Sunday Funnies - December 6th, 2009

(Click on image to enlarge)

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

Outside... looking in.

Came across a comment posted over at the blog Vancouver Condo Info that is worth reading.

It was posted by 'San Franciscan in Vancouver' and gives you an idea of just how crazy things look from the point of view of an outsider.

• I can’t help but just laugh my guts out about what is happening in this town (Vancouver), province (British Columbia) and country (Canada).
  
  To me, this pipedream looks very much like the 2002-2005 hay days of the California housing boom. I have personally experienced this and can probably write a book about it. I think the title of it would be called “Collusion”. It is merely how all bubbles are created. Collusion, on the part of the government by a way of low interest rates, a drive to increase homeownership at all costs in order to extract political dividends including becoming a subprime lender of last resort (e.g. CMHC in Canada’s case), mortgage and real estate broker and borrower fraud, unwarranted government subsidies to certain segments of the economy, i.e. the construction, real estate and financial intermediation sectors , to name a few.
  
  Location exclusivity being touted as miraculous reason for why prices are not where they should really be. Complete detachment from reality when it comes to economic and financial fundaments (e.g. price / rent ratios, price to earnings, population income potential, economic diversification etc). To add fuel to the fire which is destined to inevitably engulf all colluded parties involved, purported “chronic housing shortages”,” multi-decade demand outstripping supply” continuously trumpeted analyses and trends, “land-use restrictions” or “ lack of buildable land” justifications for why housing prices are so high, “net growth in foreign and inter-state (province) migration”, “the presence of a diversified economy “, and so the list went on, were all symptoms of the bubble mania which took hold in California in the early part of the decade.
  
  This was all good until there were no more greater fools left to bid up the inflated housing prices, and so the party abruptly stopped. People realized that they were not buying homes. In fact, they were renting them for the price of the mortgage.
  
  Those aforementioned fallacies, and many more others, are some of the principal reasons why the bubble burst in the States and why it will follow suit in Canada. British Columbia is no California, heck, Canada’s GDP is less than that of post-bubble California, with the country’s economy NOT as well diversified as one would expect, BUT heavily dependent on a few industries (e.g. oil and gas, energy, forestry and other derivative commodity industries, heavy machinery, construction etc.).
  
  Noteworthy is that Vancouver MSA’s per capita income is half of what per capita incomes are in the San Francisco Bay Area, certain portions of Los Angeles and San Diego areas, where prices have plummeted more than 50% from their peak.
  It’s only a matter of time until the bubble bursts.
  
  The deflation in the U.S. started when the Federal Reserve began increasing interest rates. This could, however, start sooner than that. One should pay a close attention on consumer psychology when it relates to perceived expectations in the future. Often, this is how contagions, financial panics, great depressions are started. The longer the imbalances persist in the greater economy when it comes to housing, the more painful and protracted the adjustment is going to be when it comes.
  
  The Canadian government can keep the last fool from wanting to dump his inflated housing mortgage on the market for as long it provides backstop guarantee. However, financial markets are going to severely punish the Canadian government shortly by dumping its dollar, lowering its perceived credit worthiness (thus increasing implicitly and explicitly borrowing costs in the economy). A scenario just like this is currently unfolding in the U.S. Anyone wanna buy BC, Ontario provincial government bond at 9%? You start printing enough money until the federal currency is eventually debased and has little incremental value left.
  
  After having met recently with “respectable mortgage brokers” who have been in the business for over 25+ years, I am now firmly convinced that this market is going to have a crash landing like one never experienced before.
  
  Pre-sales “pink paper” flipping (as what was called in the U.S.) where respective condo owners would trade condos like call options by purchasing condos without any intention of taking possession of the unit(s) and thus procuring further the housing bubble, funky appraisals based on comparable sales only with little to no historical economic fundamentals in place, liar loans (i.e. stated income (NIQ loans), stated assets) etc. are all hallmarks of the impeding and most definitely inevitable collapse of housing prices in Canada.

Another outsider view comes to us with this analysis of the US vs Canadian Housing Market by the Federal Reserve Bank of Cleveland.

(hattip to the blog Housing Analysis for finding this).

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

Up, Up and Away!!!!

Did you hear? Real estate is set going to launch into the stratosphere.

Tis true, the real estate industry said so.

RE/Max advises that the housing market recovery will accelerate in 2010 and that sales in Vancouver will increase by 45%!

Meanwhile Pascal Gauthier, economist at TD Economics, tells us that home prices will rise another 10% in 2010.

It's this type of news that will have the real estate cabel in overdrive in the next few months cranking out the 'buy now or be left behind forever' propaganda.

Curiously you don't seem many references to a prescient little excerpt from Mr. Gauthier's TD Report.

"Mostly what seems to be stimulating sales is the attractive financing rates and it's really helping the low to medium end," says Mr. Gauthier. "If you are entering this environment and you are already overstretched and later down the road you're facing the interest rate reset … households and lenders should both be doing very hard math here to look at how much they should be taking on."

Indeed they should. But you won't be seeing comments like that from RE/Max anytime soon.

The lesson of the US experience, where the woes associated with interest rate resets have all too clearly played out, are drowned out by the chorus of real estate glee.

The powderkeg continues to build.

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

Amoss admits he 'made a mistake' on Bank of Montreal

Faithful readers will remember the rumours about Bank of Montreal back in August.

Agora Financial's Dan Amoss made claims that BMO was gaming its books and had been lying about its ability to pay shareholder dividends.

As managing editor of the Strategic Short Report, a pricey Internet-based newsletter that provides 'tips' to subscribers on stocks that may be worth shorting, Amoss had issued an 'alert' about the Bank of Montreal.

Amoss implied that BMO was suffering significant losses from it's loan portfolio and wouldn't be able to maintain it's dividend payments. He predicted that a dividend cut might come as soon as that week's August earnings release, which is after the August options expiration. That cut would start a sequence of events that would drive BMO's share price down significantly.

Amoss recommended to his newsletter subscribers several market plays to take advantage of the situation, and hyped the recommendation in several internet 'teaser' ads.

The hype reached a rumour frenzy and by Sunday August 24th, the story became an honest-to-goodness Internet sensation.

In the options market on Monday the 25th, about 48,000 contracts changed hands, 34 times the usual daily volume.

The turnover included 3,405 calls and volume in the stock's puts outnumbered calls by a ratio of more than 13-to-1. The stock fell 3% during the day and the story caught the attention of the mainstream press as Bloomberg, Reuters, and several Canadian newspapers.

By opening bell on Tuesday the 26th the story washed-out as a non-event. BMO maintained it's dividend, announced it had increased profits; and news organizations found Amoss unavailable for comment.

Agora Financial issued a statement defending Amoss and said, "Of course, there's always a chance Dan’s pick is either too early or wrong. That's the nature of speculation."

Those who followed Amoss' advice were encouraged to hold their positions until December and have faith.

Well... it's now December 2nd. So what happened, you ask?

Amoss has come out and admited he made a mistake on this recommendation he advised his readers to sell their puts.

From his newsletter;

“This was the second quarter in a row that I expected conservative accounting to return to BMO, but this has not happened. It eventually will happen. Next quarter, we could see an earnings miss based upon a re-acceleration in the provision for credit losses.

Two percent of BMO’s entire loan portfolio is in the ‘impaired’ category. According to Blackmont Capital, this is 70% higher than BMO’s peer group of Canadian banks. Furthermore, BMO’s allowance for credit losses covers just 58% of gross impaired loans. This coverage ratio is just half of the coverage ratio of BMO’s peer group.

BMO stock trades at a very high valuation -- one that discounts a V-shaped recovery in the credit quality of its loans. I made a mistake from this recommendation, and have learned from it. The most important take-away from this experience is that banks have a lot more of control over the timing of their credit losses. Also, I’ve come to appreciate just how amazingly complacent Wall Street can be about embedded credit losses at banks.

Our trades depended on management recognizing reality. This has not happened yet. But it eventually will.

I’ll keep following BMO for a potential put option trade in the future. The next earnings report could contain the negative surprise we’ve been waiting for, but let’s wait until we get closer to that point to buy any more puts.”

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

Sign, sign, everywhere a sign

Slowly the wheels turn and the inevitable outcome passes another another signpost on the world stage...

This morning, for an unprecedented third straight month, Australia’s central bank raised its benchmark interest rate by a quarter percentage point to 3.75%.

On the same day, The New York Times announces that Canada is officially out of the recession.

We harken back to this speech by Bank of Canada Governor Mark Carney in which he warned Canadians that his pledge to keep the benchmark policy rate at 0.25% is “conditional” and should not be interpreted as a “guarantee.”

Carney told reporters afterward it would be unwise to assume current low rates are 'normal'. "It is an expectation, not a promise," Mr. Carney said in his remarks.

Carney told Canadians that they should "prepare for when interest rates return to normal".

Are you prepared?

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

Xanadu

When all is said and done, the story of Vancouver Real Estate at the turn of the millennium is going to make for compelling reading.

Caught up in the world-wide flood of liquidity after the dot-com bust of the late 1990s, the Village on the Edge of the Rainforest saw it's real estate values skyrocket in tandem with the bubble conditions that engulfed rest of North America.

But the lessons of the bubble folly, currently being hammer home in the United States, are lost in the land of the maple leaf - and particularly on the left coast.

As Americans wallow with 25% of mortgage holders in an underwater postion, Seattle is discovering that most of the homeowners facing underwater mortgages financed their properties between 2005 and 2008 and used adjustable-rate mortgages.

Just like Canadians are doing.

The only reason our nation is not awash in a similar disaster is because our nation has effectively forstalled the real estate collapse.

The warnings and dangers of the housing meltdown are there for everyone to see. The Canadian situation is not too far removed from the fate befalling our American cousins and that realization is gaining acceptance on a daily basis in our mainstream media.

Even the Governor of the Bank of Canada now issues warnings to Canadians that they need to wake up and smell the coffee regarding the impact of looming interest rates.

But are Canadians getting the message? Are they using the opportunity to secure and save themselves from the inevitable pain that looms on the horizon?

Last week, in Toronto, we read in the national news about the return of condo lineups and buying frenzy's.

Just to demonstrate that Vancouverites can be just as brain-dead as their eastern contemporaries, the gullible have returned to their foolhardy ways and lined up for hours in a downpour on the weekend to get first dibs on pre-sale condo units being sold at "The Mark" by Onni, a new tower in Yaletown.

"We're blown away by the turnout," said an Onni rep as about 50 investors scrambled around a model of the building in the pre-sales centre.

190 units in the first 26 floors of the tower are up for grabs and will not be completed until 2013. The prices ranged from about $320,000 to more than $900,000.

All of this comes as the global debt and credit crisis continues to haunt developments in former real-estate hotspots like Dubai in the United Arab Emirates,

And in move that clearly demonstrates just how scared officials are about the fallout from stunning announcement of a de-facto default on the Dubai World development, the UAE has blocked distribution of the U.K. Sunday Times newspaper today due to its coverage of the Dubai debt crisis

Cam Good of the Onni Group said on Sunday that Vancouver is back in boom times. "The [real-estate] strength in Vancouver is unlike anything in the world," Good said.

Yeah... but that's exactly what they said about Dubai.

Daily its proven that we are living in fool's paradise.

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

Sunday Funnies - November 29th, 2009

(click on image to enlarge)

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

Only a matter of time...

With each passing week, more and more investment professionals are warning that it is only a matter of time before interest rates rise.

The latest is Lisa Myers, co-manager of Templeton Global Income Fund.

Myers is reminding investors that interest rates have already risen in countries such as Australia and Norway and more will follow in the next six to nine months, starting with Asia. The picture is less clear in North America, but most experts believe it is only a matter of time before rates rise in the United States. When they do, Canada's would soon rise in sympathy.

Meyers notes that it's a counterintuitive fact that bond prices fall as interest rates rise. Over the past 30 years, interest rates have mostly fallen, which means bond prices rose. Hence, a protracted bond bull market.

But now Meyers and her firm are publicly warning the 30-year bull market for bonds may be over.

Joining the chorus is AlphaPro Management Inc. president Ken Mc-Cord. In his firms newsletter, The MoneyLetter, he warns, "The end of a 30-year bull market in bonds is near. It's time to prepare."

For three decades, bonds seemed to go only in one direction -- up -- with minimal volatility or nasty surprises. The idea of bonds as a safe harbour "is about to change." McCord says.

The problem is we have had such low rates for so long now that the average Canadian seems completely unable to fathom the seriousness of these warnings.

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

Dubai

.
DUBAI UPDATE: Dubai crisis jolts markets, but early fears ease - AP

Yesterday was Thanksgiving in the United States and markets were closed.

Good thing.

The stunning development of the day was news that a debt-laden Dubai state corporation was unable to meet its interest bill.

Dubai World, a company owned by the Arab emirate of Dubai, told creditors it wants to delay payments on $59 billion US of debt for six months as it seeks to restructure money-losing investments.

This news sent global equity markets reeling and generated a safe haven flow into the US Dollar as carry trades are unwound and a flight away from risk occurs. Dubai has for all practical purposes defaulted on its debt. Needless to say, this came with little to no warning and has sent the financial markets into quite a tizzy.

A default by Dubai World would be the biggest by an agency of a national government since Argentina halted bond payments on $95 billion US in 2001. It comes on the heels of an extraordinarily difficult year for the tiny emirate. The 2008 financial crisis has hit Dubai hard, with real estate prices dropping as much as 50% in the past year.

In London, British banks with the heaviest exposure to Dubai suffered some of the steepest losses, sending the Financial Times 100 down 3.2% — its biggest plunge since March.

Shares of Royal Bank of Scotland fell 7.8%, while Barclay’s Bank ended down 8%, and Lloyd’s Bank dropped 5.8%.

HSBC, the biggest lender in the United Arab Emirates, fell 5.8%. HSBC had $15.9 billion US in loans outstanding at the end of June. In Germany, shares of Deutsche Bank tumbled 6.8%. The biggest bank in France, BNP Paribas, fell 5.1%, while Societe Generale, the second-largest French lender, dropped 5.5%.

In Canada, S&P/TSX financials fell 1.7%, with Scotiabank slipping $1.15, or 2.3%, to $47.91, TD Bank off $1.34, or 2%, to $65.84, and the Royal Bank down $1.32, or 2.3% to $55.88.

This sort of news is extremely disturbing. After all, we are talking about the financial hub of the Middle East. Imagine the repercussions that would occur should London have announced this sort of news and you can understand why stock markets were pummeled overnight.

This is the kind of news that could cut off all market rallies right at the knees. The reason – it creates fear and uncertainty, two of the prime ingredients in a selling binge. If Dubai could go under, then who or what might be next becomes the question.

Scotia Capital currency strategist Sacha Tihanyi warned “the thing that would make anyone nervous is the fact that this is a financial-sector shock. It was financial-sector shocks that played such an intensive role in the recession and financial crisis.”

“Dubai is the most indicative of the huge global liquidity boom, and now in the aftermath there will be further defaults to come in emerging markets and globally,” said Nick Chamie, chief of emerging-market research at RBC Dominion Securities.

Some saw the Dubai issue coming. Scotia Capital economists Derek Holt and Karen Cordes told clients in a report that Dubai's borrowing excesses and asset bubble risks were unsustainable.

“In some sense when we look back upon it, maybe this isn't such a surprise after all. There was always something a little Land of Oz-like to Dubai, as if it were a modern-day Rome, symbolic of an overstretched empire in the years of leveraged bubble excess,” they said.

Today we will see the impact in the United States and whether the reaction is temporary or if this is the start of something larger.

You may recall our post of November 14th. SeekingAlpha had laid out three different scenarios that presented a serious concern for the ecnonomy. One of them spoke of concerns that circumstances could precipitate a rapid US dollar rally. A rapid US dollar rally has the potential to spell disaster.

Such a development would force all those people shorting the US dollar to sell stocks to pay off their shorts, a move that would force stocks to collapse (again). US Treasuries would rise, solvency issues would again take hold as China et al would panic and rush to buy US debt for safety's sake, even at low interest rates. The Asian stock markets would then burst in spectacular fashion, wiping out the dramatic gains of the last 8 months.

Yesterday... that scenario began to play out.

Capital has, once again, begun to flee to the security of the US Dollar and the dollar index is up dramatically.

At the time this is written, DOW futures are down almost 300 points.

Later today the US markets will be open.

It's going to be an interesting day.

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

Carefree

The rebellion against the U.S. dollar is gathering steam and in the latest development Russia's central bank has announced it is diversifying out of the US dollar and into several currencies - including Canada.

A senior Bank Rossii official in Moscow triggered a sharp gain for the loonie Wednesday and contributed to the U.S. dollar's slide to a 15-month low when the Bank signalled its intention to add the Canadian dollar, and possibly one or two other currencies, to its foreign exchange reserves – the third-largest in the world.

At one point last night Gold had shot up to $1,195 an ounce on the news.

Such a shift brings Russia into line with the currency diversification strategies being weighed or launched by China, Indonesia and a handful of other major central banks holding vast amounts of U.S. Treasuries.

It's another sign of what's to come.

There is no denying that the long-term trend toward currency diversification is acquiring more urgency over growing worries that soaring U.S. government deficits will eventually trigger a nasty bout of inflation. That, in turn, would severely erode the value of dollar holdings in central bank coffers around the world.

Currency specialist David DeRosa, president of DeRosa Research of New Canaan, Conn said, “there's no sign of inflation right now, but if you are a foreign central bank holding a lot of U.S. dollars, you should be concerned about whether or not the dollar is going to be destroyed by future inflation.”

And as countries move away from investing in the US dollar, how long before bond vigilantes begin pushing interest rates up on government debt?

The spectre of rising interest rates and it's effect on Canadians with mortgages has been the focus of the media for the last couple of weeks. You have also seen the Governor of the Bank of Canada, bank presidents, and economists of all strips coming out with statements of concern.

Perhaps they are noticing that in the United States, nearly one in four homes with mortgages are in an 'underwater' position (the home is valued for less than the amount their owners owe the banks holding their mortgage loans.

You can rest assured that none of those US homeowners were the least bit concerned with the first homes starting going under in 2006. But as the domino's started to fall, it dragged the rest of the nation down with them.

Wither the Canadian Alfred E. Neuman's out there who are piling on maximum debt with 5% down and huge 35 year amortizations. Are they worried?

What of the bidding wars these hyper-extended buyers are triggering. Yesterday's news brings reports of a return to condo line-ups and buying frenzy's again.

And what of the potential impact on everyone else who bought in the last five years... is the looming crisis registering in their collective psyche yet?

Mortgage rates are going to shoot upwards. And it will be the buying class of 2009 who will be be the first domino that takes down the rest.

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

Pet Emergency

Hi Gang.

Been helping close friend with a pet emergency this week so have been unable to post. Will be back tomorrow, hopefully.

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

Sunday Funnies - November 22nd, 2009

(click on image to enlarge)

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

A 40% interest rate? Ho, Ho, Doh!

Nothing will put a lump of coal in the stockings of retailers this year quite like seeing Christmas sales completely evaporate.

And the chill is now on.

Word came out yesterday that some US credit card firms are pushing up interest rates by as much as 7% ahead of Christmas - and that's in addition to some heavy increases already implemented.

For the likes of Capital One, it means some customers will be paying almost 40% interest on their Christmas gifts and January sale purchases unless they clear the balance on their cards.

Angry Capital One customers have been complaining in a forum on the consumer website moneysavingexpert.com.

One said: "My World Mastercard's old rate is 15.9% and its new rate is 23.9%. I told Capital One it's no better than legalised extortion. I've never missed a payment or paid late - what a way to treat customers."

Another said: "My Capital One Classic Visa's old rate was 30.04%, new rate 39.9%. I'll be closing my card."

Capital One's reponse: "Due to current market conditions, we have had to increase rates for some customers."

Yes Virginia, there is a Santa Claus. There just won't be any presents this year.

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

American Graffiti

“The stability we've started to see in U.S. housing was likely a false calm before a bigger storm. There are millions of homeowners under threat of losing their homes in the next two years.”

This is the observation of Derek Holt, vice-president of economics for Scotia Capital.

It seems a record one in seven U.S. mortgages, or four million homeowners, were in foreclosure or at least one payment late in the third quarter.

Even more astonishing is that Americans with solid credit ratings comprised 33% of the quarter's foreclosures.

This is what happens when a huge surge of people default on their mortgages, and the wave of foreclosures causes a big drop in the value of real estate. It puts other homeowners in an 'underwater' position. Throw in the highest jobless rate in 26 years and suddenly its impossible for many homeowners to make their payments in the quarter.

Another Canadian watching the developments closely is Jennifer Lee, an economist at Bank of Montreal. Increased foreclosures among those with good credit is a problem in any recession, said Lee, but this time the increase comes after the subprime crisis forced millions from their homes and pushed prices down as much as 50% in some cities.

Not only are they losing their jobs and falling behind on loan payments, sharply lower prices mean they aren't able to simply sell their homes to pay off their banks.

“We can't say what is typical any more in the housing sector because we've never experienced anything like this,” she said. “People need to start working again, because when they do find work the first thing they do is get back on track with their mortgages. But, that isn't likely to happen soon.”

Most of these have five-year reset rates, and were issued at the height of the market's bubble. They start coming due in January.

Once again Scotiabank's Derek Holt makes a succinct observation. “You didn't have to prove a thing to get [a mortgage],” Mr. Holt said. “They haven't been a problem because they have such long fuses. But those fuses are just about done, and we're heading into entirely uncharted territory.”

It takes a long time for the housing story to play out. For the United States it started in 2006. The full effects won't really start to be seen until next year.

For Canada the writing is on the wall.

It will start with rising interest rates. The first to get caught up will be all those resetting 0/40 mortgages and the huge number of people who "bit off more than they could chew" in the Great Reflation Drive of 2009.

The problem is, too many dismiss the writing on the wall as nothing more than graffiti.

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

Gold Observations

Last Thursday we talked about Gold and when I made a return to work this week after a multi-week absence, several colleagues were keen for my thoughts on the yellow metal.

With Gold leaping to yet another all-time high in early London trade on Wednesday (coming within 50¢ of $1150 an ounce), the 64 thousand dollar question becomes: is it a bubble that is about to burst or will Gold go higher?

So let's consider what's happening.

As was stressed last week, the real motivation for the movement to Gold is not as a hedge for inflation. The reality is that it performs that role very poorly.

The current move to gold around the world is a hedge against the mismanagement of the state - which at this time and place is the United States with it's world's reserve currency status.

We are currently witnessing perhaps the most profound paradigm shift in gold from the patterns seen over the last 20 years. During that time European monetary authorities sold the precious metal and Asian central banks accumulated official reserves in the form of US Treasuries.

But now that pattern is being turned on its head.

Currently, sales in Europe have slowed to a crawl and Asian banks have started swapping their dollars for gold.

GFMS, the London-based consultancy, estimates that over the past 20 years net sales from the official sector have run at an annual rate of about 400 tonnes - about 11% of the total supply. But the combination of slower sales in Europe and fresh gold purchases in Asia are set to cut the official sector's bullion net sales to about 50 tonnes this year, the lowest level since 1988.

The shift is important for the gold market on two fronts: the interest provides psychological support and, more important, caps a source of supply.

Things began to really pick up steam when the IMF approved the sale of 403.3 tonnes of gold back in September 2009. In a completely unexpected move, India was the official purchaser of 200 on those tonnes in October.

It is largely understood that India sold holdings of US Treasuries to make the purchase.

Next up came the central bank of Sri Lanka who purchased gold in the open market at market prices, another surprise move.

Now the IMF has announced that Mauritius' central bank bought gold at market prevailing prices on November 11 for about $71.1 million (US Dollars) in total. According to data from the London Bullion Market Association, gold was quoted on the afternoon "fixing" that day at USD 1,115.25 a troy ounce, a record high at that time.

Before the transaction, Mauritius - a tiny nation made up of islands in the Indian Ocean more than 1,000 kilometres off the East coast of Africa - held 1.9 tonnes of bullion - 3.2% of its total official foreign reserves - according to data from the mining industry-backed World Gold Council. The purchase more than doubles the reserves to 3.9 tonnes.

It's another brutal kick in the teeth to the concept of nation states storing their wealth in the in the security of US Treasuries.

Even Zimbabwe, which a year ago had hyperinflation running at 231 million percent annually, is now considering reintroducing its Zimbabwe dollar, but this time fully backed by assets, including gold.

With India, Sri Lanka and now Mauritius adding to their gold reserves – and with Zimbabwe looking to purchase gold, it is putting extreme pressure on the gold supply. "It is the sentiment that matters" and not the size, says VM analyst Gary Mead in the latest BNP Paribas Fortis Metals Monthly. "The bottom line is that the Gold Price rally has got everything going for it right now: Few official sector sellers, some official sector buyers, a low-interest rate environment, and a weak US currency. It's a perfect storm."

Included in that perfect storm are the following elements:

• Decreasing Gold Mine Production - Annual worldwide mine production of gold has decreased by 9.3% since 2001. Gold prices have nearly quadrupled since then, but more gold is not being produced because resources are being depleted and the quality of those resources is diminishing. When a discovery is made, it takes about 7-10 years to get a mine permitted and into production, making it difficult to quickly ramp up gold production.

• Investment Demand for Gold - Large institutional investors, such as hedge and pension funds, are making large allocations to gold and gold shares. Individual investors are also getting in on the action, with gold exchange-traded funds (ETFs) gaining influence. SPDR Gold Trust (NYSE: GLD), the largest physically backed ETF on the planet, is now the 6th biggest holder of gold bullion with more than 1000 tons. That is helping to facilitate and spread the ownership of gold by individuals. In fact, in the first half of 2009 investment demand for gold is up 150% over the first half of 2008, according to the World Gold Council.

• Asian Demand for Gold is Exploding - Asia, with its more than two and a half billion people, has a major impact on investment demand. Asians have a long-standing cultural affinity for gold as a store of wealth. India is the world’s largest gold consumer. For the last 50 years, until 2009, the Chinese government has forbidden its citizens from owning gold. But now China is encouraging its citizens to buy both gold and silver. Today, Chinese investors even have access to gold-linked checking accounts. As a result, demand for gold in mainland China is expected to triple in the next few years.

Gold’s price has increased every single year since 2001. In 2001 gold sat at $300 an ounce. It has risen now for eight consecutive years. Are we currently in the middle of a secular bull market for gold?

Bull markets typically last about 17 years and end with a mania stage where investors throw the concept of supply and demand out the window and frantically invest in gold. Analysts note that this pattern has repeated itself over the last hundred years of investment history.

More importantly, when adjusted for inflation, gold is nowhere near that highs it attained in the 1980s. Adjusted for inflation, gold should be at $2,000 an ounce.

And if these factors are going to place even more upward pressure on the metal than the 1980s did, it would suggest that we are about to see a major run up in gold prices.

The gold market is very small in relation to the currency, bond or stock markets, so when investors start to pile in, it could just send prices through the roof.

As a side note Jim Rogers, the renowned global commodities investor and author, said he doesn’t ever like to buy something making all time highs but he is not selling his gold. He believes Gold is going to go much higher in the course of the bull market. He also warned that it doesn’t mean it can’t go down 20% next year but during the course of the bull market it is going to go much higher and whatever you are seeing is not a bubble yet.

Jim also said that being a contrarian, he should be selling gold when others are buying. But he hastens to add that he also sells at the top and that he doesn’t think this is the top.

“In my view, in this bull market in commodities gold will make all new highs adjust for inflation,” he said.

A possible coming drop of 20% in the price of Gold?

So my response to my colleagues was to read today's blog.

Like so much of everything we discuss here, the issue is all about confidence in the economy of the United States. You need to investigate that issue thoroughly and make decisions accordingly.

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

Rationalization

Despite the fact that mainstream media, leading economists, bank presidents and the Governor of the Bank of Canada are now taking notice of the irrational way the Canadian housing market is 'reinflating', there are still those who vehemently seek to justify what is going on.

It doesn't matter that prices are hitting an all time high in the middle of the greatest recession since the 1930s. Nor that the current rate of double-digit price increases are coming amidst rising unemployment and within an economy that is otherwise contracting.

No... this isn't out of whack at all.

Certainly not to the likes of Bank of Montreal's Michael Gregory.

Gregory is adamant that there is no evidence that low interest rates are pumping a domestic housing bubble.

“The record surge in resale volumes reflects unleashing pent-up demand,” Mr. Gregory said in a research note. “From mid-2007 record highs (just before the global credit crisis began) to January lows, existing home sales plummeted 42%, with the majority of the decline occurring during the four months after Lehman Brothers' bankruptcy,” he wrote.

“Discretionary and big-ticket purchases of all types were postponed in the post-Lehman panic, creating an abnormal amount of pent-up demand... Once the panic subsided, pent-up demand started to unwind, pulled by record low mortgage rates, cheaper home prices (around 9% on average), and an emerging sense among consumers that the worst of the recession was over.”

Alrighty then. So it's a booming rebound and not a bubble then?

Douglas Porter, also with Bank of Montreal, concurs (surprise!).

“The rapid-fire rebound in Canadian housing is showing no signs of letting up,” Mr. Porter said in a note to clients. “While that may be causing some sweaty palms among bubble-phobes, the quick turn is a vivid illustration that monetary policy still works in this country.”

So here we are in the midst of a year when the average price of home resales rises by more than 20% despite the fact that overall inflation is sitting at less than 1%.

And these guys insist that it isn't a sign that something is dangerously wrong - but that it's just a reflection of 'effective monetary policy'?.

In psychology and logic, rationalization is the process of constructing a logical justification for a belief that was originally arrived at through a different mental process. It is a defense mechanism, in which perceived controversial activities are explained in a rational or logical manner to avoid the true explanation of the behavior in question.

And that's all this malarkey is... deceptive rationalization employed as a defense mechanism.

Have I said this is going to end badly?

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

The Great Reflation

Scanning the worldwide news clippings today, the main topics of interest are Gold, the US Dollar and Interest Rates.

Early last night Gold spiked to $1,140 US per ounce and the Dollar index dropped well below 75.

In the wee hours of this morning, the Dollar index is back up and Gold hovers at $1,130.

We do live in interesting times.

The stock market was up again yesterday as US Federal Reserve Chairman Ben Bernanke gave no indication that he would take actions to back up his stated preference to promote the Dollar.

It seems almost unanimous that the market's recent upswing has all been about a weak dollar and ample liquidity.

But there seems to be a fine line being walked here.

"A steep slide in the dollar would be the death knell for the great reflation engineered by the Fed. But the Fed chairman's concerns about the currency's current level are not yet serious enough for him to abandon his interest-rate policy," said Jean-Baptiste Pethe of Exane BNP Paribas.

Ahh, yes... that's what they are calling it now. The Great Reflation.

It brings to mind this interesting quote from Benjamin Anderson, Chief Economist of Chase National Bank published in the New York Times on April 1930:

“Cheap money is a stimulant, also an intoxicant. If the dose is large enough, a substantial temporary effect can be brought about, but headaches follow. If the matter really were that simple, everybody could be an economist, and only the perversity of central banks would keep us from endless prosperity. Merchants and manufacturers will not be induced to increase borrowings, since interest on money borrowed is only one small factor in total costs. But if merchants and manufacturers will not use cheap money, speculators will.”

And that's what's driving the Great Reflation... speculators who are using the cheap interest rates to their advantage.

The money that got pumped into the US economy by the Fed over the past year didn’t get anywhere near “merchants and manufacturers” or small businesses that are now the backbone of the US economy.

Speculators are borrowing at 0% plus or minus short term, and are “playing/gaming” the stock market with much of that money.

One of the bubbles forming again is in oil prices. So perverse is the emerging scenario that you have the US taxpayer advancing money to speculators so they can game the oil market so that US taxpayers must pay more for oil (!).

San Francisco Fed President Janet Yellen made an interesting comment on Tuesday in Hong Kong. She opined about whether monetary policy should be used to lean against "potentially dangerous swings in asset prices. The answer is far from clear, because the use of monetary policy for these ends necessarily compromises the attainment of other macroeconomic goals."

It would appear those 'other macroeconomic goals' involve around creating new bubbles to get themselves and of our current hole - a hole dug by the creation of the 2001 - 2006 bubble.

But how long until it becomes necessary to move to defend the Dollar by dramatically raising interest rates?

We shall see.

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

Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.

Major mortgage lender risks unpopularity with peers to express his concerns

Last Thursday Peter Aceto, President of ING Direct, told the Toronto Star that he’s worried about Canada’s real estate market.

Aceto made several candid statements and - perhaps even more astonishing - acknowledged that his comments will likely not be popular with money lenders since he is also in the business of selling mortgages.

Do tell?

Aceto said the current low interest rates have caused some Canadians to act "irrationally" in the housing market, potentially taking on too much debt that could lead to economic difficulties down the road.

More significantly Aceto indicated that mortgage lenders share partial responsibility for this situation.

You may recall back in September, Scotiabank economists Derek Holt and Karen Cordes said, in a research note, that "lenders have been scrambling to get enough product to put into the federal government’s Insured Mortgage Purchase Program over the months, and that may have translated into excessively generous financing terms"

Aceto followed up on this theme and said, "we shouldn't be interested in just selling mortgages to get our numbers up for the next quarter."

The concern, as Aceto noted, is that more than 50% of all mortgages in Canada this year were amortizations longer than the standard 25 years.

Buyers take on those long amortizations for only one reason: it allows them to borrow far more than they probably should and leaves them highly vulnerable to catastrophe when interest rates inevitably rise.

Aceto acknowledges this and says he is worried that some consumers are biting off more than they can chew.

As this blog has said all year long, the stage is being set in Canada for a US-style real estate implosion because a great many Canadians have taken on massive mortgages and will be forced to default when the catalyst of rising interest rates kicks in.

Aceto drew on his own California experience to concur with this sentiment.

Aceto's former job at ING was chief risk officer and he spent two years in California during the height of the real estate bubble there. At the time he felt that Canadians would not be as extravagant or recklessly wasteful as their American counterparts.

But when he arrived back in Canada he was surprised to see that some consumers were acting in a similar way.

"Canadians have been proud internally that we're very different than the Americans in the way we behave in terms of our spending habits and the way we deal with credit. But over time we have become a lot closer than we think," said Aceto.

"It's almost as if [consumers] feel very concerned they are missing something with such low rates," said Aceto. "The problem is: can they afford to pay for their mortgage five years from now, when interest rates go back up?"

Bingo!

Aceto joins a growing list of financial community heavyweights who are starting to publically take notice of this issue.

Last week CIBC World Markets senior economist Benjamin Tal told the Toronto Star that consumers are "blinded" by low interest rates. Before that Bank of Canada Governor Mark Carney expressed concern that he may have to 'intervene' in the mortgage market because lenders and borrowers were not being 'prudent'.

Peter Aceto, however, is the first bank president to express concern over the housing market.

Seems the fretting about the future of real estate in Canada with the prospect of rising interest rates is no longer simply a fixation of 'negative bloggers'.

The truly unfortunate thing, though, is that the ultra-low interest rates of 2009 - interest rates slashed as part of a desperate attempt to protect and re-inflate real estate asset prices - will ultimately just intensify the collapse, wreaking far greater havoc on asset prices than if the market had been allowed to correct on its own.

==================
Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.