What $600,000 will get you...

Hurry, hurry, hurry. Jump into the market now before you are priced out forever.

Here is a chance to own a beauty near East King Edward Ave and Fraser Street in Vancouver (3635 Prince Albert Street).

This 4 bedroom, 2 bath beauty has 1,650 sq ft of liveable (!) space on a 3,159 square foot lot. Asking price is $579,900. Best offer at least $20,000 over asking to make sure you land this palace.

Pictures speak a thousand words. And believe me... all 1,000 words scream BUBBLE!

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Decade of Debt Reckoning

When all is said and done, I believe historians will look back at this time and call it the decade of debt reckoning.

The unfolding financial crisis is one that began with bad bets on securities backed by subprime mortgages, lead to a tightening of credit between big banks and then spawned one of the biggest orgies of government aid that has ever been seen... all of it borrowed.

The lexicon of the day has moved from 'subprime' to 'sovereign debt'.

And it's not just America and the UK that is deeply in doo-doo. Throughout the western world the notion of government debt as salvation and the road to prosperity has reigned supreme.

Issue debt, and you will prosper.

It is as if they have all been blind to recent history when, for an entire decade, many nations of Latin America demonstrated clearly that debt as a road to prosperity was a delusion.

Now the world is poised to forcibly relearn that lesson.

The Greeks are in the process of dealing with those consequences and joining them are Iceland, Ireland, Portugal, Spain, Italy, California, New Jersey, and Illinois... all now paying the price for their debt binges.

And yet, in the face of looming disaster, the United States continues down the merry road to the same financial Armageddon. The Congressional Budget Office now estimates the Obama Deficit will be more than $9.7 trillion over the next ten years, rather than $8.5 trillion.

Truth be told, I don't think (in the long run) that the European Union will collapse over the financial mismanagement of individual states nor will the U.S. crumble from the financial disasters in California, New Jersey, and Illinois.

But deficit spending, nationalization of the health care system and increasing taxation will create business killing regulations in the United States; moves which will crush any possibility of economic growth.

Either bond vigilanties will punish America or the reality of a highly damaged economy will force the Federal Reserve - regardless of Ben Bernanke's current claims to the contrary - into serious and overt monetization of the Obama Deficit. Personally I belive the looming tough times for America virtually guarantees the latter.

And that will cause inflation to again be a problem.

Either way, interest rates will soar and Time will be proven to be 10 years too early with the magazine cover pictured above.

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Inevitable

The swirling economic ill winds continue to blow strong in Europe and we ignore what is going on at our own peril.

Tiny Iceland has used a referendum to express their outrage at being asked to take on the obligations of bankers who allowed the island’s financial system to create a debt burden more than 10 times the size of the economy. The populace is refusing to allow it's government to compensate the UK and the Netherlands for depositor losses stemming from the collapse of Landsbanki Islands hf (Icelandic internet bank) more than a year ago.

Meanwhile, despite some help from abroad and some attempts at internal reform, investors are still leery of Greece. Today, Greek ten-year bonds sell at yields north of 6%, nearly 300 basis points higher than similar maturities in German, Danish, or French sovereign bonds.

Next on that scrutiny list will be the United Kingdom.

With a debt ratio rapidly approaching Greek levels, the pound sterling has lost about 25% of its value even against the US dollar. The massive debt and misspending of the past three administrations, has led to serious out-flows from sterling and UK government ‘gilt-edged’ bonds, or ‘Gilts.’

The previously unthinkable notion of a British default has crossed into the realm of possibility. As a result ten-year British Gilts are selling off to yield above 4%, a significant premium above the country’s Continental rivals.

In other words, the free market has priced in a loss of the UK’s prized ‘triple A’ credit rating, even though the rating agencies have only issued warnings.

There is a shift now occurring in the great economic crisis of 2008 - 2010.

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

And it is one thing for prudent, rich states like Germany to bail out small states like Greece. But few states have the ability or the will to bail out financial giants like the UK.

The IMF is a sort of ‘central bank of central banks,’ but it is largely backstopped by the United States. Will China, Germany, or other creditor states be willing to assume the role of global guarantor?

And what of the United States?

Although the Federal Reserve is actively holding down the short end of the yield curve to near zero, 10-year notes are currently yielding more than 3.6%. If the Fed were to cease purchasing Treasuries, or the rating agencies were to become realistic, the free market would drive the 10-year rate into dangerous territory.

In Britain the free market is driving up rates despite the fact the rating agencies have not acted yet.

As I have said before, economic conditions all but guarantee the return of sky high interest rates. It's coming, just look around at world economic conditions.

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

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Housing Bubble?

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Europe

The crisis of 2008 was a financial earthquake whose scope, depth and magnitude is still to be fully appreciated by most.

When Lehman Brothers went down, it triggered one of the biggest corporate debt defaults in history. It also ignited the biggest stock market meltdown in decades.

By the time the smoke had finally cleared, Lehman’s bonds attracted bids of 8 cents on the dollar, resulting in staggering losses of $365 billion.

As noted on SeekingAlpha, about 350 banks and investors were thought to have insured $400 billion of Lehman’s bonds through complex derivatives, known as credit default swaps (CDSs), causing even deeper losses and mayhem in the markets. A fifth was wiped off London Footsie shares. In Tokyo the Nikkei-225 index lost 10% of its value in a single week.

What's fascinating is the prevailing attitude amongst the general public that the crisis has past and that disaster has been averted.

We've watched as the world’s wealthiest nations responded to the crisis, acting in solidarity, with a rescue package of $12 trillion, equal to a fifth of the entire world’s annual economic output.

Capital injections have been pumped into banks in order to prevent them from collapse. In order to stabilize the financial system, central banks pumped over $5 trillion of liquidity support into the system to soak up toxic assets and guarantee bank debt.

In order to finance this and prevent a second Great Depression, the G-20 issued an avalanche of debt, equal to 10% of their combined GDP in 2009, the biggest since the Second World War.

The IMF now calculates the G-20’s debt will reach 118% of GDP in 2014, up from about 80% before the crisis.

Essentially, the British and US governments have bankrupted their national treasuries in a desperate effort to preserve the wealth of their financial elite.

And, for the moment, many believe the efforts have succeeded.

But tremors from the collapse of the House of Lehman have destabilizing the weakest link in the eurozone’s economy. The sharp downturn in global shipping rates has taken its toll on Greece, which leads the global shipping industry.

With Greece's top income earners - shipping and tourism - slumping badly, gunslingers in the world’s money markets have focused their sights on the sovereign bond market of Greece, which trades a paltry $1 billion per day. Speculators have bid-up the cost of insuring Greek debt to a record high.

A frenzy of fear has been whipped up over Greece’s budgetary woes, and speculators have profited by short selling the euro, against all other major currencies.

Greece’s debt totaled €298 billion at the end of last year, equaling 120% of its GDP. The size of its debts is five times that of Moscow’s when it defaulted in 1998. The links go deeper, to German banks holding €500 billion in loans outstanding to Greece, Ireland, Portugal and Spain.

Strategists at Deutsche Bank are stirring up the animal spirits, by warning that the escalating cost of insuring against debt defaults by Greece might be a “dress rehearsal” for a similar attack on the British Gilt market. The UK is running a budget deficit at 13% of GDP this year, exceeding that of Greece. As a proportion of GDP, the budget deficit is the largest ever outside wartime. Britain sold a record 225 billion pounds worth of Gilts last year, but that was almost entirely monetized by the Bank of England via its asset purchase scheme to pump money into the economy.

With the Bank of England’s quantitative easing now on hold and more than 200 billion pounds worth of gilts to be auctioned this year, the British gilt market could be a ticking time bomb, ready to explode at the slightest hint of a serious outbreak of inflation.

It is estimated that European governments will need to borrow 2.2 trillion euros (19% of GDP) from the capital market in 2010, in order to finance large deficits and roll-over existing debt, the largest borrowing binge in decades. Gross borrowing (including maturing and new debt) is projected to be largest in France (454 billion euros), Italy (393 billion euros), and Germany (386 billion euros).

The bond vigilantes have set their sights on sovereign debt and the next chapter in the financial crisis of 2008 is only starting to play out.

If you read the newspaper accounts of the day, in 1932 the prevailing attitude was that the financial crisis of 1929 had been contained and the crisis had past.

The similarities to the attitudes of today are striking.

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Flashmob

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In addition to the post on the Olympic medals (see post below this), I thought I would post about the flash mob of Olympic proportions that took place in downtown Vancouver just before the Games got going.

I had heard it was coming but wasn't sure what to expect and I didn't have my camera on hand that day. I came across a youtube video of the event (it's posted below). Check it out, it's kinda cool.

Organizers from Imagine-1-Day, a charitable organization, gathered over 3,000 people on Robson Street between Bute and Thurlow for a choreographed dance. Besides disrupting traffic with a joyous, happy crowd (a trend over the Olympics), it was a sight to behold.

The organizers set things up through Facebook and posted video of the dance months in advance so participants could learn it. The crowd then gathered and danced to Martha and the Vandellas' 'Dancing in the Street.' Here is the link, the video doesn't quite fit the page below.

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Olympic Medals

Still sorting through pictures from the Olympic Games for you.

One of the most popular Pavillions of the Games was the one put together by the Royal Canadian Mint.

The main attraction for this Pavillion was the fact that, as makers of the Olympic Medals, the Mint had those medals on display.

And not only were the medals on public display, but for the first time in Games history the public could physically handle and touch the Olympic Medals.

As a result the RC Mint Pavillion had daily lineups of 6-8 hours long and was one of the most sought out locals.

Each medal is unique in that the front of the medal contains a portion of these designs. If the Canadian hockey teams held their gold medals together, you would actually be able to see this pattern form...


The Bronze Medal




The Silver Medal






The Gold Medal






Three medals on display but not for touching

Also on display was this huge gold coin put out by the Mint a couple of years ago.

At the time is was marketed at the "Million Dollar Gold Maple Leaf". The face value is one million dollars, but the actual cost (at the time) was about $2.8 million dollars. At today's prices, the coin is worth just under $4 million dollars.

The coin is 21 inches in diameter and contains 100 kilograms of gold (3,528 ounces or 220 pounds).

The coin was conceived as a showpiece to promote the RCM's new line of 99.999 percent pure, one-ounce gold maple leaf bullion coins...

Black Swan

Notwithstanding recommendations from the likes of the CD Howe Institute, the reality is that the Bank of Canada is going to have to dramatically increase the bank rate here very shortly.

StatsCan reports that growth was a blistering 5% in the last few months of 2009, way above expectations. Virtually every mainstream economist is now saying that the Bank of Canada has every justification it needs to start in on a string of interest rate increases, starting in about 3 months.

The surging economy "increases the odds the Bank of Canada will begin to hike interest rates in July and stay on that path in the following decisions,” says the Bank of Montreal.

Rates are going up.

The only question is: 'how fast' and 'by how much'.

Which brings us back to the issue of sovereign debt and Greece.

The image posted above are the Debt vs. GDP ratios of the world's larger economies according to the Wall Street Journal (click on image to enlarge).

Note that Greece's debt versus GDP sits at a shade over 125% versus the USA's near 100% ratio. Japan comes in as the debt champion at a 200% debt load versus GDP.

So... ummm... exactly how is the western world all that different from the Greeks?

The answer is that the Greeks don't have a currency that they can devalue in order to help inflate themselves out of their debt.

Japan would be toast right now if they were in the same situation with a currency like the Euro that they couldn't manipulate.

Because the Greeks don't have this ability, it has increased the perception of the risk that Greece could possibly default. That's what's making it very costly for Greece to sell bonds in order to fund itself.

What's amusing is watching the central banks in the UK and Japan scramble to avoid becoming the next Greece. The British Pound has taken a brutal beating as some speculators believe England may be the next country to suffocate in their own debt.

But as we noted two days ago, there is no smugness in watching what is playing out overseas because even Ben Bernanke and Alan Greenspan are concerned.

And with good reason. USA government debt is 90% vs. GDP as opposed to the 130% debt vs. GDP ratio in Greece. Anyone who thinks the US is at a lower risk than Greece is only deluding themselves. It's much like telling yourself that you are at a lower risk of having a heart attack when you are 290lbs versus being 330lbs!

The biggest worry is that investors begin to panic over the sovereign debt worries of several countries all around the world.

This could potentially trigger a wild fire as the world realizes that all of the modern economies minus China have the same problem.

The subprime crisis is a good example of watching how one tiny domino can make them all come tumbling down. If the debt spreads begin to blow out on the sovereign debt of several countries like the spreads blew out in the United States with mortgage backed securities back in 2008, then we are going to see one hell of a fiscal tidal wave.

As we have already noted... Bernanke and Greenspan both see the threat and have been moved to comment publicly on it.

Greenspan keeps daily watch on the interest rate on 10-year Treasury notes and 30-year Treasury bonds and calls them the "critical Achilles' heel" of the economy.

And that's because those spreads could spin wildly out of the control of his buddy, Ben Bernanke, at a moment's notice.

It represents the quintessential 'black swan' occurrence; those high-impact, hard-to-predict events that are beyond the realm of normal expectations.

But I ask you... would such a scenario really be all that unexpected right now? And just how stupid is it if you don't make moves to protect yourself?

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Hike Rates Often and Fast

You may recall that back on February 10th, we noted that the heads of the country's six largest banks had privately told federal government policy makers that they fear the wide-ranging economic fallout of a U.S. style binge-and-collapse in housing hitting Canada.

These pressures lead to the change in Canadian mortgage rules that were announced on February 16th.

It may interest you to know that those aren't the only pressures being exerted for change.

The C.D. Howe Institute put out this paper last week urging the Bank of Canada to raise rates aggressively once its rate hike moratorium ends on June 30.

The report stated:

• The Bank (of Canada) should keep its conditional commitment, but should thereafter raise the overnight rate sharply by 50 basis points at every announcement date (after June 2010) until mid-2011.
• If inflation continues to rise, the BoC should be prepared to hike rates proportionately more. This assertive policy style is based on the 'Taylor Principle' - after U.S. economist, John B. Taylor.
• Heading off inflation will necessitate “aggressive” rate increases (50 basis points per BoC meeting), starting this summer.

This report comes on the heels of the latest rate hike by the Reserve Bank of Australia which raised it's central rate by a quarter percent to 4%.

Canada's rate, by contrast, remains at 0.25%.

If the advice were implimented, you would have a five year rate rising to near the historical 20 year average of 8.25%.

You can almost hear the ticking sound now, can't you?

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An unequivocal warning from Bernanke & Greenspan

Well, the Olympics are over and I'm exhausted.

I'll have comments on the experience and I have a ton of pictures for you, but I'll save that for later in the week.

For now, back to the main focus of the blog.

As I have repeated over and over again, the story of Vancouver Real Estate (and real estate in Canada) is tied to the story of interest rates.

If interest rates go up significantly, the real estate bubble will burst in spectacular fashion. If interest rates fail to rise, real estate will continue to climb in value at ridiculous rates.

And, as I have posted over and over again, I believe world events - particularly as they relate to sovereign debt - make significant, prolonged rate hikes unavoidable.

Naturally, I think interest rates will shoot up. That's why my advice to anyone who cares to hear it is to eliminate/reduce debt now and extract capital gains on real estate ASAP.

Reinforcing this position are comments made at the highest levels.

Last week, as reported in the Washington Times newspaper, US Federal Reserve Chairman Ben Bernanke delivered a blunt warning on U.S. debt and outlined how the stage is set for a Greek-style debt tragedy in the United States.

Now this is nothing new. Your dilligent scribe has been pounding that drum relentlessly.

But when the current and former Chairman's of the US Federal Reserve start saying it publically, you should stand up and take note.

From the article:

• With uncharacteristic bluntness, Federal Reserve Chairman Ben S. Bernanke warned Congress on Wednesday that the United States could soon face a debt crisis like the one in Greece, and declared that the central bank will not help legislators by printing money to pay for the ballooning federal debt.
  
  Recent events in Europe, where Greece and other nations with large, unsustainable deficits like the United States are having increasing trouble selling their debt to investors, show that the U.S. is vulnerable to a sudden reversal of fortunes that would force taxpayers to pay higher interest rates on the debt, Mr. Bernanke said.
  
  "It's not something that is 10 years away. It affects the markets currently," he told the House Financial Services Committee. "It is possible that bond markets will become worried about the sustainability [of yearly deficits over $1 trillion], and we may find ourselves facing higher interest rates even today."

Now the key element of this article is that Bernanke, for the first time, addressed concerns that the failure of the US to address debt will eventually force the Federal Reserve to accommodate deficits by printing money and buying Treasury bonds — effectively financing the deficit on behalf of Congress and spurring inflation in the process.

Interestingly, Bernanke declared flatly that the Federal Reserve won't do that. "We're not going to monetize the debt," Bernanke said.

If the Fed, in fact, stands firm on this then Congress will have to slash and cut like never before. But the problem is that no one believes Congress has the resolve to do that.

Even Alan Greenspan (the former Chairman of the US Federal Reserve) is cited in the above article stating that "Congress and the White House have been unable for years to control spending by making tough decisions to raise taxes or cut spending."

This lead Greenspan to note that the current situation is so dire that he believes we could see a sudden, sharp increase in interest rates at any time. Greenspan keeps daily watch on the interest rate on 10-year Treasury notes and 30-year Treasury bonds and calls them the "critical Achilles' heel" of the economy.

Thus the stage is set for a Greek-style debt tragedy in America.

And you can bet the farm that, when it comes, a 'sudden, sharp' increase will occur in hours, not days or weeks. It means there won't be any time to move out of your variable interest rate mortgage and into a fixed term mortgage at a rate anywhere near what it is now.

Now I ask you to consider... if Ben Bernanke is adament that the debt situation and high interest rates are "not something that is 10 years away" and Alan Greenspan fears a "sudden, sharp increase in interest rates at any time", then I would humbly suggest that higher interest rates are not the vague, distant possiblity that so many Vancouverites keep telling themselves it is.

To ignore the threat of looming high interest rates and dismiss them as simple fear-mongering is foolish rationalization that can completely destroy you financially.

The warnings are being issued almost on a daily basis now.

When the time comes, you can rest assured the central bankers and your local banker will adopt the same mindset that lies behind this telling quote from Ben Bernanke uttered on October 15th 2007...

"It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions."

There will be no bailout for the common borrower.

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Oh baby... Canada: Men's Hockey Gold Medal Champions

At the start of the third period, I settled down in a cafe at Broadway and Fir Street in Vancouver.

So... where were you when Sid the Kid scored the goal of a generation?

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