlimited sums at essentially zero interest - the infamous ZIRP (zero-interest rate policy).

The Fed also pushed down mortgage rates by buying over 10% of all outstanding mortgages in the U.S.; mortgages which the banks were desperate to get off their crippled balance sheets. In addition to this the Fed also pushed down yields on U.S. Treasury bonds ("monetizing" this newly issued debt) by buying hundreds of billions of dollars of bonds itself.

1. ZIRP and unlimited liquidity was intended to enable the banks to "earn their way back to solvency" by giving them free money which they could then loan out at much higher rates. The difference between zero (their cost) and the interest rate they charged borrowers was pure profit, courtesy of the Federal Reserve.
2. The purchase of $1.2 trillion in mortgage-backed securities was intended to stabilize housing and real estate process at far above their "natural" level set by "organic" supply and demand; in essence, the goal was to stop market prices from reverting to the mean, i.e. returning to historical trendlines which are roughly equivalent to pre-bubble valuations circa 1997-98.
3. Halting this slide in real estate prices was intended to stop the implosion of banks' balance sheets as their assets - all those mortgage-backed securities and derivatives they own - kept falling in value.
4. Halting the slide would also allow banks to slowly sell off the millions of foreclosed and defaulted homes they hold in the "shadow inventory" at prices far above where supply and demand would let them settle.
5. As a side benefit, keeping home prices inflated far above their real value would also allow the Fed to dump its own portfolio of $1.2 trillion mortgage-backed securities without suffering catastrophic losses.
6. Lastly, the goal was to lower the cost of mortgages to such ridiculously low levels that otherwise prudent citizens might be seduced into buying a house "because rates are so low." The idea was to encourage rampant home buying (for speculation or long-term ownership, it didn't matter) to prop up the market with "demand," even if that "demand" was driven by the low cost of borrowing rather than actual demand based on the need for shelter (note: there are 19 million vacant dwellings in the U.S. now).

All these policies led to super-low yields on low-risk investments.

This was a deliberate strategy so that a "cash is trash" mindset could be created. This would be powerful incentive to put capital into risk assets such as stocks, commodities and real estate. By explicitly pushing free money and zero-interest rates, the Fed made it impossible to earn any yield on low-risk assets; thus they have been explicitly pushing capital and borrowed money into the "risk trade" : emerging markets, commodities, and stocks.

The ultimate goal was to create a new "wealth effect": inflate another bubble in stocks and commodities so that owners of capital will feel wealthier and - as a result - they will start spending more.

The Fed's premise was to create a "trickle down" of wealth. Flood the economy with new "free" money, thereby sparking inflation and a new round of consumption that would inject "growth" into the economy.

In other words, the "problem" was perceived as sagging asset prices (real estate and the worthless mortgages written on homes that have lost 50% of their value) which have impoverished homeowners and impaired banks' assets.

The Fed's "solution" was to reinflate the housing bubble (or stabilize its collapse) and push investors and speculators alike into risk assets in the hopes that a new asset bubble somewhere will boost assets enough to create a "feel good" wealth effect. This would trigger massive new consumer spending and repair banks' balance sheets with higher asset valuations.

Why QE1 Failed

In the normal cycle of classical Capitalism the expansion of credit/debt and rising assets leads to mal-investment and rampant speculation: overbuilding, overcapacity, over-indebtedness and leveraged bets that misprice risk.

This is precisely what occurred in the 1995-2000 stock market bubble and the 2002-2007 housing/real estate bubble; mal-investment, over-indebtedness, overbuilding and mispricing of risk on a grand, unprecedented scale.

In the normal scheme of things, all this bad debt would be written off and the assets would be sold/liquidated.

Holders of those assets and the debt based on those assets would both suffer losses or even be wiped out.

All the overbuilt properties and overcapacity would be sold for pennies on the dollar, and the liabilities (debt) wiped off the balance sheet along with all the inflated assets.

There is no other way to clear the market for future growth.

Yet the US Federal Reserve has pursued a "solution" (to reinflate asset bubbles or keep them artificially high by injecting more credit/debt into the system) that violates all the principles of Capitalism.

You cannot eliminate the consequences of speculative bad bets and over-indebtedness with more debt and more speculation, yet that is precisely the intent of all the Federal Reserve's policies.

The Fed's unprecedented purchase of mortgages and Treasury debt have indeed reinflated the stock and housing bubbles to a limited degree, but most of that free money has flowed into emerging markets and commodities (which are now in their own massive bubbles).

In yet another pernicious consequence, the Fed's bumbling attempts to create inflation in the U.S. have failed - the inflation is raging in China. And as inflation rages there, then the cost of Chinese goods in the U.S. will rise.

Instead of sparking "good inflation" in the U.S. which they presumed (thickheadedly) would boost wages along with prices, thus enabling American debt-serfs to pay down their debts with "cheaper" money, they have sparked runaway asset bubbles in commodities and "bad" inflation in China, which means the cost of goods Americans need to survive is skyrocketing while their wages and income stagnate.

In other words, the plan completely backfired in terms of helping 90% of the citizenry.

The "wealth effect" of rising stock prices failed to boost the spirits and balance sheets of the bottom 90% who have essentially no financial capital, average incomes have declined in the recession and yet prices for commodities are climbing.

The Fed's policies have created the worst-case scenario for the average American household: stagnant income and rising prices of essentials.

Now demand is falling along with net incomes, not the supply of new debt.

By raising the costs of commodities, the Fed is actually reducing the net disposable income of households: the reverse of the "wealth effect."

Rather than allow the economy to clear out bad debt and re-set asset prices that would enable organic growth, the Fed has tried to inflate new asset bubbles to save the Financial Power Elites from suffering the losses resulting from the last two bubbles popping.

As a result QE1 was a failure.

Now we have QE2.

More on that tomorrow in Part 2.

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

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Have we hit bottom? Anatomy of a Bubble

(click on image to enlarge)

Anatomy of a bubble was posted on Charles Hugh Smith's blog and is very interesting so I have condensed and reposted it here. There are more graphs on his site if you are interested.

The big real estate debate in Vancouver right now is, "have we hit bottom? Is now the time to buy?"

Interestingly, no one refutes the fact that we have been in a housing bubble anymore. What people now deny is the fact it is going to continue to burst in spectacular fashion.

And so, with that in mind...

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:

1. As euphoria grabs hold, prices rise in a steep ascent to a point at which "everyone" believes there is no end to the trend.

2. The initial descent from the bubble peak is a "shock" which leaves the bubble mentality intact, i.e. the Bull Market in tulip bulbs, real estate, tech stocks, etc. is only suffering a standard retracement/indigestion; the trend higher is still in place.

[which is where we are in Vancouver right now. People are arguing that prices are only suffering a retracement and the upswing in prices will return shortly]

3. In housing, this psychology is embedded in such chestnuts as "they're not making any more land," "real estate always rises over time," "population growth means demand for housing will always rise," "the house is the foundation of middle class wealth appreciation," and so on.

4. At some point speculators who were left out of the initial explosive rise jump in because "prices are a real bargain now."

5. This buying pushes demand above supply briefly, and prices start rising again.

[which is what we are seeing in Vancouver with historic low interest rates and a decline, after 11 months, of over $121,000 in the benchmark price for SFHs]

6. But the realities beneath price action have changed, and this bargain-hunting burst soon fades as demand falters, supply rises and prices renew their descent.

7. Speculators and investors' memory of the tremendous profits made on the way up remain firmly embedded, forming an "investment memory" which locks them into the view that the upward trend will resume at some point. This drives wave after wave of bottom fishing in which speculators buy into an apparent bottom only to be disappointed and see that false bottom wiped out by a renewal of the downtrend.

8. At some point, all the bottom fishers have expended their capital and prices retrace to the pre-bubble levels, or even lower. This is what can be called "the real bottom."

[which in Vancouver Real Estate will probably be pre-2002 ($375,000), down from last years high of approx $910,000]

9. But the memory of past glories still remains in the minds of speculators/investors, and so a subdued uptrend starts as "hope springs eternal" buying kicks in.

10. Eventually this institutional/cultural "memory of an uptrend" fades as the "recovery" in prices fails. The truisms which fed the brief bubble and long post-bubble decline and recovery--that tech stocks were the future, real estate only goes up, the South Seas is the epic investment of all time, etc. are repudiated and lose favor. This is the ultimate bottom.

Can a 10-year bubble reach this "ultimate bottom" in a mere 11 months? History suggests not.

Vancouver's real estate market still has a long way to decline, years not months, with many minor bounces upward along the way.

Remember... it has only been 11 months since the market started to decline. In the United States it has been over four years. This bubble pattern has played out in every American city and Vancouver's drop in the first 11 months outpaces all but 2 or 3 US cities in their first year of collapse.

More importantly the economy has shifted dramatically. Add in the following financial factors that control real estate valuations and you cannot help but conclude the price declines will resume. These factors include:

1. Extreme bubble valuations must eventually retrace to the starting point, and in many cases they drop below the starting point.

Vancouver's real estate bubble started to inflate just prior to 2002. The benchmark price at that time was approx $375,000. We have come nowhere close to retracing to the starting point yet.

2. Housing and real estate are based on the availability of cheap, plentiful debt. As economy-wide debt loads are at historic extremes, it is prudent to ask what conditions will enable trillions more in debt to be issued to buy inflated housing.

3. As the Federal government borrows billions of dollars (in the USA, trillions of dollars) on the open market to fund its mega-stimulus-bailout debts, then the government is competing with private borrowers for a dwindling pool of capital/savings. That will drive up rates, making mortgages more expensive. And since prices drop as rates rise, this global push on interest rates is a profound headwind for housing prices globally.

4. Paying a mortgage requires steady income, which for most citizens means a steady job. Rapidly rising unemployment reduces the pool of potential buyers and adds to the inventory as those losing their incomes also lose their homes. (And BC is leading the nation in job losses with greater losses a certainty).

In short: with the national and household balance sheets at historic extremes of indebtedness it is difficult to see what fundamental financial foundation exists for higher housing prices.

The only conclusion to be drawn is that those currently buying "at bargain prices" will very likely be disappointed as prices renew their downtrend in the near future.

And Vancouver's bubble still has a long, significant ways to go in its downward deflation.


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Email: village_whisperer@live.ca