Sunday Post #2: The European Debt Crisis Explained

Blogger Gonzalo Lira has produced an excellent post trying to make the European Debt Crisis understandable for the average joe.

It also succinctly explains why more Quantitative Easing is almost assured.

The European Debt Crisis: This is what happened

In 1999, the Europeans implemented a common currency, the euro. They did it in order to improve trade between the eurozone nations, and thus bind the European countries closer together.

This new currency was centrally managed—that is, there was a single issuer of this new currency. Which of course makes sense: In the United States, you don’t have 50 states issuing currency—you just have the Federal Reserve, issuing dollars for the entire country.

Same with Europe: Thus the eurozone - the zone of countries that had the euro as their currency. This new currency was managed by the European Central Bank - the ECB - out in Frankfurt, Germany. The ECB’s primary concern - like all central banks - was making sure that the currency it was supervising did not lose value. That is, it made sure that inflation stayed below 2% per year.

However, just like in the U.S., though there was a central bank - in this case the ECB -each of the member states of this European Money Union (from where we get the acronym “EMU”) - could issue its own debt.

So far, so good: The euro was printed and managed by the ECB in Frankfurt. The individual countries - pain, France, Germany, Holland - could each issue their own debt, and of course manage their own government budgets.

Now, the strongest economy in Europe is Germany’s. For our purposes, the reasons why of this don’t matter. What matters is, Germany’s cost of borrowing was the lowest of the eurozone.

This makes sense: If I make a million bucks a year, and borrow $10,000 for expenses and stuff, I’m going to get a pretty good interest rate from my credit card company or my bank. You know how lenders are: They lend you an umbrella when it’s sunny, then take it away when it rains. Since I don’t need to borrow the ten grand, all the lenders will trip over themselves to lend me money at extremely low rates, because they know I’m good for it. I won’t default on the debt.

Same with nations - and same with Germany: German debt was always cheap, in the 1%–3% range, because Germany was good for it. After all, it’s the fifth largest economy in the world, and the biggest within the eurozone, racking trade- and fiscal budget surpluses year after year. So who wouldn’t feel comfortable lending money to the Germans? Nobody - ‘cause see the Germans? They pay up - always.

But here comes the problem: Banks felt very comfortable lending money cheaply to Germany. Germany was a member of the eurozone. Therefore, lenders assumed that the other countries in the eurozone were going to be as good a credit risk as Germany.

So the banks lent money to the other, weaker countries in the eurozone at the same rates of interest as they lent to Germany.

Imagine you have a great credit rating - so the bank gives your kid a $100,000 consumer line of credit, just because he happens to live in the same house as you do. The bank lends your kid the money because it says there’s a “tacit promise” that if your kid doesn’t pay back the money, you will.

Crazy, right? Right - but that is the core problem: Countries like Portugal, Italy, Ireland, Greece and Spain - countries whose initials spell out the acronym “PIIGS” - could go into debt at the same rates of interest as Germany, just because they shared the euro as a currency.

The economies of the PIIGS were not as sound as Germany’s - but the lenders treated them as if they were. Not only that, the lenders assumed that, if any country got into trouble - i.e., if any one of the PIIGS couldn’t pay back their loans - the eurozone as a whole would be good for the debt.

This was great for the PIIGS. Because it meant cheap and plentiful loans, with which they could go out and buy stuff.

So they did: The PIIGS went into debt - too much debt  - while the banks gave them all the slack they needed. Which makes complete sense: If before 1999, these countries were borrowing at (say) 6% or more, and all of a sudden their cost of borrowing drops in half, what will they do? Go into debt!

Which is what they did - massively.

And what did these countries do with the debt? Create a false sense of prosperity!

This in a nutshell is what happened between 1999 and 2010, when the Greek crisis first erupted: During those “boom” years (which were really no more than junior going crazy with the credit card), the various countries of the eurozone went into massive debt, in order to both fund a social safety net, and cut taxes on their citizens.

In other words, something for nothing, bought and paid for with cheap debt. Kind of like America. 

Though they now don’t want to admit it, the Germans encouraged this over-indebtedness, by the way - as did the French. Why? Because with this false sense of prosperity, the over-indebted nations bought German and French goods and services. German and French banks were at the forefront of lending money to the PIIGS - which essentially made the whole scheme nothing more than vendor financing on a massive scale: I lend you money so that you can buy my products.

Just like a junkie setting up an addict, or a predatory credit card company giving you teaser rates, the Germans and the French - via their banks and government institutions—gave the weaker economies all the incentive in the world to go into massive debt, and then go out and buy German and French products.

It was bound to end in tears. As is happening now. It all goes to the issue that all these countries are over-indebted. And that overindebtedness is being reflected in the sovereign bond markets.

Let’s take a slight detour, to explain what this means.

What Are Bonds? What Are Yields? And Why Do They Matter?

A bond is a bit of paper that is traded, just like stocks. But unlike a stock, which is a piece of ownership in a company, a bond is essentially a promissory note: You lend me money, and I give you this piece of paper where I promise to pay you back. The bond has a face value, and an interest rate. The person who buys the bond at the market price collects the interest, and receives the principal of the bond on maturation. A person can own a bond, or sell it to someone else, just like a stock.

Corporations issue bonds, in order to finance factories, expansion, whathaveyou. And governments issue bonds, in order to finance various infrastructure projects, as well as their deficit spending.

With all bonds, there are three pieces you have to understand: There is the face-value of the bond, there is the interest that the bond pays, and then there’s the effective return-on-investment of the bond—which is known as the yield.

The yield of a bond is what everyone pays attention to. The yield on a bond is a percentage value: It is the interest rate of the bond, times the face value of the bond, divided by the current price of the bond. The yield is inversely affected by the price of the bond: The higher the price of the bond, the lower the yield, and vice versa.

So you see, it’s a seesaw: When the yield of the bond is going up, then the price of the bond is going down. When the yield is going down, then the price of the bond is going up.

Let’s see an example: Say I sell you a bond for €1,000, paying 5% interest per year. The bond is trading in the open markets at €900. So 5% times €1,000, divided by €900, equals 5.55%—the yield has widened, as they say in the biz. That is, the yield has gone up, since the price of the bond has gone down.

But say instead that the bond has risen in value, which of course can happen: Say the price is up to €1,100 per bond. So 5% (the original interest) time €1,000 (the face value), divided by €1,100 (the current price, gives us a yield of 4.54%. The bond’s yield is said to be narrowing.

Since bonds all have different conditions insofar as maturation, interest rate, etc., it is simpler and quicker to speak of changes in yield only: “The yield is rising” means that the price of the bond is going down.

Why is the price of a bond going down? Because investors think that the person who owes the debt—the bond issuer—is not necessarily good for the debt. That is, they think the debtor might default. So the owners of the bond sell it at a lower price, because they don’t want to have the risk of a default.

Why does a bond go up in price? Because the debtor might show signs that it won’t default—so the high yield makes it attractive for a buyer to pay more for the bond, thereby driving up the price, thus paradoxically lowering the yield of the bond.

So what does this mean for countries?

Well, when the yield of a government bond rises, it means that people are selling that country’s bonds. Take the above example of €1,000 bonds paying 5%. If the bonds are now at €900, the yield is at 5.55%, as per the above example.

Now, if the yield on that bond rises to 7%, what does that mean? It means that the bond is trading at distressed levels. Because for a €1,000 bond paying 5% interest to be yielding 7%, then the bond is trading in the €715 range. (The face-value price of €1,000 times 5% divided by a current price of €715 yields 7%.)

So say you’re a government, and you have to fund €1 billion for a bridge. You will issue bonds to finance the bridge, bonds that will pay an interest of 5% a year. In order to raise those billion euros, you have to sell not a million €1,000 bonds—you have to sell 1,400,000 bonds with a face value of €1,000.

And therefore, you have to pay interest on 1,400,000 bonds, instead of 1,000,000 bonds. And when these bonds mature—that is, when they have to be paid off in full—the government won’t be paying out €1 billion in principal: They’ll be paying out €1.4 billion in principal, on what was supposed to be a €1 billion bridge. Because bonds are paid full face value on maturation.

Thus a government’s cost of borrowing has risen. And it’s all expressed in the yield.

That’s why yields matter. And unfortunately, rising yields is what’s been going on with European debt: They have risen massively—because investors think there is a less likelihood that the bonds will be paid back in full.

Why does this matter? Because these nations are all relying on deficit spending: They spend more money than they bring in. So they need to issue more debt, in order to pay off their obligations, such as salaries, pensions, medical care, not to mention pay off the interest on the previous bonds they’ve already issued.

So in this situation, a country can get to the point where its bonds are selling at such a discounted value that it cannot issue enough bonds to simultaneously pay off their obligations and allow them to continue to function at their current level.

That is, countries can get to the point of bankruptcy—depending on how high the yields on their bonds rise.

Now, About Greece

This is what happened to Greece: Its cost of borrowing rose so much that they no longer had the ability to raise the cash to pay off all their obligations.

So starting in April of 2010, the so-called Troika—the International Monetary Fund (IMF), the European Central Bank (ECB), and the European Commission (EC, the executive arm of the European Union)—structured a bailout package, which was eventually passed through in June.

The bailout package of course had some conditions, which the Greeks agreed to in order to get the money—and which they then promptly failed to live up to.

The details aren’t that important for the purposes of this discussion. What matters about the Greek Drama is two-fold:

• One, Greece is a small economy within the EMU—about 2% of the eurozone’s GDP—so therefore its debts, while massive, were all-in-all manageable.
• Two, the bailout of Greece was supposed to be swift and decisive, and act as a signal to the markets that the Troika would defend the eurozone, and not allow any of its members to go bankrupt. In other words, Greece was a firewall, to protect the other economies.

But the problem was, the Troika dithered.

Why did they dither? Because it became immediately clear that the only way to fix the Greek situation was by debt haircuts—and haircuts were impossible, because they would bankrupt the European banks. And the American ones too.

Fear of a Credit Event

Part of any debt restructuring—be it a poor man’s bankruptcy, or the bankruptcy of a large corporation—is debt haircuts: That is, lenders get less than the 100% of the debt that they are owed.

Say I owe $10,000 to a car dealership for a new car I bought last year, and I go bankrupt. The dealer will get a percentage of the money I have left after everything (including the car) is liquidated. But they won’t get the full $10,000 that I owe them, obviously, because I’m bankrupt: I owe more than I have.

Same with nations: Greece owed more than they had—so Greece’s lenders were going to have to take a haircut. That is, they would have to take less money than they were owed.

This is what’s known as a “credit event”.

This was a problem.

If there was a haircut on Greek debt—a credit event—then the banks and insurance companies which held the debt (predominantly German and French banks) would have to write a loss on those loans. Huge losses. Losses bigger than their capital.

Thus these banks would go bankrupt, if there was a credit event in Greek debt.

Even if they didn’t go bankrupt, these financial institutions would have to sell off other bonds, in order to raise the cash to stave off bankruptcy.

This massive sell-off of sovereign bonds would have a contagion effect: In order to cover their Greek bond losses, banks would have to sell their Italian, Spanish and French bonds—at a loss—so as to raise the cash to stay solvent, which would in turn make Italian, Spanish and French debt toxic.

In other words, a domino effect.

Furthermore, American banks—which don’t own much in the way of PIIGS debt directly—have written a lot of insurance on those sovereign bonds: The famed credit default swaps (CDS). Bank of America especially has made a lot of money selling CDS’s on those debts in 2008, 2009 and 2010, as has JPMorgan.

If those sovereign bonds defaulted, those American banks would have to pay off these CDS’s—

—and thus they would go bankrupt too!

Everything is connected: A credit event in Greek bonds would trigger credit events in Italian, Spanish and eventually French bonds, which would bankrupt European banks as well as American banks—

—basically, a repeat of the 2008 Global Financial Crisis, only bigger, and without the happy ending.

This is why the Troika dithered. They talked tough, and they even put the gun to Greece’s head: Pass these austerity measures, or else no bailout money. But they never pulled the trigger and let Greece fail—because if they did, the European and American banking sector would collapse.

Since the Greek financial hole grew bigger between 2010 and 2011—because the Greek’s didn’t live up to most of their promises—a second bailout package had to be created.

Again—more dithering. This time, the dithering was because the Germans in particular feel that they are propping up spendthrift countries—and nobody likes to feel like the chump who’s paying for other people’s good times.

There is enormous political pressure on Merkel to not save Greece. The people pressuring Merkel don’t realize what will happen if Greece collapses.

So then last October 28, the Troika plus German Chancellor Angela Merkel and French President Nicolas Sarkozy finally came up with a “solution” to the Greek Drama.

“Solution” is used in the loosest possible sense of the word: In the weeks previous to the Oct. 28 announcement, the Europeans had been going around the world, hat in hand, asking emerging markets—especially China—to fund their bailout facility. They had been politely refused—because they’re not stupid: They saw that the bailout facility—the famed European Financial Stability Facility (EFSF)—was just a lot of smoke and mirrors, essentially throwing good money after bad.

Through some clever accounting tricks and some not-so-clever baldfaced lies involving accounting standards, the Europeans managed to cobble together a workable EFSF which could give Greece and potentially one of the other PIIGS a lifeline.

But in order to show that they were “serious”, the Troika and Merkel and Sarkozy insisted that the Greeks agree to a serious of painful austerity measures.

The big news, however, was that this second bailout of Greece included haircuts on Greek debt. The advertised number on the Greek haircuts was fifty percent! (Though when you looked more closely at the details, it was more like 20%.) The Oct. 28 deal stipulated that the haircuts on the Greek debt would be voluntary—“voluntary” as opposed to “forced”, which would have triggered a credit event)—

—but then on the following Monday, Georgios Papandreou, the Prime Minister of Greece, threw a monkey wrench into the Rube Goldberg contraption that is the Second Greek Bailout Package:

G-Pap called for a popular referendum of the bailout!

All hell broke loose.

The eurocrats famously do not like going to the public to ask for their support—they like to dictate instead. Why? Because they consistently lose the popular vote, to the point where they no longer bother putting things up for a vote.

For Papandreou to put the austerity package to a popular referendum meant that it would likely not pass—because no citizenry likes to be asked if they want their government to give them less services and entitlements (duh!).

Therefore, the Troika suspended the €8 billion tranche of the first bailout package that the Greeks were supposed to get in November.

Without that tranche, Greece goes bankrupt on December 15.

So Papandreou backtracked on Thursday, November 3, and said that there would be no referendum.

But the damage was done: The bond markets got so freaked out that they started looking at the next weak link in the European chain.

Enter Italy

In mid October, Italian debt was yielding about 3.5%—very respectable. Italy, furthermore, has a very large debt, but it is far from insolvent: In fact its government regularly meets its budget with a bit of a surplus. Balance of trade is okay, growth is low but in line with the rest of Europe. And aside from periodice sex scandals, the Berlusconi government is fairly competent and efficient.

Overall, Italy is in pretty good shape.

But it needs more debt to pay off previous debts, and to shore up its economy, which is in a recession much like the rest of the world’s. It’s debt load is growing, but strictly because its government is spending to prop up the sagging Italian economy.

Nevertheless, after the Greek fiasco, the bond markets turned on Italy.

On the Monday after the Greek Week (Nov. 7), Italian yields rose from their 5% level—then spiked on Wednesday to above 7.6%, which is potentially catastrophic. Why catastrophic? Because at those levels, no advanced economy can finance itself—not to mention the fact that certain derivatives require that yields stay below certain thresholds. If they remain above certain yield numbers for a set period of time, they are considered credit events—which triggers CDS’s, which lead to bank bankruptcies.

So those yields have to go down now—fast.

This crisis in Italy has led Silvio Berlusconi to resign, once austerity measures are passed. His resignation will likely calm the markets—for a bit.

What is striking is the inanity of the eurocrats’ response. They come up with vague and flimsy packages, and a lot of flowery rhetoric—you should have just heard Sarkozy, after the Oct. 28 deal, going all French Literature on the thing.

But the Europeans don’t seem to understand that they have a nuclear weapon at their disposal—which they refuse to use.

And that nuclear weapon in the European Central Bank.

Fear of Monetization

The easiest way to fix this entire debt situation would be for the European Central Bank to simply print up money, and go out and buy enough Greek and Italian debt to bring down their yields.

It wouldn’t even have to be very much—a mere €50 billion would do the trick. The fear that the markets would have of being caught on the wrong side of a trade against the ECB would be enough to keep the markets docile and quiet.

And this is where more QE is almost assured.

 You have to stabilize the patient, before you give him the treatment—not operate him for liver cancer while he’s still bleeding from a gunshot wound to the leg.

Having the ECB come in and decisely calm the markets—like the Swiss National Bank did a month ago—would be the best way to get the European house in order, and then implement the structural reforms and austerity measures that everyone agrees need to be implemented.

But the ECB isn’t stabilizing the patient. Why? Because the Germans are greedy.

If the ECB does a European version of Quantitative Easing, the Germans are afraid that their currency will weaken—which they do not want, because they are a creditor nation. If the euro’s value erodes, then Germany will have lost some purchasing power.

They are so afraid of the euro weakening—and thus the Germans losing a bit of their surplus—that they are making the other economies in the eurozone crash.

The Germans do not seem to understand that, if the nations of Europe go down, there will be no buyers for their goods and services—so they will suffer too.

Thus the ECB sits there, while this Greek problem becomes now an Italian problem—

—and soon a French problem: The yields of French bonds are rising precipitously, and already one French bank, Credit Agricole, is in trouble over the Greek Drama. It’s only a matter of time before the big French banks start tumbling—and then France itself—unless the bond markets are calmed.

So What’s Going To Happen?

At some point the Germans are going to come to their senses, and the ECB will start buying up European sovereign debt, calming the markets. Greece and a couple of other small and/or weak eurozone countries exit the European Monetary Union, go back to local currencies, devalue, and then rebuild their economies; say Greece, Portugal, Spain and maybe Italy. And finally, austerity measures are imposed, fiscal budgets are put on a sounder footing, and things right themselves in a few years.

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Sunday Post #1: Party Pooper

There will be a second post today on the events taking place in Europe. Please check back later.

Back on November 5th, 2011 there was a great little discussion on the Vancouver Real Estate Ancedote Archive (VREAA).

VREAA had picked up on a comment made regarding a Vancouver Sun story titled 'To buy or rent: that is the question'. The comment (made by r_dub71) embodied the mantra of the real estate bulls:

“You lazy spendthrifts have no one to blame but yourselves... I got on the “property ladder” 14 years ago using my RRSP savings to buy a 500 sq.ft. condo, then I moved up to a 2 bedroom, then a townhouse, then a 1/2 duplex, and now am the proud owner of my dream 4 bedroom westside home for my family. Hard work and saving money, keeping my head down and saving and investing like previous generations. It worked then, it still works now. It is doable. Great condos are available in Gastown right now starting at $200k, not that much different than the $165,000 I paid for my first place Downtown in 1997. But everybody wants the easy life, no one wants to work for it!”

Suspend for a moment you desire to debate the validity that buying a property, sitting on it for a year, and then flipping it for a 25% (or greater) profit - without making any improvements whatsoever -somehow classifies as "working for it".

Climbing the 'Property Ladder' is a crucial component of the Real Estate PR machine that says your home is a route to wealth creation.

And the escalation of the housing bubble these past 14 years is what has given it validity.

The author of this ancedote tells you that he took $165,000 in 1997 and has parlayed it into the ability to buy a $2 - 3 million home today. And while we aren't told how much of that $2-3 million is a mortgage, his point is that he has been able to leverage up (via the property ladder) to the point that he can assume a mortgage for such a high valued property.

But as with anything, it is not as simple as just buying into the market, scraping by on Kraft dinner, making the monthly mortgage payments and then becoming a millionaire... althought this is EXACTLY how it is portrayed.

One has to look no further than the R/E page of the this week's Globe and Mail newspaper to understand this.

The G&M hilights the selling history of a condo in South Vancouver and you can easily see the midas touch has not necessarily graced every property you buy.

This particular one-bedroom plus den suite at Retro Lofts near Hudson Street and Marine Drive sold brand new in 2004 for $215,900.

In 2007 it sold for $285,000.

Initially listed in mid September for $335,000, then reduced to $325,000, it sold after 55 days on the market this month for $316,500 - a $100,600 gain over 7 years.

It is really possible to parlay a $100,000 gain over 7 years into the necessary leveraging upwards over 14 years so that you are able to hold a mortgage on a dream 4 bedroom westside home for your family?

The person who posted the anecdote in the Vancouver Sun claims that "hard work and saving money, keeping (his) head down and saving and investing like previous generations" is the tried and tested true formula for obtaining that dream home.

For those who may be wooed by this 'tale' of success, consider this.

The only way r_dub71 will have moved up the property ladder is by buying the maximum house he could afford and taking on the maximum allowed mortgage with each 'transaction'.

Today he is, no doubt, still sitting on a 30 year mortgage for which he continues to scrape and save to maintain as a debt serf.

But it didn't have to be this way.

In 2001 r_dub71 probably made the first of his four sales on the way up the 'property ladder'.

At the time Gold was worth $225 an ounce and Silver was selling for $2 an ounce.

If he had taken his original $165,000 and invested it in Silver, r_dub71 could have bought 82,500 ounces of the shiny metal.

By not buying back into the real estate market, r_dub71 could have spent the last 10 years with a lot more disposable income to spend on his family.

Each month he would have paid half as much on rent as on his mortage. He could have used that extra money to enrich their lives, taken them on numerous vacations, or simply invested the extra money.

And his silver?

Today r_dub71's investment would be worth almost 3 million dollars ($2,887,500 to be exact assuming Silver at $35/ounce) not to mention another $1 million if he had invested the money he had saved over the years by renting.

Today he could have bought that westside dream home outright and not have a mortgage to pay.

But why do that when you could toil for a decade and a half on the 'property ladder' and still be a debt serf?

Can you imagine how left out you would feel at cocktail parties as everyone else talks about real estate and you have nothing to contribute?

Climbing the 'property ladder' is not all that it's cracked up to be. There are many, far more effective means of wealth creation.

But pursuing those won't feed into the property bubble. And that's what the 'property ladder' is all about.

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Vancouver's SFH price now 3 times greater than that of New York City's

I was perusing the discussion forum over on the blog Vancouver Condo Info and vanpro has posted a link to an interesting Reuters story on home prices in the United States.

Titled 'Home prices decline in NYC area, rise in Boston', it seems home values are continuing their decline in much of the United States.  In the third quarter, values fell in almost three-fourths of all U.S. cities as Americans become more pessimistic about real estate values.

Perhaps the most interesting statistic is the fact that the median price of a single-family home in the New York metropolitan area has fallen another 3.6% and currently sits at $389,600.

As vanpro notes, metropolitan New York has a population 6 TIMES larger than the entire Greater Vancouver region, which sits on way less land than we have here.

Factor in the fact New York is still one of the great financial centres of the world with incomes and wealth way beyond that of Vancouverites and you have a situation where a Vancouver SFH sells for 3 times that of the New York SFH, which is nothing short of astonishing.

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Remembrance Day November 11, 2011

We pause to remember... and say, "Thank You."

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Email: village_whisperer@live.ca

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'Some Things You Should Know About China' - Charles Hugh Smith

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

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

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Some Things You Should Know About China

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

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

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

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

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

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

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

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

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

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

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

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

Which brings us to point 2:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why We Should All Be Very Skeptical on China

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

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

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

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

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

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Real Estate never goes down... WAIT!... This just in...

How's this for a twist.

As noted by our fellow blogger Fish, the British Columbia Real Estate Association (BCREA) predicts home prices in Vancouver will decline in 2012 as supply outstrips demand.

According to the Canadian Real Estate Magazine, who headline 'Vancouver home prices to decline in 2012', the BCREA's fourth quarter housing forecast is calling for a 2.5% decline in the average residential price next year... with detached homes leading the drop.

Must be a buying opportunity, right?

Of course this forecast from the BCREA comes after a stunning month of September wherein not one single new home sold on the west side of Vancouver.

This was followed up by the month of October in which the Real Estate Board of Greater Vancouver (REBGV) advised that sales for the month ranked as the the 2nd lowest in the past 10 years (click image to enlarge):

Toss in today's revised negative economic forecasts from both federal Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney and suddenly you get a deep sense of foreboding that all may not be well in the land of the ever-appreciating real estate myth.

Soon we will add in a pinch of panic liquidations from debt stressed, China-based, Vancouver homeowners (see yesterday's post re: 'China's Residential Property Prices in Freefall')...

We will also mix in the first wave of Boomers whose retirement plans are wrapped solely around cashing in on the bubble-based equity of their real estate...

And suddenly you have a recipe for a perfect storm brewing.

Whocouldaknown?

What will tip the first domino.

Anyone?

Anyone?

Bueller? Bueller?

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"Residential property prices are in freefall in China" - Forbes

On Saturday we talked about how the Real Estate in China appears to be starting the process of bursting.

Coverage of this issue has been growing since early summertime.

In mid June the UK newspaper the Daily Mail ran a story titled 'China's ghost towns: New satellite pictures show massive skyscraper cities which are STILL completely empty'.

Recently we had this TV news story reporting the fact that property values in Shanghai are crashing:

And, as Forbes reported yesterday, the problem is not just limited to Shanghai but is spreading throughout China:

"Residential property prices are in freefall in China as developers race to meet revenue targets for the year in a quickly deteriorating market."

Forbes is reporting that China's largest builders began discounting homes in Shanghai, Beijing, and Shenzhen in recent weeks, and the trend has now spread to second- and third-tier cities such as Hangzhou, Hefei, and Chongqing.

In Chongqing, for instance, Hong Kong-based Hutchison Whampoa cut asking prices 32% at its Cape Coral project. 

Property Consultant Alan ChiangSheung-lai told the South China Morning Post that:

“The price war has begun.”

What started slowly at the end of summer has now turned into a rout. The middle of October is normally a good time for sales, but Shanghai developers started to slash asking prices instead.

Analysts expected falling property values to move China's Premier, Wen Jiabao, to relax tightening measures intended to cool the market. China has increased mortgage rates and put prohibitions on second-home purchases.

So far Wen Jiabao is unmoved.

After a State Council meeting on October 29, 2011 Mr. Wen affirmed the policy, stating that local authorities should continue to:

“strictly implement the central government’s real estate policies in the coming months to let citizens see the results of the curbs.”

The announcement turned an escalating drop in prices in mid-October into an earnest spree of panic selling over the past 15 days as desperate developers begin competing among themselves to unload inventory.

Over the past week and a half stunning price cuts are turning up everywhere. One builder — Excellence Group — even said it would sell flats in Huizhou at its development cost.

Citi’s Oscar Choi believes prices will decline another 10% next year, but that’s a conservative estimate. State-funded experts are far more pessimistic. For example, Cao Jianhai of the prestigious Chinese Academy of Social Sciences sees price cuts of 50% on homes if the government continues its cooling measures.

If China's 'approved' analysts are saying prices could halve in a few months; you can be rest assured they believe the eventual sell-off will be worse.

Legendary investor Jim Chanos has long been bearish on the China Real Estate market and has said that China will be “Dubai times 1,000—or worse”. He has said that what will play out is the unwinding of “the biggest housing bubble ever created”.

Anyone who thinks this will not be felt in North America is simply deluding themselves. As Time has noted:

"if the bubble pops, it will have serious consequences in the U.S. America sold $92 billion in goods and services to China last year. If China succeeds in moving away from its model of cheap land and cheap capital and makes a smooth transition to an economy based more on domestic demand, hallelujah. But if Chinese land prices plummet, there will be less demand for raw materials and a steep decline in world commodity markets and global trade in general."

And as this blog wrote on Saturday - when China's Real Estate values collapse, many of China's investors will have serious credit problems. As those credit problems mount, assets will have to be liquidated to pay debts. Given the choice between liquidating assets at home and liquidating assets abroad... assets abroad will most often be liquidated first.

Does anyone seriously believe that Vancouver won't be significantly affected by a rash of Asian owned property liquidations in our city?

Anyone, besides Ozzie Jurock, that is.

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Correcting the ‘fairy tale’: A Navy SEAL’s account of how Osama bin Laden really died

Completely off topic from what is normally posted here, but interesting notwithstanding.

A Navy Seal has come forward and offered a different account of the events that transpired when Osama Bin Laden was executed and is highly critical of the political attempts to leverage the PR value of the event.

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Correcting the ‘fairy tale’: A Navy SEAL’s account of how Osama bin Laden really died

Forget whatever you think you know about the night Osama bin Laden was killed. According to a former Navy SEAL who claims to have the inside track, the mangled tales told of that historic night have only now been corrected.

“It became obvious in the weeks evolving after the mission that the story that was getting put out there was not only untrue, but it was a really ugly farce of what did happen,” said Chuck Pfarrer, author of Seal Target Geronimo: The Inside Story of the Mission to Kill Osama Bin Laden.

In an extensive interview with The Daily Caller, Pfarrer gave a detailed account of why he believes the record needed to be corrected, and why he set out to share the personal stories of the warriors who penetrated bin Laden’s long-secret compound in Abbottabad, Pakistan.

In August the New Yorker delivered a riveting blow-by-blow of the SEALs’ May 1, 2011 raid on bin Laden’s hideaway. In that account, later reported to lack contributions from the SEALs involved, readers are taken through a mission that began with a top-secret helicopter crashing and led to a bottom-up assault of the Abbottabad compound.

Freelancer Nicholas Schmidle wrote that the SEALs had shot and blasted their way up floor-by-floor, finally cornering the bewildered Al-Qaida leader:

“The Al Qaeda chief, who was wearing a tan shalwar kameez and a prayer cap on his head, froze; he was unarmed. ‘There was never any question of detaining or capturing him—it wasn’t a split-second decision. No one wanted detainees,’ the special-operations officer told me. (The Administration maintains that had bin Laden immediately surrendered he could have been taken alive.) Nine years, seven months, and twenty days after September 11th, an American was a trigger pull from ending bin Laden’s life. The first round, a 5.56-mm. bullet, struck bin Laden in the chest. As he fell backward, the SEAL fired a second round into his head, just above his left eye.”

Chuck Pfarrer rejects almost all of that story.

“The version of the 45-minute firefight, and the ground-up assault, and the cold-blooded murder on the third floor — that wasn’t the mission,” Pfarrer told TheDC.

“I had to try and figure out, well, look: Why is this story not what I’m hearing? Why is it so off and how is it so off?” he recounted. “One of the things I sort of determined was, OK, somebody was told ‘one of the insertion helicopters crashed.’ OK, well that got muddled to ‘a helicopter crashed on insertion.’”

The helicopters, called “Stealth Hawks,” are inconspicuous machines concealing cutting-edge technology. They entered the compound as planned, with “Razor 1″ disembarking its team of SEALs on the roof of the compound — not on the ground level. There was no crash landing. That wouldn’t occur until after bin Laden was dead.

Meanwhile, “Razor 2″ took up a hovering position so that its on-board snipers, some of whom had also participated in the sea rescue of Maersk Alabama captain Richard Phillips, had a clear view of anyone fleeing the compound.

The SEALs then dropped down from the roof, immediately penetrated the third floor, and hastily encountered bin Laden in his room. He was not standing still.

“He dived across the king-size bed to get at the AKSU rifle he kept by the headboard,” wrote Pfarrer in his book. It was at that moment, a mere 90 seconds after the SEALs first set foot on the roof, that two American bullets shattered bin Laden’s chest and head, killing a man who sought violence to the very end.

President Obama stepped up to a podium in the East Room of the White House that night to announce bin Laden’s death. That rapid announcement, explained Pfarrer, posed a major threat to U.S. national security.

“There was a choice that night,” Pfarrer told TheDC. “There was a choice to keep the mission secret.” America, Pfarrer explained, could have left things alone for “weeks or months … even though there was evidence left on the ground there … and use the intelligence and finish off al-Qaida.”

But Obama’s announcement, he said, “rendered moot all of the intelligence that was gathered from the nexus of al-Qaida. The computer drives, the hard drives, the videocasettes, the CDs, the thumb drives, everything. Before that could even be looked through, the political decision was made to take credit for the operation.”

And in the days that followed, as politicians sought to thrust their identities into the details of the bin Laden kill, the tale began to grow out of control, said Pfarrer.

“The president made a statement, and as far as that goes, that was fine, that was the mission statement,” he explained. “But, soon after … politicians began leaking information from every orifice. And it was like a game of Chinese telephone. These guys didn’t know what they were talking about. Very few of them had even seen the video feed.”

Pfarrer suggests that much of the misinformation was likely born out of operational ignorance, even among those sitting in the White House.

“One of the things that happened was that there were only a handful of people who know about this mission,” he said. “On the civilian side, there were only a handful of people in the situation room who were watching the drone feed. They were looking at the roof of a building taken from a rotating aircraft at 35,000 feet.”

“None of those guys, not a single one of them, had a background in special operations, with the exception of General Webb who was sitting there running a laptop,” Pfarrer went on. “No one knew or could even imagine what was going on inside the building. They didn’t know.”

“There was an alternative feed going to CIA headquarters where Leon Panetta sat there with the communications brevity codes [a guide sheet for the mission's radio lingo] in his lap and a SEAL off-screen by his side to be able to tell him what was going on,” he said. “But these guys, none of them, really knew what they were looking at.”

As the media raised more questions, officials gave more answers.

Whether or not bin Laden resisted ultimately developed into a barrage of murky official and unofficial explanations in the days following. And statements from as high as then-CIA Director Leon Panetta offered confirmation that the endeavor was a “kill mission.”

Pfarrer dismisses that assertion.

“An order to go in and murder someone in their house is not a lawful order,” explained Pfarrer, who maintains that bin Laden would have been captured had he surrendered. “Unlike the Germans in World War II, if you’re a petty officer, a chief petty officer, a naval officer, and you’re giving an order to murder somebody, that’s an unlawful order.”

Pfarrer also suggests some of the emerging claims were simply self-aggrandizing “fairy tales.”

“The story they tried to tell — it’s preposterous. And the CIA tried to jump in. About mid-June the CIA tried to jump into the car and drive the victory lap. There’s this whole stuff about the CIA guy joining the operation, the gallant interpreter — he couldn’t even fast rope!” exclaimed Pfarrer, referring to a technique for descending from an airborne helicopter.

“There’s this fairy tale about him walking out of the compound during the operation to tell crowds of Pakistanis to go home and everything’s OK.”

Pfarrer tried to put this in perspective: “Do you mean that during the middle of this military operation at night, with hovering helicopters over this odd house in this neighborhood, that people came out of their houses to ask what’s going on, instead of [remaining] huddled in their basement?”

“And I think that there were so many of these leaks that were incorrect, the administration couldn’t walk them all back,” Pfarrer explained. “And so, in the middle of May, they froze everything.”

It was that freeze-out that left Chuck Pfarrer with nowhere to turn for the real story but the SEALs themselves.

Seal Target Geronimo delivers an account of the night Osama bin Laden died with a level of detail unlike anything previously reported. Pfarrer bills the story as “absolutely factual.”

“That’s the other thing. I’m prepared for the White House to say, you know, ‘this is full of inaccuracies,’ et cetera,” offered Pfarrer. He told TheDC that in order to protect American interests, his book is “full of names that are made up, and it is full of bases that are not quite where they really should be.”

“But the timeline of my events,” he cautions, “and the manner in which it happened is 100 percent accurate. And they’ll know that.”

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Update: CME issues clarification

The CME has come out with a press release that has clarified their Friday Press Release that triggered significant concerns within the Gold/Silver community.

The CME has announced that their move was actually to DECREASE the initial/maintenance margins so as to decrease the size of margin calls on transferred MF Global accounts. 

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Meanwhile... on the topic of Real Estate in China

We continue to monitor the chatter on the move by the CME to increase margins to 100% for all commodities; a move many believe that will lead to widespread margin calls for small and medium investors on Monday and widespread liquidations after that. We will update when we have more to contribute.

Meanwhile the blog World Housing Bubble has brought our attention to another excellent article on Real Estate in Beijing, China.

Titled "Home price-cuts get steeper, more extensive in China", China's news agencies are telling us that there is now a stunning 22 months of inventory available for sale in Beijing.

• "According to the Centaline Property Agency, a supply of 9,152 new homes in October has added Beijing's total house supply to 118,000 units, a new high since June 2009. It would take 22 months to consume the inventory even if there were no new supply, said the agency."

Zhang Yue, chief analyst with Home Link China, a leading real estate agency, said with large trading volume and strict government curbs, Beijing is seen as bellwether for the market. He says price-cuts will get stronger in the fourth quarter and that in Beijing, 53 of this year's 90 new residential projects have already started to offer discounts.

As if that wasn't enough, Zhang Dawei, an analyst from the Centaline Property Agency, said the first-tier cities have come very close to the house price turning point.

• "If the government continues to maintain firm curbs on the real estate market, house prices will reach a turning point in March next year."

Chang Zhi, chief analyst of Century 21 China Real Estate, said he expects more real estate companies in the second- and third- tier cities to follow large firms' steps to cut house prices under the current policy.

• "A new round of home-price declines may come in one or two months."

China is no different from anywhere else.

As Real Estate values collapse people run into credit problems.  As credit problems mount, assets have to be liquidated to pay bank loans.

Given the choice between liquidating assets at home and liquidating assets abroad... assets abroad will most often be liquidated first.

The question is: how will Vancouver be affected by a rash of Asian owned property liquidations in our city?

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Prepare for a wild week coming up...

Stunning things are happening this weekend and next week could be wild for Silver and Gold.

First off the Commodities and Futures Trading Commission (CFTC) has released this vague statement regarding their enforcement investigation of the Silver markets:

• “In September of 2008, the Commission announced the existence of an enforcement investigation into the possibility of unlawful acts in silver markets. Since that time, the staff has analyzed over 100,000 documents and interviewed dozens of witnesses and obtained expert advice. It has been a long, detailed, and thorough investigation, and it continues in an appropriate and considered manner.”

Shortly afterward, on the blog King World News, CFTC member Bart Chilton gave a bombshell interview in which he has confirmed there is manipulation in the silver market and that there have been "violations of the Commodity Exchange Act". Chilton states that the manipulation should be "prosecuted to the full extent of the law."

Following this, and once the markets had closed, the CME issued a memo stating that on Monday they will be raising maintenance margins to initial margins on all products.

Because maintenance margins are 20-30% below initial margins, this is effectively a 20% + margin hike for holders of ANY maintenance position. This means that by close of business Monday, millions of options and futures holders will be forced to deposit billions in additional capital to the CME just so they are not found to be margin deficient, and thus receive a margin call.

Naturally, since it is very unlikely that this incremental amount of liquidity can be easily procured in one business day, it is anticipated that this will lead to the issuance of hundreds of thousands of margin calls Monday, followed by forced liquidations of margin accounts across America... and the world.

Have the pending charges against JPM for silver manipulation hit a nerve with the banking cabal? Will the massive forced liquidation dramatically drive down Silver/Gold prices so that JPM can quickly exit their remaining short position?

Regardless, Monday should be the start of a wild and rocky ride in the precious metals.

More as the weekend progresses.

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The Surging Demand for Silver in China

It has been an incredible week in Euroland and we haven't written much lately about Gold and Silver.

Obviously if you follow this blog, you know we remain highly bullish on the prospects for both metals. There may be some short term issues as positions are liquidated in the MF Global bankruptcy, but one only have to look at how the Chinese are desperately acquiring the metals to understand what lies on the horizon.

Dan Collins, over at the blog Financial Sense, recently took a look at Silver and China.

Collins notes that Chinese investment in silver has exploded since last year, with the trading volume going exponential.

The China Daily reported yesterday that the trading volume of silver forwards on the Shanghai Gold Exchange (SGE) surged 751% year-on-year in 2010. Meanwhile, the volume in September of this year was more than six times that of the same period in 2010.

That is a stunning demand for Silver.

Chinese commercial banks are now selling silver to investors in the hundreds of tons. One example is the Industrial and Commercial Bank of China Ltd (ICBC), China's biggest lender which launched paper silver trading for individual investors in August of last year.

The other large Chinese Banks have also introduced silver trading. The trading volume of ICBC's paper silver products alone reached 300 tons in the first half of 2011, almost four times the figure for the whole of 2010.

That's right, one Chinese bank alone sold 300 tons or over 10.5 million ounces of silver in only 6 months.

In only their first year of trading, ICBC bank alone will sell over 20 million ounces of silver which alone would represent over 2% of the total amount of silver mined on earth for the entire year.

The key factor to pay attention to is that most of these silver purchases are forward contracts and not the actual physical silver. What happens when Chinese investors demand physical silver instead of paper silver?

Demand for precious metals in China is skyrocketing. High inflation and a lack of investment options are feeding the demand.

With new housing regulations bringing housing investment to a standstill, investors are looking for new ways to invest cash. The housing market looks to go down and the stock market is widely viewed as corrupt and risky.

Gold and silver are becoming increasingly popular.

It's yet another reason why we remain bullish on the prospects for Silver.

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A Different Perspective

Faithful readers know this blog is very bearish on Real Estate.

Juiced by easy credit it seems obvious why the Real Estate bubble has blown so big and even more obvious that it's implosion will be massive.

But not ever one shares that viewpoint. And today we bring you that alternative take on where we are and what lies ahead.

Local Real Estate Guru Ozzie Jurock in the perma-bull of Vancouver R/E and last week shared his thoughts in the Vancouver Sun.

• “In 1960 your home sold for an average price of $13,105. Yes! By 1970 we reached $24,000, by 1980 we clocked in at $100,000, by 1990 $230,000 and by 2000 $296,000. In the last 11 years we rocketed from there to where we now are at $1.1 million (average used home sale price between Lions Bay and Mission).
  
  
  We have had massive inflation in housing prices, driven by excess, cheap easily available money and today we are doing more – much more – of the same.
  
  
  Real estate remains cyclical. I have told my subscribers to expect a downturn in the Interior and Vancouver Island over a year ago and a slowdown in Vancouver, too. But, I remain convinced that the naysayers will be wrong again. Yes, the numbers are bigger, the zeros larger and yet each time – after climbing a wall of worry – we muddle through with the result that hard assets will be even higher five to 10 years later.

To Ozzie the never-ending spiral of price appreciation may stall but it will never end. 

Who can blame him?

An entire generation has grown up and has never know any other pattern.  How could the future possibly be any different?

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Eric Sprott discussing Silver yesterday - 14 minute interview

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Royal Canadian Mint to offer "Exchange Traded Receipts" for Gold

The Royal Canadian Mint made an interesting announcement yesterday.

The Mint is launching a Canadian Gold Reserves program within which they are offering Exchange Traded Receipts (ETRs).

These 'receipts', according to the Mint, will provide evidence of ownership in physical gold bullion held in the custody of the Mint at it's facilities in Ottawa.

Ian E. Bennett, President and CEO of the Royal Canadian Mint says:

• "We believe that this new program will build on our reputation and continued success as a world-class custodian of precious metals. With the introduction of the Canadian Gold Reserves ETR program we hope that investors will see this as a convenient, efficient and secure method for investing in and owning physical gold."

According to the Mint Press Release the purchaser of an ETR owns the actual gold rather than a unit or share in an entity that owns the gold, unlike other gold investment products.

The net proceeds of the initial offering will be used to purchase gold on behalf of the initial purchasers of ETRs at the London pm fix price on the closing date of the offering (Closing Date). Subject to certain restrictions, ETR holders will be entitled to redeem their ETRs for physical gold products in the form of 99.99%, or for cash based on the future gold price or market price of the ETRs.

Subject to market conditions, the initial offering of ETRs is targeting an issue size of approximately CAD $250 million. The issue price per ETR will be CAD $20.00 or the USD equivalent and the Per ETR Entitlement to Gold will be determined on the Closing Date and will be reduced daily by an annual service fee of 0.35 per cent. Subject to the satisfaction of certain conditions, the ETRs will be listed on the Toronto Stock Exchange and commence trading on the Closing Date. ETRs will be listed in both Canadian and U.S. dollars and may be traded in either currency.

The ETRs have not been and will not be registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States.

The precious metals community has always been highly skeptical of any arrangement where paper claims are offered in place of physical Gold in hand so it will be interesting to see how this is received.

Clearly the Royal Canadian Mint is betting on it's reputation in offering these ETR's.

It will be interesting to keep an eye on this and whether or not the Mint makes a similar offering in Silver.

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