Fri Post #2: Non Farm Payroll tanks (Updated)

The US Labor Dept. released it's non-farm payroll numbers this morning and the results are sending precious metals higher as expectations explode for QE3.

Nonfarm payrolls were unchanged last month, the Labor Department said. It was the first time since 1945 that the government has reported a net monthly job change of zero!

The August payrolls report was the worst since September 2010, while nonfarm employment for June and July was revised to show 58,000 fewer jobs.

“The bottom line is this is bad,” Diane Swonk, chief economist with financial services firm Mesirow Financial, told CNBC.

The numbers indicate employment growth ground to a halt in August, as sagging consumer confidence discouraged already skittish U.S. businesses from hiring, keeping pressure on the US Federal Reserve to provide more monetary stimulus to aid the struggling economy.   

Updates as the day moves along.

UPDATE

Gold and silver have been highly resilient in the face of the traditional bear raids that normally are executed ahead of the Non-Farm Payrolls number that was released today.

While many observers are now looking for a strong showing next week remember that Obama is making an economic announcement in a joint speech to Congress and the Senate.

Caution should be exercised as ammunition might be set aside by the banking cartel to support the Presidential Address with a bear raid on the metals.

Silver is poised to break and there is speculation we will see $60 - $70 this fall. We'll talk about this a little more on Sunday.

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A significant day of reckoning is coming.

If you ever have any doubts about what looms on the horizon in the months ahead for Vancouver Real Estate (in general) and the North America economy (in particular), bookmark today's post and refer back to it.

Last week, after the U.S. debt panel failed to agree on measures to create more than $4 trillion in budget cuts over the next 10 years, BNN spoke to David Stockman, the former Director of the U.S. Office of Management and Budget under President Ronald Reagan.

If there ever was a proponent of the current measures to repair the American economy, you would figure an architect of Reagan's trickle down economics would be it.

You'd be dead wrong.

Stockman spoke about the American situation and where America goes from here. He has a stark analysis of his country's situation.

You will not find a more succinct and insightful analysis of the current economic situation in 12 minutes anywhere. Click here to see the interview, and I highly encourage you to watch the full clip before it cycles off BNN's archive list.

You will have no doubt, after watching this, about the direction that the economy will ultimately follow.

A couple of quickly transcribed excerpts:

• "It's just a further confirmation that we have a total paralysis/stalemate in our fiscal governance process, the whole process is in denial... What is actually happening is that Washington will be ADDING $350 Billion to next year's deficit (instead of cutting). They will extend the Bush tax cuts, they are going to extend the so called external tax patch - that's $60 Billion - they're going to extend a lot of the tax credits - that's 10's of Billions of dollars - what's more they're going to extend unemployment insurance for another year - that's another $60 Billion... and it gets worse from there.
  
  We're really rolling the dice thinking that somehow we can borrow another $5-6 Trillion - that's really what's baked in the cake - and that somebody's going to buy all these bonds. The fact is the only buyer on margin all of these bonds, hundreds of billions a month, is the Federal Reserve, in this so-called QE2. But it's just out and out money printing, monetization, and when they stop I think there is going to be a real day of reckoning in the global bond and currency markets because there is no indication anyone in Washington recognizes the gravity of the situation."

Stockman goes on the suggest both the Democrats and Republicans are completely unable to grapple with the breadth and depth of cuts that are needed combined with the massive amount of taxes that have to be increased. As a result America is...

• "... drifting towards the wall waiting for the bond market system to wake up and take action. I don't know when that is going to happen, it may be in the next months, it may be in the next years, it may take longer but sooner or later there is going to be a day of reckoning."

Stockman then discounts those who believe the Reagan era of 'trickle down economics' is a solution to the current problem.

• "I think the Fed went off the deep end in the 90s and especially in the last 4 or 5 years with very easy monetary policy of low, low interest rates that were inappropriate and encouraged businesses and the household sector to massively leverage up, that led to the crisis in 2008 and we're still only begining to dig our way out of that... We're going to have a significant day of reckoning here, there is no recovery."

The most chilling part is Stockman's assertion that the bond market is going to force America's hand before long.

As I said yesterday, this is EXACTLY the fear expressed by former US Federal Reserve Chairman Alan Greenspan.

We are seeing the effects of what happens when the bond market does this. Just look at Ireland, Iceland, Spain, Portugal and Greece.

Are you ready for double digit interest rates yet? They're coming.

Of course naysayers will simply dismiss this as yet another post from a disgruntled bear blogger fearmongering about interest rates.

Hey... speaking of fearmongering about interest rates, Bank of Canada Governor Mark Carney sent out another warning to Canadians yesterday.

In the December issue of its Financial System Review, the Bank of Canada warned Thursday that the risk of another global economic shock is rising and Canadians may not be prepared for it.

And in a veiled hint that the Bank of Canada won't shield Canadians they way they did after the 2008 crisis, the Bank said "Canadians won't be spared another shock because during the current period of tough economic times, they have continued to take on debt."

How can that be, Mr. Carney? How could be possibly suffer? I mean... you will slash interest rates to dirt so the impact won't be felt, right?

Apparently not.

• "Developments since (June) suggest that the vulnerability of the Canadian household sector has increased."
  
  "The probability of an adverse labour market shock materializing is judged to have edged higher in recent months, owing to the downward revision... to the outlook for the global and Canadian economies."

Sal Guatieri, senior economist with BMO Capital Markets, said in a commentary the review suggests the bank won't resume increasing rates until the global economy picks up and Europe's credit crisis ebbs.

• "However the bank is also cognizant of the risk to household finances (and the economy) of keeping rates too low for too long. This suggests it has every intention of guiding rates back toward more normal levels at the earliest opportunity, which in our view, is likely in May."

Hiking interest rates come May? Is this why Carney issues another direct warning to Canadians by saying:

• “Households bear ultimate responsibility for ensuring that they will be able to service that debt in the future.”

Umm... why do you say that Mark? Are you getting ready to hand us debt serfs out to dry?

What about our 'sound Canadian banks', if I can't pay my debts, won't that hurt them?

Well it seems the BOC goes to great lengths to warn that the potential for harm to our 'sound banks' this time around might be severe.

Carney suggests that high household debt this time around is going to get kicked by high interest rates. This will affect Canada's banks 'as borrowers lose their ability to make debt payments.'

Now why would Carney hike interest rates this time around when he didn't in the last crisis?

The source of the problems all stem from from other countries, the bank said.

(Ahhh... time to start connecting the dots... see Stockman's comments above re: bond vigilantes wrath being unleashed on the United States)

The BOC forsee's the very real possiblity of a global trade war. It also foresee's the looming threat of much higher interest rates.

Carney see's them coming. He's warned you time after time and given you almost a year's advance warning.

The good news?

Re/Max was far more effective in manipulating the P/R machine two days ago and got far more coverage in the press to convinced you that Real Estate everywhere in Canada can only go up, up up (at least 10% next year) and that interest rates are going to stay low for a while.

Thus, if you are smart, it should be easy to dump your massively leveraged real estate on some simpleton or wealthy Asian and prepare for what's coming.

Speaking of what's coming, did you catch this Globe and Mail article profiling the musings of Stephen Jarislowsky, billionaire investor and CEO of Montreal-based Jarislowsky Fraser Ltd?

Jarislowsky offered his thoughts on the next lurking financial disaster.

• "In Canada the hardship still lies ahead. Our houses are still 20 to 30 per cent above normal levels, salaries are shrinking and a lot of Canadians are heavily indebted. There’s a lurking disaster, to the extent that you have reduction of purchasing power and we are just not saving hardly anything as a nation. That’s pretty bearish. I think things are going to get a hell of a lot worse. We still have a trade deficit today despite the fact that commodity prices are incredibly high. I hope I’m wrong but I think Canada is on the edge of a lot of trouble."

What drivel, eh?

You can either connect the dots or you can dismiss Stockman, Carney and Jarislowsky et al as wanker renters who live in their parents basements while hiding behind their computers to dump on real estate investors.

If you do dismiss them, tho, don't say you weren't warned.

And remember... buy now or be priced out forever!

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Greenspan: "Time to let the markets power recovery"

Yesterday I made a post about former US Federal Reserve Chairman Alan Greenspan's speech to the Council on Foreign Relations in New York.

Greenspan made some interesting comments about Gold, but that wasn't the only point of interest.

Of particular note for real estate observers in the Village on the Edge of the Rainforest, were comments made about government stimulus.

The still influential Greenspan said fiscal stimulus efforts have fallen far short of expectations, and the government now needs to get out of the way and allow businesses and markets to power the recovery.

“We have to find a way to simmer down the extent of activism that is going on” with government stimulus spending “and allow the economy to heal” itself.

At this point, “we’d probably be better off doing less than more” because “you’d be far better off to allow the normal market forces to operate here," Greenspan said. That’s largely because stimulus spending is not proving as effective as many had hoped. “To the extent the evidence suggests very large deficits concurrently crowd out capital investment, there is a debit to the stimulus program that is somewhere between a third and a half of what the gross stimulus is,” he said.

Greenspan said that the U.S. needs to do something now to deal with budget deficits and it must do something very soon. He explained his anxiety is so high that “I’m coming out in the first time in my memory” in support of higher taxes in addition to reduced spending, including allowing the so-called Bush tax cuts to expire.

“Our choice is not between good and bad; it’s between terrible and worse,” Greenspan said. The nation has “a level of commitment... which I don’t think we can psychically meet,” absent huge changes in how the government finances itself.

These are, once again, stunning statements with potentially massive reprecussions for Vancouver.

The ONLY reason interest rates are so low is because of government intervention.

Given the current state of the worldwide economy and the capital demands of governments, if interest rates were let to float to market level the impact would be profound.

Rates would, at the very least, return to their historical norm over the last twenty years of 8.25%. Government has been manipulating those rates for the last 10 years and the time for that intervention is coming to an end.

When this all plays out, Vancouver real estate is going to implode on a level even the staunchest of bears cannot fathom.

Meanwhile in Victoria

Vancouver has had three consecutive months of dismal real estate sales and September is shaping up to make it four in a row with sales down about 40% from last year.

But that's nothing compared to Victoria where September is on track for a collapse in sales of 75%.

And finally, from the Hyperinflation Debate

Harry Schultz, author of the famous International Harry Schultz Letter [IHSL], has had a long and colourful financial career.

Much like Gonzalo Lira, he is fascinated by the possibility that hyperinflation might be triggered quickly, by a sort of global financial traffic accident. Back on June 10th, 2010 he wrote:

• "We (collectively) are poised at a heart-stopping moment in economic times. On the one extreme side, the world is on the edge of massive deflation and depression. At the other extreme ... hyperinflation. My view is: Both these extremes are possible. Certainly deflation is, on balance, in play today and gaining ground as money supply is actually declining! Hyperinflation seems impossible when there is not much inflation in most economies. But... hyperinflation is a monetary event, not an economic one, and will happen on an overnight basis, not via a general uptrend in inflation data."

At age 89, Schultz is winding up his businesses and will wind up his IHSL at the end of this year. In the latest letter he summarizing the account of how hyperinflation could happen by Gonzalo Lira and describes Lira's scenario as “a genuine risk” and comments:

• “Hyperinflation can be triggered in several other ways. Trustfailure (my new word) is the controlling element, which triggers Fearflation (another new word). E.g., a Comex gold delivery default or a major Too-Big-To-Fail bank failure or a self-propelling domino bank-run are all possible triggers. A bond market implosion will result from any of the above, even if it isn’t itself the trigger.”

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Interesting US currency development.

I have talked about gold on this blog in the past.

In North America there are those who eschew gold/silver as an investment and claim that "gold's only use today is as an inflation hedge as record debt depresses currency values, until fiscal order is restored."

They are right. The problem though is that people are starting to realize that it is going to be a long, difficult time until 'fiscal order' is restored.

As you peruse the blogosphere, articles can be divided into one of two sides of a philosophical fence. On one side the argument that we are slipping into deflation. The other, inflation.

I guess you could say it appears I sit on the fence. A deflation/inflation symbiotic relationship, if you will.

The problem is to look ahead and assess how things will play out. After that you make you decisions on how best to prepare for what is coming.

On July 8th I made a post about the austerity/stimulus debate. To me, there is no debate... there will be a second round of massive stimulus.

And because of that I would suggest that you will see the Euro roar back towards a high and the US Dollar will sink to new lows because. I think it's unavoidable because the financial condition of the USA dwarfs the problems of Europe.

Inflation and hyperinflation are always the product of a loss of confidence in currency. All hyperinflation in modern history has occurred for one reason, and one reason only. That is loss of confidence in currency.

Loss of confidence in a currency can be brought about by many reasons, but there is one constant factor. When hyperinflation has occurred in modern history EVERY economy involved was decimated as and when it occurred.

Everyone talks about the world wide economy falling into deflation. The fear is that the US Federal Reserve is out of ammunition to fight deflation.

Oh?

I disagree.

The US Federal Reserve can (and will) do Quantitative Easing to infinity. Nothing can restrict them on this. And the European Central Bank will not be far behind in following their lead.

You can argue all you want about deflation, but the next response by the US Federal Reserve is not that hard to predict (Bernanke has already written about it - his famous speech on the matter is where the nickname 'Helicopter Ben' came from).

With the next round of currency printing (QE2), you will in all probability see another $2 trillion in currency printed.

'Loss of confidence' is what is driving the interest in gold.

And that 'loss of confidence' is starting to manifest itself in the United States itself.

In mid-Michigan they are starting to take matters into their own hands. As ConnectMidMichigan reports, "New types of money are popping up across Mid-Michigan and supporters say, it's not counterfeit, but rather a competing currency. Right now, you can buy a meal or visit a chiropractor without using actual U.S. legal tender."

Minted by private mints, people are to buy and sell goods with pure silver coins. In one simple act they have completely bypassed the destabilizing influence of the domestic currency printers known as the US Federal Reserve.

Dave Gillie, owner of Gillies Coney Island Restaurant in Genesee Township talks about it in the article.

"Do people have to accept dollars or money? No, they don't," Gillie said. "They can accept anything they want or they can refuse to accept anything."

The U.S. Treasury Department says the Coinage Act of 1965 says "private businesses are free to develop their own policies on whether or not to accept cash, unless there is a state law which says otherwise."

And in Michigan, they are starting to use things other than US dollars.

"I sell three or four (of the non-US government silver coins) every single day and then I get one or two back a week," said Gillie.

Gillie also accepts silver, gold, copper and other precious metals to pay for food.

The is a trend starting. Gold is starting to be used as money. For food... and to load up your gas tank.

So why is there interest in these competing currencies?

I would suggest that events are clearly pointing to a point where QE2 is unavoidable and with it will come a crisis of confidence in the US dollar.

It means inflation and a spike in the value of gold/silver.

To me it seems you want to position yourself to take advantage of these two, apparently unavoidable, trends.

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A slow motion train wreck...

So many topics to touch on... but only so much time in the day to sit down and talk about them.

So today I will focus on American events.

Bank Failure Friday returned last week when the FDIC released information regarding the first US bank closure of 2010 – Horizon Bank of Bellingham, Washington.

You can't really hit much closer to home (in relation to Vancouver) than Bellingham (Blaine is too small).

But it's the size and scope of the closure that is so astounding. If it is indicative of things to come it will be a very rough year for our American cousins and the FDIC.

According to the FDIC, Horizon Bank had $1.1 billion in deposits and balance sheet assets of $1.3 billion; yet the FDIC’s estimated cost to close the bank is $539.1 million.

Say wha???

That means the real market value of Horizon’s assets is believed to be about $561 million – 41.5% of the value claimed.

Ay carumba!

As has become the norm, the FDIC had to enter into a loss-share transaction with respect to $1.0 billion of the assets purchased, meaning there is significant concern the assets will turn out to be worth even less than presently estimated.

This cost of closing this bank amounted to 49% of the value of Horizon’s deposits – the highest relative cost seen so far in this crisis.

By way of comparison, the cost of closing the first three banks in this crisis (in late 2007) was about 5.7% of deposits.

Perhaps you now have a keener appreciation of the importance of the FDIC's 'Interest Rate Advisory' for banking institutions.

That's the FDIC's stern warning for US Banks to prepare to "manage interest rate risk." Soaring rates will further depress market values which will further undermine the real worth of the bank's assets and balance sheets.

It does not bode well for the year ahead and we will watch the banking developments with keen interest this year.

But banking isn't the only story you should pay attention to.

Last Friday also bore witness to the stunning announcement that another 661,000 jobs were lost in the United States.

This at the height of the Christmas hiring period.

The broad U6 category of unemployment statistics rose to 17.3% (that's adding all the Americans who did not show up in 'official' statistics because they have stopped looking for work).

That is the stat that really matters. It means that December was the worst month for US unemployment since the Great Recession began.

Can you see what is coming next?

The home foreclosure axe usually drops for homeowners a year or so after people lose their job, and exhaust their savings. After six months they drop off the unemployment rolls. Six months from now that axe will start dropping.

That's what 2010 is going to be all about Charlie Brown. And that's despite the fact that foreclosures are already setting new records.

Realtytrac says defaults and repossessions have been running at over 300,000 a month since February in America. One million American families lost their homes in the fourth quarter. Moody's Economy.com expects another 2.4 million homes to go this year.

Meanwhile commercial real estate is a disaster. Check on this article in Time magazine.

"It's not that everything's fine in the commercial real estate business. Everything's awful and will probably get more awful. But unlike 2008's Wall Street panic, this particular financial unraveling looks as if it will play out over a period of years, not weeks."

Headlining the news is Tishman Real Estate in New York City. They will miss payment on a commercial loan of over $5 billion on a massive New York apartment complex, the 2nd largest default in commercial real estate loans in history.

As this unfolds, California declares an economic emergency. They are the biggest concern but there are another 40 states in deep trouble. Hawaii can't even afford to hold a congressional election.

Meanwhile apartment vacancies hit record highs.

Really?

Riddle me this... if foreclosures are skyrocketing... and rental vacancies are soaring... where are the people going?

Does it suprise you that homelessness is rising dramatically?

And then there is consumer credit. Consumer credit in the US last month dropped a record $17.5 billion.

This despite the fact that many cash-strapped US homeowners are doing exactly what their UK counterparts are doing: "New research from Shelter, the homeless charity, [suggests] that as many as 1 million people have used their credit cards to pay mortgage bills or rent demands in the past year."

And what is that going to lead to?

"You would have to be relatively desperate, at least in the short-term, to go down this route. Many of those people are likely to end up defaulting on their credit card bills, or on their mortgages, or both," quotes the article.

Against this backdrop, does anyone really think American quantative easing is going to end in March?

All the talk about the US Federal Reserve draining the excess reserves is comical. That's why gold shot up on the weekend.

And that's why it's going to shoot even higher. Watch the next big spike to take the metal to over $1,650 an ounce.

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More economic observations

Let me expand on Saturday's concerns about the economic outlook.

The most recent data on outstanding credit card and auto loan amounts was released on Friday.

US consumer credit fell for the fifth straight month as banks maintained more restrictive lending terms and households remained reluctant to borrow money for major purchases.

How can the U.S. economy expand if consumer credit continues to contract?

From Bloomberg;

• Consumer credit fell $10.3 billion, or 4.92 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $5.38 billion in May, more than previously estimated. The series of declines is the longest since 1991.
• Stagnant wages and falling home values mean consumer spending, about 70% of the economy, will take time to recover even as the recession eases.
• “This string of declining credit should continue as long as the economy eliminates workers at an elevated pace,” said Richard Yamarone, director of economic research at Argus Research Corp. in New York. “We’re 20 months into the recession and the economy is still losing a quarter-of-a-million jobs per month.”

It's important to note that consumer credit contains no housing related debt at all. So it begs the question... how sharply are outstanding home equity lines of credit and home equity loans contracting?

I bet you that they are contracting even faster than consumer credit and auto loans.

Again I urge you to ask yourself the question, how can the U.S. economy expand if consumer credit (home equity loans, home equity lines of credit, consumer credit and auto loans) continues to contract?

Speaking of homes, interesting presentation by the San Diego County Assessor/County Clerk David Butler on Notice of Defaults (NODs) and foreclosures in the county.

The following is a handout from the presentation (click on image to enlarge).

San Diego real estate broker Edgewood121 attended the presentation and advised that San Diego county is "expecting a wave of foreclosures in the near future and they are gearing up for it" (quoting Edgewood121 paraphrasing Butler).

Butler thinks the banks are holding back, probably because of the various government programs.

Edgewood 121 was left with the impression that "it is [only] a matter of time before more properties become available." And that the only reason prices appear to have stabilized "is because of the artificial choking-off of inventory, thereby creating urgency and multiple-offer scenarios."

This situation is being repeated all over the United States.

Clearly banks are hoping that the modification programs will reduce the number of foreclosures. However, as we said last week, most loan modifications just capitalize missed payments and fees (so the banks can pretend they are still whole), and reduce interest rates for a few years (so the homeowner can pretend they still own something of value).

Extend and pretend... that's all the banks are really doing right now. Which is fine until the coming wave of commericial and prime mortgage defaults hits.

Meanwhile there is the topic of personal bankruptcies.

Last week I commented that bankruptcies in the United States were up 600%. Now comes word from the UK newspaper, the Independent, that the United Kingdom registered a record 33,000 people insolvent in the second quarter of the year, the largest number ever recorded.

Insolvency experts warned that the combination of rising unemployment and the lack of stigma attached to insolvency options meant the number of people affected would go on rising.

Mark Sands, director of personal insolvency at Tenon Recovery, predicted 140,000 people in the UK would be declared insolvent during 2009, 30% more than in 2006 – the worst year on record so far – when the figure was 107,000.

"The overall record level of personal insolvencies, whilst at first shocking, hides the detail which suggests the worst is yet to come," Mr Sands warned.

'The worst is yet to come'... hmmm.

On that note, did you catch Treasury Secretary Timothy Geithner's missive to Congress on Friday?

Geithner urged elected US officials to raise the $12.1 trillion debt ceiling since, according to current projections, that limit may be reached as soon as mid-October.

Said Geithner, "It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations."

Ummm... anyone care to explain to me what is the point of having a 'ceiling' if, as you get near that limit, you simply raise it time after time again?

Seriously.

How twisted is the logic that passes for policymaking in Washington that it becomes critically important that the limit be increased before it is reached?

Geithner says its important because investors may lose confidence in the entire system if it isn't raised.

Say whaaa?

You mean to say investors won't lose confidence because the United States has a spiraling debt so large that the government has to raise the absolute 'ceiling' they have imposed on that debt every few months?

And investors won't lose confidence because there seems to be a total lack of any realistic plan that would see the money repaid?

But somehow these same investors will, apparently, lose confidence because lawmakers hadn't paid close enough attention to the relationship between the debt and the debt 'ceiling'. And if lawmakers fail to move the ceiling upward when conditions required such action, this will trigger a loss of confidence?

Alrighty then.

As I said on Saturday, this economic maelstrom is not over, we are experiencing the calm that comes when the 'eye' of an economic hurricane passes over us.

As any weather watcher knows, once the 'eye' passes the back end of a big storm always hits harder than the front end.

Brace yourselves.

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Ride The Wayback Machine for a Peak at '70s Inflation

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So let's join Sherman and Mr. Peabody and hop into the Wayback Machine, shall we?

Destination: March 24th, 1980.

That was the date of this Time Magazine article titled 'Jimmy Carter vs. Inflation'. Many faithful readers do not recall those days so if the topic interests you, click on the link and you can read the entire 10 page article.

Here is the 'Coles Notes' version...

As Jimmy Carter stepped before the television cameras in the East Room of the White House last Friday, his task was not just to proclaim another new anti-inflation program but to calm a national alarm that had begun to border on panic. Inflation and interest rates, both topping 18%, are so far beyond anything that Americans have experienced in peacetime—and so far beyond anything that U.S. financial markets are set up to handle—as to inspire a contagion of fear.

For three weeks the White House struggled to develop a plan that would restore the public's confidence that the Government could bring the economy under control... But the dramatized search for an anti-inflation program proved slow and frustrating. So on Friday afternoon, Jimmy Carter strode into the East Room, having carefully waited until half an hour after the major financial markets had closed in the East, to (speak to the nation).

Speaking earnestly and somberly, Carter opened by stating that "persistent high inflation threatens the economic security of our country," and that "this dangerous situation calls for urgent measures."

The troubles had been building up for more than a decade, said Carter, and they could be traced largely to "our failure in Government, as individuals and as a society to live within our means." Glossing over his own record of rapidly rising spending and huge deficits, both of which contradicted his firm campaign pledges of 1976, he proclaimed his born-again fiscal faith: "The Federal Government must stop spending money we do not have and borrowing to make up the difference."

He acknowledged that his program would be "difficult politically" and, by implication, "onerous and burdensome" to some needy people, though less so than continued inflation would be... But his new plan would succeed, though three previous ones failed, he asserted, because "the nation is aroused now as it has never been before, at least in my lifetime, about the horrors of existing inflation and the threat of future inflation."

In follow-up press conferences Saturday morning, Federal Reserve Board Chairman Paul Volcker proclaimed that "the greatest risk beyond doubt" facing the economy is accelerating inflation. "There is no way we can deal with the problems... other than by placing restraint on people who individually would like more credit."

As this barrage of resolute rhetoric might indicate, inflation is not only a frightening economic problem but is rapidly becoming Carter's most dangerous political liability as well. Front Runner Ronald Reagan has been hammering increasingly harder on economic issues and said in Illinois Friday night: "It's Government that causes inflation, and Government can make it go away by cutting out deficits and stopping the printing of money."

Credit controls. They will be imposed. Said Carter: "Inflation is fed by credit-financed spending. Consumers have gone into debt too heavily. Businesses and other borrowers are tempted to use credit to finance speculative ventures."

So what happened after this?

Massive spending cuts were instituted and many government benefits were slashed. More importantly numerous steps were taken by the Federal Reserve to choke off the lending of money by banks. Raising interest rates was only part of it. A significant campaign was launched to choke off credit lending itself.

This was March, 1980.

The interest rate was 18%.

One year later, the problems still existed and the Fed interest rate was jacked up to 21.5%. You couldn't get a mortgage for less than 22%.

The lesson learned from people like then-Fed Chairman Volcker (who is now Chairman of U.S. President Barack Obama’s Economic Recovery Advisory Board)?

Next time act faster to combat inflation by raising interest rates to similar levels and don't give the economy, lenders and borrowers time to adjust.

Ominous, don't you think?

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How US Treasury Sales Immediately Impacted Canada This Week

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It has been another banner week for the US Federal Treasury and Treasury sales. This week alone the Fed had to convince “investors” to buy up $150 billion worth of debt! This follows three weeks where the US auctioned off $87 Billion, $127 Billion and $138 Billion. This is an astonishing amount of debt for investors to absorb (and there's lots more to come).

This insatiable demand for debt sales has now created a historic crash of the bond market with TLT (the 20 year bond fund) losing almost 30% of its value. The ten year rose to 4% and that will take 30 year mortgages well over 6% in the United States.

This last statistic is particularly important for us because as US mortgage rates go, so do Canada's mortgage rates.

As such three of Canada's major banks decided to push mortgage rates higher yesterday despite the fact the Bank of Canada did not change it's rate and the BOC govenor wishes lending rates to stay where they are.

Nothwithstanding, the Royal Bank of Canada, the Bank of Montreal and Bank of Nova Scotia all announced they had increased the rates charged for money for homebuyers. Five year mortgages at these institutions will now cost a borrower 5.85%, four-tenths of a percentage point higher than the previous rate. Likewise, the rate for a three-year term rose 0.40 of a percentage point for the trio of banks, reaching 4.55%.

And why did they do this even when the Bank of Canada had not changed the lending rate?

CBC reported the news this way, "Analysts have noted that the cost of borrowing for longer periods of time more likely reflects the prevailing view of inflation in the next couple of years rather than the current short-term collapse in economic activity. Governments have responded to the ongoing recession by running deficits and printing money, factors that can boost short-term activity but hold out the threat of longer-run price increases. Thus, lenders will be reluctant to extend cash for longer periods without a commensurately higher interest rate."

But the Bank of Canada lending rate is still 0.25%. What gives?

The article goes on to note, "More ominously, the U.S. government got the cold shoulder from debt buyers Wednesday when Washington sold off $14 billion US in long-term bonds. Traders said Washington has been forced to flood debt markets in order to cover its stimulus spending. In bond economics, falling prices equal higher interest rates. Thus, industry experts now expect interest rates on longer-term borrowing to start rising again."

You see? It's all about US Treasury and Bond sales, which is why we follow the topic so closely.

Interestingly... Global News covered the rate increase on their 11:30pm newscast Wednesday night. The last interview of the piece was with a CMHC rep who pointed out that Vancouver prices are still falling and are expected to fall further over the next year, suggesting that future lower prices might more-than-offset future rate increases.

In other words rising interest rates are going to beat down house prices so that anyone buying at the higher interest rate will still be able to afford roughly the same size house because the lower selling prices (and thus mortgage size) will produce a similar monthly payment despite the higher interest rate.

Gee... and on what blog did you hear that prediction first?

And it's an important point, because it will happen.

When rates do skyrocket to 1981 levels (22%), anyone trying to sell their $650,000 home is screwed. They would need a buyer to assume a mortgage that will equate to a monthly payment of $11,700 per month... and that's simply not going to happen.

The only way that house is going to sell is if the price falls to $220,000.

The CMHC rep knows what all of us who were old enough to live through those times in 1981 know... that high interest rates will crush our bubble inflated Vancouver Real Estate market like a flimsy tin can.

So I ask you, what would you rather have?

(1) A $600,000 mortgage at last weeks low 2.99% variable interest rate, or
(2) A $220,000 mortgage at 1981's 22% interest rate?

Both will run you about $2,500 per month in monthly payments.

The difference? If interest rates skyrocket, you won't be able to renew your mortgage if you choose option (1). You will lose your home.

If interest rates skyrocket, as so many analysts now predict, a seller will never be able to sell a $650,000 property unless he slashes the price to $220,000 because no one can afford a $600,000 mortgage at 22%.

And when you consider how many local homeowners, who have bought in the last five years, will have to surrender their homes to banks under foreclosure when owners can't pay the monthly payments required when they have to renew under these rates... the downward pressure of forced bank sales will easily push prices down to $220,000, if not lower.

Remember banks don't keep foreclosed properties, they move them off their books ASAP.

If you buy under option (2), you still have the same monthly payment as option (1) BUT when rates go down again, you'll be laughing.

So why would anyone buy in today's market when virtually all economists are predicting a return to late 1970s style inflation and interest rates?

Why indeed.

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Wall Street Journal warns America to 'Get Ready For Inflation and Higher Interest Rates'

.Click here, listen to Laurel talk about working as an escort while married to Bill Magri.

Today the Wall Street Journal became the latest to warn of rising inflation and higher interest rates. The article, which can be seen here, ominously warns that the unprecedented expansion of the money supply could make the '70s look benign.

As we have already noted on this blog, inflation hit such a pace in the late 1970s that the only way governments could bring it under control was to dramatically spike interest rates to 21.5% in the early 1980s.

Such a move, in today's bubble inflated real estate market, would crush market prices and wipe out many who hold large, variable-rate home mortgages.

The W.S. Journal article touches on many of the issues we have already discussed. The economic crisis has triggered ill-conceived government reactions, which has been followed by an ensuing economic downturn. Throw in the unfunded liabilities of federal United States programs -- such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid -- and the you have liabilities which total a debt of over $100 trillion.

With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.

About eight months ago, starting in early September 2008, the US Federal Reserve (lead by Chairman Ben Bernanke) did an abrupt about-face and radically increased the monetary base -- which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash -- by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.

This 'quantitative easing' initiative was soon repeated by many other Western governments.

The WSJ article does a great job of explaining how quantitative easing affects the money supply and the inflationary pressures it will exert on the system. If you are intestested I encourage you to read the full article.

The most important element from the piece is that, "it's difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed's actions because, frankly, we haven't ever seen anything like this in the U.S. To date what's happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges."

Now it must be noted that Ben Bernanke insists he can walk the fine line between deflation and inflation without triggering the consequences we saw in the late 1970s.

And you trust the government not to screw up, right? Unfortunately others, like the Wall Street Journal, have their doubts.

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Wither to unlease 'Creative Destruction'?

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The United States of America, the great bastion of capitalism, is having a crisis of confidence on a scale that few common Americans appreciate.

And within that crisis of confidence, a debate is emerging that will form and shape the 21st Century.

First it was President George W. Bush, now it is President Barack Obama. Both Presidents have returned America to a Keynesian economic philosophy.

What does that mean? Keynesian economics is a term that means diddly to the average American and Canadian.

John Maynard Keynes (June 5, 1883 – April 21, 1946) was a renowned economist from Britain whose many ideas on economic and political theories as well as on governments' monetary policies influenced America during the Great Depression. He advocated a government that played an active role in the lives of people regarding business, economy, etc. His ideas are the basis for the school of thought known as Keynesian economics.

Keynes spearheaded a revolution in economic thinking that overturned the older ideas which held that free markets would certainly allow full employment for all workers who agreed to lower their demands for higher wages. Shortly before the end of the Great Depression his ideas were wholeheartedly put into practice by leading Western economies. During the 1950s and 60s, the success of Keynesian economics was so resounding that almost all capitalist governments around the globe utilized its policies.

Keynes's ideas became less influential in the 1970s, after attacks from Milton Friedman and other economists who were less optimistic than Keynes about the potential for interventionist government policy to complement the free market.

The adverse economic conditions of the seventies, most especially the 1973 oil crisis and the recession that followed, unleashed a swelling tide of criticism for Keynesian Economics.

By 1979 Monetarist principles had displaced Keynes as the primary influence on Anglo-American economic policy and America saw a return to the free market principles that made it the bastion of capitalism.

'Creative Destruction' returned as a guiding force of capitalism. Officially Creative Destructions denotes a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

Creative destruction occurs when something new kills something older. A great example of this is personal computers. The industry, led by Microsoft and Intel, destroyed many mainframe computer companies and rendered them obsolete. In doing so, entrepreneurs created one of the most important inventions of this century.

But today Keynes's ideas are enjoying a revival, with Keynesian thinking being behind the plans of President Barack Obama and other global leaders to rescue America's treasury and economy.

But is that what we really need right now?

Can you imagine if the computer revolution were taking place today? The government would be scrambling to bailout IBM and other giant mainframe computer companies because they were 'integral' to the economy.

The billions thrown at the likes of IBM would keep them from failing and that would have greatly hindered the development of the home computer and the technological revolution that sprang from it.

Can you imagine a world with no internet? No home computers? Such intervention would have probably profoundly devastated its development.

And that, many fear, is what is happening now. GM, Chrysler, AIG, Bear Stearns, US Banks, Fannie Mae and Freddie Mac. The list goes on and on.

Let other car companies pick up the pieces and start anew. Let other investment bankers fill the void. Critics argue that the United States must let 'Creative Destruction' run it's natural course and allow capitalism to destroy the value of established companies that enjoyed some degree of monopoly power and allow them to fail.

This process frees up capital and labour so it can be redeployed and put to better use elsewhere.

Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid in instant photography – have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs.

Should we have prevented that?

Creative destruction is a powerful economic concept and explains many of the dynamics of industrial change; the transition from a competitive to a monopolistic market, and back again.

It lies at the heart of evolutionary economics.

The problem is Creative Destruction can also hurt.

Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. And while a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience.

This destruction lies at the heart of the American Capitalist Experience and is crucial to the American economy reinventing itself. The problem is American is now abandoning this philosophy as President Barack Obama and other global leaders attempt to rescue America's treasury and economy with a revival of Keynesian thinking.

Like the giant forest that catches fire and burns to the ground as part of a renewal process that sees it return stronger and greater than before... so must the economy burn down the deadwood of the economic forest. When men interfer in the regeneration of forests by preventing forest fires; the amount of debris on a forest floor gathers greater and greater until it sparks an even more ferocious blaze.

Critics fear this is what both Bush and Obama are doing with the American Economy.

The US Republican Party currently founders for renewal after the folly of George W. Bush and his abandonment of American's finest capitalistic principles.

Don't any of them realize that restoring America to it's status as the world's greatest capitalist nation is the path to both the party's, and the nation's, salvation?

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Like sand through the hourglass...

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UPDATE: Bank Failure #36 - Citizens National Bank, Macomb, Illinois
UPDATE: Bank Failure #35 - Strategic Capital Bank, Champaign , Illinois
BANK FAILURE FRIDAY UPDATE: Bank Failure #34 - BankUnited, Coral Gables, Florida

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As I said yesterday, in the end it’s all about the economy.

For several weeks now pundits have been agog about the 'green shoots' indicating a recovery may be at hand.

Balderdash.

While it is true that the markets have recovered over 30% from last year’s lows, something just doesn't add up.

First quarter corporate earnings are down over 30% and there is a serious disconnect between stock prices and economic reality - just like in late 2007. Those plunging headlong back into the market seem to think that the 50% sell-off in 2008 was overdone and great bargains are now available.

I believe those investors simply do not understand the economic maelstrom of last October.

As I have said over and over, the crash of 2008 was a once in a multi-generational event borne of systemic problems in the economy.

Economists like Peter Schiff have succinctly identified the issue and we have profiled them on this site. The North American economy must allow dead industries to die and permit the natural restructuring of capital and manpower that will rebuild the economy.

But government is interfering. Like an addled heroin addict who cannot break free of his drug addiction, our governments continue to indulge in the traditional vices of over-borrowing and over-spending. Wherever the private sector attempts to correct its behavior, a bloated federal government overrides its efforts.

Faced with a meltdown of the banking system. World governments injected trillions of dollars into their economies and changed accounting rules to ensure that a systemic banking failure was averted. Though the system has stabilized, investors seem to forget that none of the fundamental problems have been solved. We may have survived the initial catastrophe, but the system remains wrought with faults.

By diverting trillions of borrowed dollars into keeping alive vegetative corporations such as AIG, Chrysler, Big Banks and GM, our governments are preventing new enterprises from access to vital labor and capital resources. We are enshrining inefficiency.

North America needs fundamental restructuring in order to compete in an increasingly competitive marketplace. Meanwhile, profitability in those countries that do the hard work of restructuring can be expected to rise disproportionately as the world economy revives.

The news wires are already a tither about another avalanche of loan defaults and derivative failures that are coming down the pike, sham “stress tests” notwithstanding. The "stress-tests" will prove to be nothing more than a confidence-boosting whitewash of the massive problems confronting the banking industry.

As corporate earnings fail to keep pace with the blistering ascent of stock prices, look for investors to bail on the market as they did in late 2008.

Only this time the damage will be even more severe.

After the crash of 2008, investors fled to the safe havens of the U.S. dollar and U.S. government debt.

It won't happen that way next time.

China, the world’s largest gold producer, has recently doubled its central bank’s gold reserve. China also floated a preliminary idea at the recent G-20 meetings to replace the U.S. dollar with a gold-linked international reserve currency. This idea may soon catch on among creditor nations who value real money but also want the flexibility to undervalue their paper currency for the benefit of exporters.

Russia, in a news story announced yesterday, has moved away from using the US dollar as its basic reserve currency (see story here)

At the beginning of the 20th century, the U.S. dollar became the world’s reserve currency because, at the time, it was “as good as gold.” Now the world’s largest debtor nation will suddenly confront the true weight of its obligations and be forced to significantly lower its standard of living.

We are nearing the crest of some serious (and tumultuous) times. And the markets are starting to sense it.

Earlier this month, the U.S. reported the first budget deficit for April in 26 years, with spending exceeding revenue by $20.9 billion, even though that’s the month when taxpayers have to stump up to the Internal Revenue Service and the government’s coffers should be overflowing.

So far this fiscal year, the U.S. shortfall is $802.3 billion, more than five times the $153.5 billion gap in the year-earlier period.

For the fiscal year ending Sept. 30, the Congressional Budget Office forecasts a record deficit of $1.75 trillion, almost four times the previous year’s $454.8 billion shortfall and about 13 percent of gross domestic product. Bear in mind that the target demanded of European nations wanting to join the euro was a deficit no greater than 3 percent of GDP.

Meanwhile Chinese exports are dropping as the global economy weakens, with overseas shipments declining 23% in April from a year earlier. This leaves China (a nation that has already expressed concern about its U.S. investments) with less to spend on supporting that debt in the future.

This is not going to end well.

And Real Estate will be but one of the massive casualties.

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Email: village_whisperer@live.ca

Tug O' War

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There's nothing like a good 'ole fashion Tug-O-War to get the competitve juices flowing, is there?

Yesterday we profiled Meredith Whitney, a former stock analyst at the investment bank Oppenheimer & Co. Inc, an insider who became one of Wall Street’s first bears when credit markets started to freeze in 2007. Early this week, after government evaluations of their financial health, she said banks are “grossly overvalued” and that "at a core basis, I would not own these stocks. Their business models are not going to come back."

Enter Bill Miller, fund manager of Legg Mason's Value Trust mutual fund. Miller is famous for having beat the Standard & Poor’s 500 Index for a record 15 straight years (before stumbling in 2006) and he proudly proclaims that financial companies are his favorite investment for the rest of the decade.

Now there's bravado for you! And if there is something investors love, it's confidence.

Miller is a self-titled 'value investor', someone who seeks the cheapest companies relative to earnings or assets. Last week he said, “financials have the biggest potential to outperform” and boldly named his favorite picks as San Francisco-based Wells Fargo & Co., Capital One Financial Corp., and New York-based American Express Co.

And faithful readers know how much the Whisperer has been picking on Wells Fargo of late.

So it is with great interest that we will watch the great Bill Miller and his stock market advice because, make no mistake, it is at stark odds with what the Whisperer has been saying.

Miller’s says his bets hinge on U.S. home prices stabilizing this year and an economy that performs better than projections from the Federal Reserve. Whisperer believes both will do the opposite.

To his credit, in the first three months of 2009, Miller bought about 3.77 million shares of Wells Fargo (who, btw, is the largest U.S. mortgage originator) and almost quadrupled his position in credit-card company Capital One, according to data compiled by Bloomberg and Legg Mason’s Web site. Miller also increased his stake in American Express, the biggest U.S. credit-card company by purchases, by about 22 percent.

With a maasive wave of foreclosures yet to come and a tsunami of credit card write-downs in the offing, what does Miller see that Whisperer does not?

Perhaps a lot.

Miller can currently boast tremendous success with his investments. Since March 31st Wells Fargo has gained 70%, Capital One 96%, and American Express 77%.

But as we saw in yesterday's post when we profiled Whitney, there is significant concern bank stocks will decline because the gains aren’t matched by improvements in their businesses.

“The underlying core earnings power of these banks is negligible,” cited Whitney, who quit Oppenheimer in February to start her own firm, Meredith Whitney Advisory Group LLC in New York. U.S. banks will likely return to “negative earnings” after posting first-quarter profits and the largest companies must sell assets after expanding at an unsustainable pace in the past two decades.

Furthermore home prices are likely to be down 50 percent from peak levels, which makes gains unlikely and a recovery in consumer spending (which accounts for 70 percent of the U.S. economy) may be undermined as banks and card companies slash $2.7 trillion in credit lines by the end of 2010.

It's a classic battle of viewpoints. What makes it so compelling is that the viewpoints are such polar opposites. And the impact from the winner will affect stock markets and real estate worldwide.

We do indeed live in interesting times.

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Email: village_whisperer@live.ca

The First Tremors

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Last week we talked about the looming possibility of inflation and even hyper-inflation with the 'quantatitive easing' policies (ie. printing money) of many Western goverments, particularly the United States.

The danger this represents to Vancouver Real Estate, of course, is we could see a return of the high interest rates of the early 1980s. With the inflated bubble real estate prices of the Lower Mainland, homeowners with with large outstanding mortgages face potential ruin.

[For example: the monthly payment on a $650,000 mortgage at today's five year monthly variable rate of 3.30% would be $2,603.28. If the rates spiked to 11%, the montly payment would be $6,090.22. If rates spiked to the 1981 level of 22%, your monthly payment would be $11,922.46.]

The greatest concern outlined by Peter Schiff was the massive dependance by the United States on foreign countries to continue purchasing US Treasuries. Schiff speculated that if China stops financing US debt, the value of the US dollar will plummet, triggering a hyper-inflationary spiral in the US.

Last week, for a few horrifying moments we saw the possibility of this scenario playing out.

The tremors began in Beijing, where a essay from the governor of the People’s Bank of China favoured the creation of an IMF currency to replace the U.S. dollar as the world’s reserve currency.

Delegates of China’s legislative advisory body suggested that the biggest foreign holder of U.S. debt diversify away from Treasuries into more risky assets. Jesse Wang, executive vice president of China Investment Corp., said that his $200 billion sovereign wealth fund may invest in “undervalued” commodity assets. Zhang Guobao, head of the National Energy Administration, said China should invest more in commodities instead of hoarding the U.S. dollar.


Almost simultaneously, in Europe, the rotating president of the European Union, outgoing Czech Prime Minister Mirek Topolanek, characterized America’s plan to combat the widening global recession as the “road to hell.”

Meanwhile, British Member of the European Parliament Daniel Hannan made headlines with his stinging rebuke of the inflationary and debt-focused policies of the current UK government.

In response to these events, the U.S. dollar suffered a dramatic drubbing on money markets.

Immediatly Treasury secretary Geithner and his ministerial counterparts in Berlin, Paris and London did their best to convince everyone that the world is pulling together as one to combat the economic crisis.

The charm offensive was effective, calm was restored and the dollar leveled... for the time being.

Given the size and scope of the remedies that the Obama Administration is cajoling the world to adopt, it is likely that the unease will grow. Germany and France are now openly refusing to continue with America’s stimulus plans.

Washington insists that North America's economic problems result from a lack of consumer spending. Therefore, the solution is for government spending to pick up the slack. However, if Americans are too broke to spend, then how can government spend for the people? The only money they have is taken from the American people through taxation. To postpone immediate tax hikes (adding interest for good measure), Washington plans to borrow more from abroad.

The US Administration continues to argue that more debt will restore growth which will then allow the repayment of borrowed money.

But the rest of the world is starting to vocally condemn that approach. This week, at the G20 conference, the United States and Canada will hear that to solve our problems we must first come to terms with their source. We borrowed and spent ourselves to the brink of bankruptcy, and now we must save and produce ourselves back to prosperity.

The voices from abroad are insisting that there is simply no way to sustain an economy based on consumer credit.

Nothwithstanding, the Obama Administration will go to London to cajole the world to adopt its stimulus initiatives. Given the size and scope of the remedies they want implimented, it is likely that worldwide unease will grow until many countries emerge in open revolt to America’s plans.

Meanwhile we continue to splash about on the shores of the Village on the Edge of the Rainforest blissfully unaware of it all.

As greater Vancouver home sales continue at a pace of 100 sales per day, I wonder how many real estate agents - supposedly representing the best interests of their clients - have offer a single, cautionary word to their clients making those purchases?

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Email: village_whisperer@live.ca

Inflation or Deflation?: A firestorm of debate erupts

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Last Monday I wrote about the possibility that the US Federal Reserve was opening Pandora's box and unleashing a destructive wave of monetary inflation with their policy moves to deal with the financial crisis.

Through programs known as quantitative easing, the Fed was basically printing money in an attempt to buy up toxic assets.

On Wednesday March 18th, Fed Chairman Ben Bernanke raised the ante with a move that has shocked the financial community. In announcing that they were printing an additional $1 Trillion dollars, the Fed embarked on a course that has NEVER been utilized... they began buying their own treasury bills.

This has touched off a firestorm of debate around the world as to whether it is deflation or inflation that looms on the horizon.

But who is right?

In the Vancouver Sun the debate is hi-lighted in an article titled "Will it be inflation or deflation? Observers are split: U.S. government's injection of new money could overheat the world's biggest economy".

"That's one of the great debates right now," said Douglas Porter, deputy chief economist at BMO Capital Markets. "What is the greater medium-term risk to the global economy -- deflation or an outbreak of inflation?"

Yesterday I wrote that Garth Turner had come out decidedly against the inflation scenario. Today he has somewhat tempered his outlook. In the latest post on his blog, Turner concedes the point I have been trying to make - that the policies of today will lead to an inflationary spiral that contains a poison pill for anyone buying real estate in today's markets.

While Turner envisions a longer time-line, the end result is the same. Dramatically higher interest rates are on the horizon. Anyone buying now and financing at today's incredibly low mortgages rates face a devestating prospect.

The normal fixed-rate mortgage term here is five years, and increasingly borrowers have opted for shorter periods of time, gambling that interest rates will be lower when the loan comes due.

But as Turner notes, "Rates can only move in one direction. Up. Over the course of the next five years, possibly way up. In fact, I’d say it’s a certainty. Central banks around the world have been printing a flood of money to try and stall deflation and revive economic growth. Public debt has exploded, governments have plunged headlong into deficit spending, countries are buying back their own bonds with tax money and banks have been nationalized while the money supply increases. In this are sown the seeds of inflation, once economic expansion continues."

Turner then summarizes the looming catastrophe, "So, if 3% mortgages in 2009 become 11% mortgages in 2014 (that is the historic norm over the last few decades), just imagine the consequences for someone buying a house today. After all, a $400,000 mortgage at 3% costs less than $1,900 a month to carry. But the same loan at 11% has double the payments - $3,850 a month."

The inflation vs deflation debate rages on right now. But even staunch inflation discounters like Garth Turner now concede that dark storm clouds loom on the horizon, storm clouds that could bring economic ruin to anyone holding a large mortgage or who jumps into the market with a large home purchase.

Check out this CNBC roundtable debate on the issue featuring Peter Schiff. Its a complex issue but it is imperative that everyone understand what is going on.

Tomorrow I will try to post a summary outlining Schiff's position.


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Email: village_whisperer@live.ca

Bank Failure Friday (2009/02/27)

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UPDATE: Bank Failures #15 & #16 added.

Has it been a week already?

As faithful readers know, bank failures in the US always seemed to be delayed until late on Friday afternoons, prompting Friday to be jokingly referred to as 'Bank Failure Friday' in many economic blogs.

2009 is off to a record breaking year with 14 failures so far.

Mind you... for a while it looked like last Friday might slip by without one. Will that be the case today?

We wait with eager anticipation for today's carnage. Updates from the FDIC as they come in, check back late this afternoon. Click here to read our post: "US Bank Failures - Why Do We Care".

In the meantime, an interesting youtube clip in which Fox News Commentator Glenn Beck goes over the history of housing prices and makes the case that President Obama's plans to stem the collapsing housing market in the US may be doomed from the start. His statistics suggest the collapse - to date - may not have even reached the mid-way point.

Interesting.



Bank Failure #15

From the FDIC: MB Financial Bank, N.A., Chicago, Illinois, Assumes All of the Deposits of Heritage Community Bank, Glenwood, Illinois.

Heritage Community Bank, Glenwood, Illinois, was closed today by the Illinois Department of Financial Professional Regulation, Division of Banking, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $41.6 million. MB Financial Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Heritage Community Bank is the fifteenth FDIC-insured institution to fail in the nation this year and the third in the state.

Bank Failure #16:

From the FDIC: Bank of Nevada, Las Vegas, Nevada Assumes All of the Deposits of Security Savings Bank, Henderson, Nevada

Security Savings Bank, Henderson, Nevada was closed today by the Nevada Financial Institutions Division, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $59.1 million. The Bank of Nevada's acquisition of all the deposits of Security Saving Bank was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Security Savings Bank is the sixteenth bank to fail in the nation this year.


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Email: village_whisperer@live.ca

The 2nd Great Depression... Don't You Mean the 3rd Great Depression?

As mentioned on Saturday and Sunday, a great many commentators are raising fears that we may be entering a 2nd Great Depression.

Pundits recall a time when the stock market crashed and Wall Street panicked.

This set off a chain reaction of bank failures and temporarily closed the New York stock market for 10 days. Factories began to lay off workers as the United States slipped into desperate economic times.

18,000 businesses failed over the next two years and unemployment soared to record levels. Construction work lagged, wages were cut, real estate values fell, corporate profits vanished and people began stashing silver and gold under mattresses as bank failures reached epidemic proportions. Even 89 of the United States’ 364 railroads went bankrupt.

Am I referring to the Stock Market Crash and Depression of 1929?

Nope.

These events are a summary of the Panic of 1873, which lead to the Great Depression of 1873.

Today the 'Great Depression of 1873' has been re-named 'The Long Depression' and is all but ignored in modern economic study. It was a period of deep economic recession that affected much of the world and was contemporary with the Second Industrial Revolution.

This depression started in the United States following the Panic of 1873. The National Bureau of Economic Research (NBER) dates the contraction following the panic as lasting from October 1873 to March 1879. At 65 months, it is the longest recession identified by the NBER. The Depression itself, however, ranged from 1873 until as late as 1897, some 26 years.

Until 1929, when people used the words 'Great Depression', they referred to 1873.

The 1873 Depression was a worldwide international phenomenon that started with the banks, just like the current 2008/2009 panic. In fact the collapse that has followed the Great Panic of 2008 looks a lot more like the 1873 crisis than 1929 one.

Historians familiar with the Panic of 1873 say that economic 'experts' are mistaken to compare the current crisis to 1929 because the federal government was far more passive in the 1920s. The U.S. let 15,000 out of 30,000 banks fail then. Government efforts to jump-start the economy were slow and relatively weak until President Franklin Roosevelt came along with the New Deal.

Today we reap the benefits of policies created during that era. Roosevelt helped create New Deal legislation to insure bank deposits and enacted other modern relief efforts like unemployment compensation to help those in distress. When a bank failed back then, regular people were completely wiped out... and half of all the banks in the United States failed in the years following 1929.

Historian's who have studied the panic of 1873 say the swirling events happening today more closely parallel what is properly termed 'The First Great Depression of 1873'.

And those same historians are very concerned at what they see happening saying today's economy might even be worse than the American economy in 1873.

Scott Reynolds Nelson, a professor of history at the College of William and Mary in Williamsburg, Virginia, says, "This is a perfect storm: banks failing, stock markets declining and commodity prices dropping," all conditions eerily reminiscent of 1873.

Nelson says it took America four years to recover from the 1873 panic. Tens of thousands of workers -- many Civil War veterans -- became homeless. Thousands lined up for food and shelter in major cities. The Gilded Age, where wealth was concentrated in the hands of a few "robber barons like John D. Rockefeller," followed the panic.

It is said that those who ignore history are bound to repeat it.

And when Paul Volcker, chairman of the newly formed Economic Recovery Advisory Board advising President Barack Obama, says "I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world… you know, even the experts don't quite know what is going on", it rightly raises alarm.

Could it be that our so-called ‘experts’ are studying the wrong depression as they struggle to apply 1929 solutions to 2009?

If so it could prove to be a fatal oversight, ensuring that we slip inexorably into what will become known as The Third Great Depression.

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