Alasdair Macleod: All Roads in Europe Lead to Gold

Chris Martenson, on his website, had a great interview with Alasdair MacLeod on the European debt situation that I thought was a good read and it is reproduced for you here.

From Martenson's interview:

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This week we bring back Alasdair Macleod, publisher of Finance and economics.org, because, as he puts it "every horror that we discussed last time we spoke is coming about". Especially scary since our previous conversation with him was less than three weeks ago...

Today's interview continues building on his excellent synopsis from last month that detailed the origins of the Eurozone crisis. The fundamental shortcomings warned of at the Euro's creation in 1997, combined with the excessive sovereign debts run up since then, have finally expressed themselves at a scale too large to be contained any longer.

Today, Alasdair details in-depth the huge and serious challenges facing Greece and the major Eurozone countries, and the likely impacts of the fast-dwindling options left remaining.

He sees no happy ending to this story, no outcome in which serious pain and permanent behavior change can be avoided. And for those looking for shelter from the unfolding economic storm, he sees few options besides the precious metals (which he believes are severely under priced at the moment):

Greece

The Greek situation is entirely predictable: when you force enormous pressures on an economy and try and raise taxes from the private sector -- a private sector which isn’t used to paying taxes because usually they find away around it -- you start cutting pensions, you start cutting this, cutting that, and the people revolt. They haven’t a clue what they are doing, but we get the revolt nonetheless. It looks like nobody there can form a government; and it looks like there will be another election probably in June. That won’t resolve anything unless by some miracle, some sense gets knocked into people’s heads.

The other thing, which nobody has mentioned, is that there are about 90 billion dollars in derivative contracts involved in the Greek economy. This is not just government, but also local governments and towns and cities and all the rest of it. The counterparties to this $90 billion must be getting a bit worried about that, I would think because that looks as if it will default.

The people who have been most active in getting these derivative contracts going over time have been people like Deutsche Bank, Goldman Sachs and I suppose JP Morgan -- so you can see the problems aren’t just limited to the government and some unfortunate Greek citizens who are caught in the middle of this.

We are looking at potentially up to ninety billion dollars worth of derivatives which one side of those transactions is going to default. One side: it is not a balanced figure is it? I don’t know that it is necessarily as bad as that, but it is a problem that needs to be dealt with, addressed and contained. I think what they have to do as much as possible, is to try to work for a sensible outcome in this, which probably will involve Greece leaving the Eurozone, but maybe obtaining help from the ECB to set up a currency board. The reason I say that is that I think for Greece to return to the drachma would be complete destruction. You would have a situation where people who owe money in Euros would still owe money in Euros. If the Greek government tried to change that by law, for starts, that could only apply to loans taken out in Euros in Greece; whereas a lot of these have been taken out in Euros elsewhere in the European Union. In any event, I think if they tried to do a law on this, it would be a retroactive, which would be open to legal challenge.

Meanwhile, if you have deposits in a Greek bank, you can be sure the Greek government would say we are going to re-designate those into New Drachmas, which would impoverish the depositors. When it comes to trade, I think everybody would just stay well clear. To go back to a New Drachma, I think is the most destructive path Greece can have. Now, they could do that on the basis that, if the European Union wanted to make an example of Greece, then this is a way in which they could just let them go hang. The importance of that would be that the situation for Greece should be so bad that no other member of the Eurozone would contemplate leaving the Eurozone. That is a possibility. But I think that is less likely than coming to terms in such a way to give Greece an exit. But if they do get an exit, again, they’ve got to have an exit in such a way that it hurts enough and anybody else who wants to take that exit would see, well it is actually probably more painful than staying where we are. It is a very difficult balance to achieve.

The people who will do this, I don’t believe are the politicians. It would have to be the sensible people in the ECB and perhaps some of the more backroom boys who could put together some sort of face-saving mechanism without this becoming too much of a political hot potato. It is very, very tricky, it really is, and quite honestly, the way political governance has been going in Europe, the chances of them getting some sort of orderly withdraw in the interest of continuing relationships, et cetera, I think are actually probably slim. That is what we are up against: this is not easy. There is no precedence for this at all and I know that lots and lots of people are saying it has got to return to the Drachma; I just think that a New Drachma would collapse almost immediately. I think that a currency board in the Euro is actually a more sensible result given where we are.

France

France is a mess. They have outstanding debt of 1.3 Trillion Euros, something like that. Their debt/GDP is around about 85-90% going on a hundred quite rapidly. That is a very liquid and nasty situation. Unemployment is running close to ten percent.

It is almost impossible to employ anyone in France because the taxes are so high. Do you know the total tax that you pay as an employer, more than doubles the salary that you pay an individual? This is absolute craziness, but it is been like that in France forever and a day. The result is an awful lot of the market is black market.

Spain & Italy

Spain is a worse situation. Government debt alone is just under a trillion. A trillion dollars equivalent, I should say, and that is a lot of money. That is a lot of money. Italy is over two trillion dollars. That really is a very, very big one, so this contagion must not be allowed to happen.

Germany

Their economy is performing reasonably well, but it is not performing well because they are doing well for Europe; they are doing well because they are selling the most cars, machine tools and everything else to China, to Brazil, to Russia. Africa’s a great growth area. Europe, as far as Germany is concerned is dead. Which of course brings us on another question; that is why should Germany continue to support all these bust Europeans? There is a sort of conscience if you like about the last two world wars, but there is going to come a point where that wears pretty thin I would have thought. The trouble is that it is all very well, everyone turning around and saying, Germany has to help. Actually, what they are saying is that Germany’s citizens should give up their savings, their hard won savings to rescue a project, which is obviously dead or deceased. I think Germany really should bust out as soon as possible and I am sure that there are an increasing number of businessmen and bankers in Germany who are beginning to feel that way.

On Gold

People who have gold or silver, I think actually had a very rough ride over the last couple of months. A lot of them are wondering what on Earth is going on because every time you get good news, gold seems to rally along with equities, but every time there’s bad news and gold actually should be giving you some protection, it goes down the swanny.

I think the problem there is that the whole system is run by people who went to college and were taught keynesian economics. In my day, when I first went into the stock market and I enjoyed that first bull market in gold when it went from thirty-five bucks to eight-fifty, the traders and investment managers were all practical people. They all cut their teeth, all learned their trade the hard way. Some of them had degrees in college, but generally it would have been something like classics or history or something like that. If they got a degree in economics, they probably would have left because they never would have understood it in those days. But now it has changed. Everybody who is employed has a degree and if they are anything to do with investment strategy, or the investment business, it is all economics degrees. So they have been brainwashed in the keynesian thing. This sort of neoclassical approach where gold is yesterday’s story, paper money is the future. They really do believe it and it is the opinions of these people who drive the markets in the short term.

The result is that gold and silver have become very, very seriously mispriced. I don’t think I have seen a stretch like this as I can remember; by stretch, the difference between perhaps where it should be. We must be careful not to tell the market what the price should be, but it is so underpriced at a time of enormous systemic stress, that I think when gold and silver snap back into a more sensible, logical valuation relationship with the markets, the move actually could be very, very sharp and quite large. If gold ran up through the $2,000 level very quickly, which I think is a very strong possibility, because it is been held down so much, that could bring other problems. The central banks, who might have sold gold and not told us about it will find that they are embarrassed. I think also the bullion banks in London who operate a fractional reserve system with gold, exactly the same way as to do with any paper currency, will be hurt very, very badly on the run. Any shorts in the futures market equally could be hurt very, very badly. We have a situation, where there is a potential for a huge run in gold and I personally wouldn’t be surprised to see it.

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Bubble? What bubble? - The counter offensive begins

So what if the mainstream media is abuzz with talk of a Canadian Housing bubble.

And yes, articles abound that trouble looms on the horizon.

Sales are tanking.  Listings are soaring. So what's a realtor to do?

Trash all this bubble talk, of course.

Enter Condo King Bob Rennie;

"It’s not a bubble. With the 80% of the [condo] market that traded in [Metro] Vancouver last year, you only needed a household income of $52,800 to purchase. That’s not a bubble story.”

Rennie's comments come courtesy of an interview with the Vancouver Sun following his keynote address to the Urban Development Institute Thursday.

Rennie sees aging baby boomers with billions of dollars in equity becoming a much greater force in the condo market as they increasingly downsize from expensive single-detached homes, and put money aside for their children.

Rather than seeing a market crash as hundreds of thousands of boomers dump bubble inflated single family houses and downsize, Rennie has a different take.

Noting that the number of people between 55 and 64 will increase 38% between 2009 and 2018, those between 65 and 74 will increase 56%, and those between 35 and 54 will only increase by 4.6%, Rennie views this as positive - particularly for his niche focus in condos.

“I believe the leaner, meaner baby boomer is the game changer. Baby boomers are sitting on $88 billion in equity in Greater Vancouver and they’re looking at their retirement years. That equity will be freed up over the next 15 years [and] when they sell their home, they’ll buy down and help their kids.”

Rennie said there were about 19,000 condo sales in Metro Vancouver in 2011, and that while the average price for 80% of those condos was $315,000, the overall average price was $427,000, which required an income of $66,000 to finance.

And, as we noted in our discussion about Marine Gateway, Rennie has a number of big projects coming to market this year... ergo the never-ending sales pitch continues.

Meanwhile our buddy Tsur Somerville, director, centre for urban economics and real estate at UBC's Sauder School of Business, chimes in as well.

He also doesn’t believe there’s a real estate bubble in Metro Vancouver because there’s not an explosion in housing starts.

Somerville says that while the affordability numbers have been skewed by the higher end parts of the market – “there were double-digit increases in Richmond, Vancouver, Burnaby and West Vancouver, with single-digit increases everywhere else” — the region is still very expensive compared to other cities in Canada.

“Compared to other cities, that income [$52,800] gets you a house. Here, it gets you a condo. That means we’re expensive, but that’s the reality of what we are. It’s still an expensive place to live, but it’s not unaffordable. You’ll end up smaller and further away from the core.”

Bubble? What bubble?

That's clearly what's emerging as the counter offensive theme by the industry right now, a theme which continued over on Global TV.

Adding to the 'non-bubble' message is this treatsie... "just because sales are slumping, don't bank on prices doing the same":

Announcer: “Is the Canadian housing market a bubble ready to burst, or is it steady as she goes? Finance Minister Jim Flaherty is warning Canadians against taking too much debt against the value of their homes, but the latest report from the Canadian Mortgage and Housing Corporation is dismissing those fears saying there is no clear evidence of a real estate bubble.”

Tsur Sommerville: “There is clearly a slowing down in the market you see an increase in the number of listings, drop in sales, all things that create less pressure on the market.”

Announcer: “According to the Real Estate Board of Greater Vancouver home sales were down 19% compared with this time last year.”

Helmut Pastrick: “The comparison to last year was heavily influenced by the change in the federal government’s mortgage insurance criteria which pulled forward a large number of sales into early 2011. So we’re comparing that high point to activity so far this year.”

Announcer: “But don’t get too excited, even though sales are down, home price indexes show a 4% increase in the price of a home in greater Vancouver. … The message to buyers, the economy is in reasonable shape, there’s a lot of supplier there, and interest rates are low. So just because sales are slumping don’t bank on prices doing the same.”

Tsur Sommerville: “We don’t have a sort of financial environment where people are looking at major financial corrections, you know, double digit increase in interest rates, or, you know, huge tightening of liquidity, that just doesn’t seem to be on the horizon, you know, to expect across-the-board 10%, 15%, 20% drop in house prices, I think that being rather, er, hopeful, for a buyer to expect that.”

The message is clear. Don't be deceived by slumping sales and burgeoning listings. Prices aren't coming down so stop waiting.

Now is the time to buy. What are you waiting for?

(hat tip to Greenhorn for the video archive and VREAA for the transcript of the Global clip)

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Are the swirling winds of change blowing towards a Nexus point?

HAM... or Hot Asian Money... has been a prominent feature of our real estate bubble.

As China pumped more stimulus money, per capita, than the Americans into their economy a huge bubble has been blowing.

One of the benefits has been China's real estate.

Buoyed by inflated real estate values, wealthy Chinese have extracted equity and utilized equity to leverage real estate purchases overseas. And Vancouver has been a primary beneficiary.

But what happens when the bubble begins to burst?

One of the first consequences is the access to easy money disappears... and with it the free flow of money to locales such as the Village on the Edge of the Rainforest.

HAM is basically AWOL in the Vancouver Spring Real Estate market and all indications are the situation in China is worsening.

Mish Shedlock noted on his blog yesterday that the Real Estate Crash in China is Underway.

Citing an excellent report (China Real Estate Unravels) by Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management in Beijing, Mish notes that Chinese developers, burdened by 70% leverage ratios and loans threatening to come due, rushed to complete projects already in their pipeline, to put those units onto the market and raise cash.

That rush to complete inflated real estate investments, investments that were allegedly up 23.5% in the first quarter.

But other statistics from the report tell the real story.

• Year-on-year sales in Q1, for all real estate, was down 14.6%.
• Residential property sales were down 17.5%
• Office sales were down -10.2%
• Sales in January-February were a disaster, falling 20.9% overall, compared to the first two months of 2011, -24.7% for residential.
• Total amount of floor space “for sale” was up 35.5%, compared to the same date last year
• Floor space of residential units “for sale” grew 47.4%.
• At the end of 2011, total floor space “under construction” was roughly 4.6 times the floor space sold
• A year and a half worth of excess inventory is hidden somewhere in the pipeline
• New starts in April fell 14.6% year-on-year and 27.0% month-on-month, for property as a whole
• Housing starts fell -14.4% year-on-year and -23.4% month-on-month
• Office starts fell -21.0% year-on-year in April, and -45.1% compared to March
• Retail property starts fell -18.7% year-on-year, and -36.8% compared to March
• Land sale revenues in April (RMB 27 billion) were down -54.7% compared to April last year
• Foreign funding for property development was down -91.4% in March and -80.8% in April, compared to the same months last year.

Chovanec notes:

"Clearly a crash is underway and the Chinese soft-landing thesis is collapsing.

The “resilient” growth in real estate investment that seemed to promise a “soft landing” is not very resilient at all. It’s more like the last gasp of a market that’s running out of steam. Once the surge in completions plays out, the declining number of new starts will become the pipeline, and growth in property investment will flatten or go negative.

Property investment accounts for roughly a quarter of gross Fixed Asset Investment (FAI), and net FAI accounts for over half of China’s GDP growth. As I noted in January, in a back-of-the-envelope thought exercise, if property investment plateaus (growth falls to zero), it could shave as much as 2.6 percentage points off of real GDP growth. If it fell 10% (in real, not nominal terms) it could bring GDP growth down to 5.3%.

At the time I first saw this dynamic in the data, when the Q1 numbers came out, I figured it would take several months to begin playing out. But the April numbers suggest it is already happening.

Chovanec notes if real estate investment drops by 10%, GDP will come in at 5.3%. But what if real estate investment falls by 20% or 25%?

Moreover, why shouldn't it?

The real estate crash in China has arrived and is underway.  The GDP crash will follow shortly.

What comes after that?

After that comes the second consequence for the Village on the Edge of the Rainforest... the panic sale of overseas assets to meet financial demands at home.

All of which is shaping up to hit us just as the OFSI rule changes come into effect.

The swirling winds of change are blowing towards a convergence point that can only be described as the perfect storm combining the Boomer Trigger, the China Trigger and the Speculator Trigger with upcoming mortgage rule changes.

People email me and say my prediction of a collapse in real estate values here of 70-85% is completely unrealistic and they just can't see how it could possibly come to pass.

Not only do I think it is very easy to see... I sometimes think my estimate may be underestimating the full extent of what may play out.

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OFSI: "Banks not immune to Housing related failures"

Yesterday we once again brought up the topic of the OSFI – the Office of the Superintendent of Financial Institutions - which is the organization regulating Canadian banks.

In the early part of the year the OFSI released a draft about upcoming changes to banking regulations. Yesterday's post was about how the mainstream media is picking up on those changes and what it could mean from for Canadian Homeowners... specifically that homeowners should 'beware' of the looming changes.

The OSFI theme continues today as Bloomberg reports on information they obtained in freedom on information request.

And it appears there is grave concern by the regulator for the health of Canadian banks in the event of a housing collapse..

Shortly after the OFSI was criticized on March 19th for it's proposed changes via the mortgage-industry website Canadian Mortgage Trends, the OFSI wrote an internal memo reflecting on the Canadian banking system.

The OFSI noted that while Canada’s banks may be ranked the soundest on the planet by the World Economic Forum, they aren’t immune to collapses triggered by falling housing prices.

The documents Bloomberg uncovered were written by Vlasios Melessanakis, manager of policy development at the Office of the Superintendent of Financial Institutions.

Melessanakis said that previous failures of Canadian financial institutions were due to bad real estate lending and sharp falls in housing prices, and these can happen again.

“Canada is not immune. Just because nothing happened in Canada in 2008 (a U.S.-centered crisis), does not mean that Canada is not vulnerable to a housing correction now.”

Canadian Mortgage Trends had critically asked in it's website posting, “How many new lending ‘guidelines’ can the market bear before it breaks?”

Melessanakis' response?

“The market may break because the fundamentals are not sound (i.e. overvaluation of homes), not because of OSFI guidance. Previous failures of Canadian financial institutions were due to bad real estate lending and sharp falls in housing prices, and these can happen again."

Somehow I get the feeling the battle over these proposed changes is only just getting started.

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Homeowners Beware

Homeowners Beware!

That's the ominous intro to the above newscast story on the upcoming changes to Canadian bank regulations.

We have discussed this topic a couple of times (and it's something I raise with colleagues regularly).

The OSFI – the Office of the Superintendent of Financial Institutions - is the organization which regulates Canadian banks.  In the early part of the year they released an announcement about upcoming changes to banking regulations.  This was followed by a  discussion paper on those changes.

It's the common procedure for changes implemented by the OFSI.  And rarely are the implemented changes all that different from those outlined in the discussion paper.

Hence the news story.  Some of those changes are HUGE.  And they will be implemented by the end of the year. The OFSI wants banks to tighten up when it comes to renewing your mortgage.

• They want verification of a home’s true value (not the bidding-war price).
• They want the elimination of cash-back mortgages.
• They want to make sure that when your mortgage is renewed you would still qualify for that mortgage.
• And most importantly... they want your loan-to-value ratio to still be intact when your mortgage renews.

In a rising real estate market this is never a problem.  But there are markets where values have fallen (hello Okanagan and Vancouver Island).

And in the Lower Mainland, as inventory hits seasonal highs, as the flood of Asian buyers evaporates, as the Spring Market disappears and sales plummet... are price drops all that far off?

Garth Turner provides a striking example of how this could affect everyone:

"If you bought a $400,000 place in 2010 with 5% down, then your mortgage is $380,000 and your LTV is 95%.

If the same place is worth $340,000 in 2015 (after a 15% correction) when the loan renews, then the LTV means the maximum loan is $323,000. If you took a 3% VRM when you bought, with a 30-year amortization and made 5 years worth of payments, then (counting in the mortgage insurance premium), you still owe $349,000 upon renewal. So, you’d have to come up with $26,000 in cash to maintain your home loan – after spending $101,457 on mortgage payments.

Let’s see, that’s a downpayment of $20,000, plus $101,457 in payments, plus a $26,000 mortgage renewal payment – or a total of $147,457 in cash for a home worth $340,000 on which you still owe $323,000.

This is a nice, simple example of why all those horny young virgins with their 5% downpayments are at risk of being wiped out financially."

For years everyone has assumed that the banks will renew your mortgage without question.

It is a topic we have raised numerous times on this blog and anytime we have raised the issue with local banks we have received vague, noncommittal answers.

Well... the OFSI is now making sure we have an answer to that question.

And the mainstream media is starting to spread the message.

Homeowners Beware!

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"The Sizzle is coming off the Vancouver housing market" - BMO

The Bank of Montreal has a chilling report out that should send shivers down the spines of all speculators out there.  BMO is predicting that Vancouver's housing market could face a bumpy landing.

As reported by News1130 radio, BMO says Vancouver's home prices will fall over the next couple of years.

Year-over-year home re-sales are down by more than 13% in April and sales in the first four months of this year compared to last year are down 20%.

"I can best describe it as a softening of a market," says BMO Mortgage Expert Carolyn Heaney. 

BMO Senior Economist Sal Guatieri says the price of homes in Vancouver and uncertainty over long-term mortgage rates are creating a buyer's market. He also says rich foreign investors who have driven up real-estate prices in Vancouver are now looking at cities that are less expensive.

"The sizzle is coming off the Vancouver housing market," Guateri says.

The report also says condos are being overbuilt in Vancouver and that is curbing demand.

Meanwhile, over at Vancouver Condo Info, regular contributor ZRH2YVR shares some additional inventory facts.

The west side of Vancouver exceeded 1,000 available detached listings on Thursday. Sales are off 17% and listings are up 25%.

In addition to single family houses, a serious flood of apartments is going up for sale on the west side – current pace is for 1,230 of attached units (Apartment/townhouse combined).

Meanwhile Richmond will likely have a 'months-of-inventory' total which is over 12 months by the end of May. More significantly the vast majority of transactions are now for less than the tax-assessed value of the properties. Sales are plummeting by 47%.

Interesting times.

Also... don't forget about out 20,000 listings prediction competition. Put in a comment and let us know when you think Vancouver will hit 20,000 available properties for sale.

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The Countdown to 20,000... what's your prediction? - Day 3

When it comes to Real Estate on the Wet Coast right now, the story is all about the burgeoning inventory.

While total inventory has been higher before, never has it been this high this early in the year. More interestingly, there has not been one single day this year where the total number of sales has been higher than the total number of new listings.

However... until prices start to fall noticeably, it isn't a crash or even a severe 'correction'. 

But one thing is for certain - it IS damn interesting.

Thursday we cracked the 18,000 mark and we head into the weekend sitting at 18,176.  All indications are that the Vancouver market is moving resolutely to the psychologically significant 20,000 mark.

So let's have some fun with it.

Each night we post the days total inventory increase/decrease as well as the total market inventory figures. On which night, exactly, will we crack the 20,000 mark?

Between now and Sunday chime in with your prediction in the comments section.

If you don't have a blogger ID and you normally post anonymously, add a pen name with your prediction so we can keep track of who is predicting what.

There's no prize, but let's see who can pick the day closest to the actual day inventory cracks the 20,000 mark (remember... there are not updates on Saturday or Sunday nights)

Below are guesses submitted so far.  Pick the same date as others or choose one that isn't selected. What night will we crack 20,000?

______________________

May 28
Farmer

May 29
RumbleGuts

May 30
Jen

June 1
Sockeye
BoneShaft

June 2
Terminal City Girl

June 3
Nick-Vancouver

June 4
Robert (Maple Ridge)
Ash

June 5
Michael J - Vancouver

June 6
V

June 8
Alpha_Bear

June 12th
Peter

June 15
another value investor

June 20
MolestoTheClown

June 21
Summer Solstice! (buffates)

June 29
anobserver

July 1
Steve

July 11
GG

July 17
A Political Junkie

July 25
Alexander

20,000 won't be achieved
kman

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The Countdown to 20,000... what's your prediction? - Updated

When it comes to Real Estate on the Wet Coast right now, the story is all about the burgeoning inventory.

While total inventory has been higher before, never has it been this high this early in the year. More interestingly, there has not been one single day this year where the total number of sales has been higher than the total number of new listings.

However... until prices start to fall noticeably, it isn't a crash or even a severe 'correction'. 

But one thing is for certain - it IS damn interesting. There's a strong possibility we will crack the 18,000 mark tomorrow and all indications are that the Vancouver market is moving resolutely to the psychologically significant 20,000 mark.

So let's have some fun with it.

Each night we post the days total inventory increase/decrease as well as the total market inventory figures. On which night, exactly, will we crack the 20,000 mark?

Between now and Sunday chime in with your prediction in the comments section.

If you don't have a blogger ID and you normally post anonymously, add a pen name with your prediction so we can keep track of who is predicting what.

There's no prize, but let's see who can pick the day closest to the actual day inventory cracks the 20,000 mark.

______________________

On another note, many of you will recall how we questioned the media trumpeted sell out that occurred at Marine Gateway, the first such condo pre-sale sell out in Vancouver in years.

Shortly after that MSM fantasy, lightening struck again with the 'sell out' of Telus Garden.

But did they actually sell out?

Not according to downtown realtor Ian Watt.

Such is the state of the market that the ever-bullish car-cam booster Watt is calling bullish*t on the media hype of the Telus Garden sell out.

Even more astonishing is the way he trashes pre-sales and closes by throwing water on anyone hoping to flip their pre-sale purchase at Telus Garden.

Meow!

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The Emperor is naked

Faithful readers know we keep a keen eye on monetary policy, both in Canada and abroad, because our housing bubble in intertwined with it.

And today's post is a long one on just that topic: monetary policy.

In the past we have posted about David Stockman, a former U.S. politician and businessman who served as a Republican U.S. Representative from the state of Michigan from 1977–1981.

He is, however, more well known as the director of the Office of Management and Budget under President Ronald Reagan from 1981–1985 and has been a keen critic of US monetary policy.

Recently he has spent a considerable amount of time talking and writing about the effect of government-funded, debt-fueled spending on the stock market and the ultimate effect of Quantitative Easing.

The respected Stockman believes we are in the last innings of what he describes as "a very bad ball game. We are coping with the crash of a 30-year–long debt super-cycle and the aftermath of an unsustainable bubble."

As for Quantitative Easing, Stockman contends it is making the situation worse by facilitating more public-sector borrowing and preventing debt liquidation in the private sector — both erroneous steps because they prevent the US federal government from getting its financial house in order.

Says Stockman:

"We are on the edge of a crisis in the bond markets. It has already happened in Europe and will be coming to our neighborhood soon."

To Stockman the cause of the crisis is the US Federal Reserve.

"The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. The yield curve signals nothing anymore because it is totally manipulated by the Fed. The very idea of "Operation Twist" is an abomination.

Capital markets are at the heart of capitalism and they are not working. Savers are being crushed when we desperately need savings. The federal government is borrowing when it is broke. Wall Street is arbitraging the Fed's monetary policy by borrowing overnight money at 10 basis points and investing it in 10-year treasuries at a yield of 200 basis points, capturing the profit and laughing all the way to the bank. The Fed has become a captive of the traders and robots on Wall Street.

Stockman believes the Fed needs to get out of the way and not act like it is the central monetary planner of a $15 trillion economy.

But because they will not get out of the way, he believes we are in the final innings of a debt super-cycle. And what is the catalyst that will end the game?

"I think the likely catalyst is a breakdown of the U.S. government bond market. It is the heart of the fixed income market and, therefore, the world's financial market.

Because of Fed management and interest-rate pegging, the market is artificially medicated. All of the rates and spreads are unreal. The yield curve is not market driven. Supply and demand for savings and investment, future inflation risk discounts by investors—none of these free market forces matter. The price of money is dictated by the Fed, and Wall Street merely attempts to front-run its next move. As long as the hedge fund traders and fast-money boys believe the Fed can keep everything pegged, we may limp along. The minute they lose confidence, they will unwind their trades. On the margin, nobody owns the Treasury bond; you rent it. Trillions of treasury paper is funded on repo: You buy $100 million (M) in Treasuries and immediately put them up as collateral for overnight borrowings of $98M. Traders can capture the spread as long as the price of the bond is stable or rising, as it has been for the last year or two. If the bond drops 2%, the spread has been wiped out. If that happens, the massive repo structures—that is, debt owned by still more debt—will start to unwind and create a panic in the Treasury market. People will realize the emperor is naked."

Stockton believes 2008 was a dry run of what happens when a class of assets owned on overnight money goes into a tailspin: there is a thunderous collapse.

2008 was one of those 'thunderous collapses' . It occurred in the repo market for mortgage-back securities, credit default obligations and such. Since then, the repo trade has remained in the Treasury and other high-grade markets because subprime and low-quality mortgage-backed securities are dead.

So does Stockton foresee another 'thunderous collapse'? And if so, how it could all unwind? What happens when the fast-money traders lose confidence in the Fed's ability to keep the spread?

"They are forced to start selling in order to liquidate their carry trades because repo lenders get nervous and want their cash back. However, when the crisis comes, there will be insufficient private bids—the market will gap down hard unless the central banks buy on an emergency basis: the Fed, the European Central Bank (ECB), the people's printing press of China and all the rest of them.

The question is: Will the central banks be able to do that now, given that they have already expanded their balance sheets?  The Fed balance sheet was $900 billion when Lehman crashed in September 2008. It took 93 years to build it to that level from when the Fed opened for business in November 1914. Bernanke then added another $900B in seven weeks and then he took it to $2.4 trillion in an orgy of money printing during the initial 13 weeks after Lehman. Today it is nearly $3 trillion. Can it triple again? I do not think so. Worldwide it's the same story: the top eight central banks had $5 trillion of footings shortly before the crisis; they have $15 trillion today. Overwhelmingly, this fantastic expansion of central bank footings has been used to buy or discount sovereign debt. This was the mother of all monetizations."

Following that path, what happens if there are no buyers? Do the governments go into default?

"The U.S. Treasury needs to be in the market for $20B in new issuances every week. When the day comes when there are all offers and no bids, the music will stop. Instead of being able to easily pawn off more borrowing on the markets—say 90 basis points for a 5-year note as at present—they may have to pay hundreds of basis points more. All of a sudden the politicians will run around with their hair on fire, asking, what happened to all the free money?"

Stockton sees this mayhem stretching into the private sector as well. Once the bond market starts unraveling, all the other risk assets will start selling off like mad.

"If the bond market goes into a dislocation, it will spread like a contagion to all of the other asset markets. There will be a massive selloff.

I think everything in the world is overvalued—stocks, bonds, commodities, currencies. Too much money printing and debt expansion drove the prices of all asset classes to artificial, non-economic levels. The danger to the world is not classic inflation or deflation of goods and services; it's a drastic downward re-pricing of inflated financial assets."

Stockton does not see any way to unravel this without this massive dislocation.

"The Fed is now at the end of a $3 trillion limb. It has been taken hostage by the markets the Federal Open Market Committee was trying to placate. People in the trading desks and hedge funds have been trained to front run the Fed. If they think the Fed's next buy will be in the belly of the curve, they buy the belly of the curve. But how does the Fed ever unwind its current lunatic balance sheet? If the smart traders conclude the Fed's next move will be to sell mortgage-backed securities, they will sell like mad in advance; soon there would be mayhem as all the boys and girls on Wall Street piled on. So the Fed is frozen; it is petrified by fear that if it begins contracting its balance sheet it will unleash the demons."

Stockton takes issue with the idea that the banking system was threatened in 2008 and needed Fed action.

"The banking system, especially the mainstream banking system, was not in peril at all. The toxic securitized mortgage assets were not in the Main Street banks and savings and loans; these institutions owned mostly prime quality whole loans and could have bled down the modest bad debt they did have over time from enhanced loan loss reserves. So the run on money was not at the retail teller window; it was in the canyons of Wall Street. The run was on wholesale money—that is, on repo and on unsecured commercial paper that had been issued in the hundreds of billions by financial institutions loaded down with securitized toxic garbage, including a lot of in-process inventory, on the asset side of their balance sheets.

The run was on investment banks that were really hedge funds in financial drag. The Goldmans and Morgan Stanleys did not really need trillion-dollar balance sheets to do mergers and acquisitions. Mergers and acquisitions do not require capital; they require a good Rolodex. They also did not need all that capital for the other part of investment banking—the underwriting business. Regulated stocks and bonds get underwritten through rigged cartels—they almost never under-price and really don't need much capital. Their trillion dollar balance sheets, therefore, were just massive trading operations—whether they called it customer accommodation or proprietary is a distinction without a difference—which were funded on 30 to 1 leverage. Much of the debt was unstable hot money from the wholesale and repo market and that was the rub—the source of the panic. Bernanke thought this was a retail run à la the 1930s. It was not; it was a wholesale money run in the canyons of Wall Street and it should have been allowed to burn out."

And when the inevitable unwinding of the Fed and the bond markets comes, it won't put the banking system back in peril. The people were lied to in 2008. And when unwind comes, when the next crisis starts, Stockton believes we will "see torches and pitch forks moving in the direction of the Eccles building where the Fed has its offices."

Stockton also believes that moment is closer than most people think.

"On Dec. 31, the tax cuts will expire, defense cuts go into place and we hit the debt ceiling. That will be a clarifying moment; never before have three such powerful vectors come together at the same time — fiscal triple witching.

First, the debt ceiling will expire around election time, so the government will face another shutdown and it will be politically brutal to assemble a majority in a lame duck session to raise it by the trillions that will be needed.

Second, the whole set of tax cuts and credits that have been enacted over the last 10 years total up to $400 – 500B annually will expire on Dec. 31, so they will hit the economy like a ton of bricks if not extended.

Third, you have the sequester on defense spending that was put in last summer as a fallback, which cannot be changed without a majority vote in Congress.It is a push-pull situation: If you defer the sequester, you need more debt ceiling. If you extend the tax expirations, you need a debt ceiling increase of $100B a month.

Congress will extend the whole thing for 60 or 90 days to give the new president, if he hasn't demanded a recount yet, an opportunity to come up with a plan.

To get the votes to extend the debt ceiling, the Democrats will insist on keeping the income and payroll tax cuts for the 99% and the Republicans will want to keep the capital gains rate at 15% so the Wall Street speculators will not be inconvenienced. It is utter madness.

If the debt ceiling is raised again, defense purchases and non-defense purchases will be hit with brutal force by the sequester. As we go into 2013, there will be a shocking hit to the reported GDP numbers as discretionary government spending shrinks. People keep forgetting that most government spending is transfer payments, but it is only purchases of labor and goods that go directly into the GDP calculations, and it is these accounts that will get smacked by the sequester of discretionary defense and non-defense budgets.

In this environment unemployment numbers will soar.

So in the midst of this volatility, how can normal people preserve, much less expand their wealth?

"The only thing you can do is to stay out of harm's way and try to preserve what you can in cash. All of the markets are rigged or impaired. A 4% yield on blue chip stocks is not worth it, because when the thing falls apart, your 4% will be gone in an hour."

But if the government keeps printing money, won't cash be rendered worthless too?

"I do not think we will have hyperinflation. I think the financial system will break down before it can even get started. Then the economy will go into paralysis until we find the courage, focus and resolution to do something about it. Instead of hyperinflation or deflation there will be a major financial dislocation, which means painful re-pricing of financial assets.

How painful will the re-pricing be? I think the public already knows that it will be really terrible. 

My investing model to deal with all of this is ABCD: Anything Bernanke Cannot Destroy.

And if you read this blog regularly... you know the the tangible items Stockman is referring to.

Primarily Gold and Silver.

But you knew we were going to end up with this, didn't you?

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The Pressure builds

Yesterday we noted how the evaporation of HAM (and with it the strong Spring Real Estate market sales) was finally gaining recognition in the mainstream media.

Even local condo King Bob Rennie chiimed in:

Prominent condo marketer Bob Rennie said the high-end house prices in west-side Vancouver were so out of line with the rest of the region and country that it was skewing people’s perceptions of real-estate increases, not just in Metro Vancouver, but in all of Canada.

“In 2010, reports were saying real estate went up 8.9 per cent in Canada. But if you took out Vancouver, it only went up 4.3 per cent,” he said.

The spike in west-side house prices the last two years has provoked intense media coverage – with one Bloomberg News story in late May headlined, Chinese Spreading Wealth Make Vancouver Homes Pricier Than NYC – and debate among residents, politicians and commentators both here and abroad.

Much of it was attributed to “mainland Chinese” buyers, although no one had hard overall numbers to support that. Nor could anyone say whether that group might be 100 or 1,000 people, or whether they were truly offshore investors or immigrants. But that didn’t stop arguments about the need to limit foreign ownership or to tax speculation to prevent the nebulous phenomenon.

A number of realtors said early signs started appearing six months ago that the market was slowing down, but the difference really appeared in early March. There is usually a surge of buying in Vancouver around Chinese New Year, as visitors from China come to see family or friends in the city and often make decisions to buy.

The absence of sales is being magnified by the burgeoning number of listings... a theme we have been tracking with interest in our sidebar.

And the explosion in listings is the early theme for the month of May.

• On May 2 we saw an increase in total listings of +121 
• On May 3: +157
• On May 4: +192
• And today, May 7: +135

While it is early in the month, the current Inventory increase pace is at a blistering +150 per day.

Over on the blog Vancouver Condo Info, one contributor (who goes by the post moniker 'Inventory') advises that detached home sales year to date on the west side of Vancouver are down a stunning -48%.  On the east side of Vancouver detached home sales are down -38%.

The suburbs aren't faring any better.  South of Vancouver is taking a big hit as well.

In Ladner detached home sales are down year to date -43%. In Tsawwassen they're down -47%. Richmond is down a stunning -53%.

To the immediate east of Vancouver... Burnaby East is down -34%, Burnaby North is down – 42% and Burnaby South is down -46%.

Even the City of West Vancouver is down -52%.

Everywhere it seems listings are soaring and sales are tanking.

Will we see prices start to move?

We have profiled a few examples in the past and hopefully later this week we can show some more.

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The media says... HAM is "fizzling out"

So I was sitting in a cafe near Canada Place this morning with a group of 'friends of friends' who had just finished running the Vancouver Marathon (or in their case... the half marathon) and the topic turned to real estate.

One astute member for the 'friends of friends' clan was explaining to a colleague about why downtown condo prices, which have been falling recently, will continue to fall.

Our table was long, but my ears had not deceived me. The bear case was being eloquently laid out!

Listening in, my heart shone as this learned individual explained the current market dynamics.

It wasn't long before your faithful scribe chimed in about the impending OSFI changes to LTV mortgage renewals to complete the discussion when he turned and said, "ah... so you know all to well what's going on!"

Indeed... and clearly I'm not alone as one glance at the weekend papers indicate enlightenment isn't just occurring in local cafe's.

For several years now this, and other blogs, have ruminated that the phenomena of HAM (Hot Asian Money) was not a panacea to the everlasting inflation of our housing bubble.

And as the Spring market fails to materialize, it becoming very evident to all that Chinese buyers are not going to save the market.

It's so evident that even the local newspaper columnist Frances Bula is now writing about it.

Bula writes that the:

"boom of sky-high prices for Vancouver west-side houses – one that provoked media around the world to claim with scant proof that mainland Chinese investors were buying up the city – is fizzling out."

Bula notes that a house in the 3000 block of West 24th Anenue, first listed at near $4.5-million six months ago, sold on April 15 for $3.35-million, over $1 million chopped off the asking price.

Fresh statistics from the Greater Vancouver Real Estate Board show the number of sales on the west side is down by nearly 40% for the first four months of the year. Only a third of the nearly 400 homes listed in April have sold – one of the lowest rates in the region.

And Bula quotes west-side realtor Marty Pospischil, who specializes in selling single-family homes owned by long-term residents, who says that last year, 90% of his 100 house sales were to “offshore buyers”. This year, it’s less than a tenth of that.

Pospischil also noted:

“We’re now seeing a 50% collapse rate in deals, when it’s usually more like 5%.”

The reason?

In addition to the lack of money flowing from China, there is another factor hitting sales hard.

“Banks are now requiring borrowers to disclose incomes and assets before mortgages are approved, as of the last six weeks.”

Meanwhile Bula quotes another west side realtor, who specializes in single family homes. He notes:

“I always thought that market was not sustainable. Every local person was juiced out of the market. The average household income on the west side doesn’t support those prices.”

Wow!

Not that we haven't been saying the exact same thing.

But to see these types of headlines coming from mainstream media in the Vancouver real estate scene, it tells you this is a market in trouble.

For if HAM is evaporating, mortgage rules are tightening and local incomes can't support the current bubble prices; it means there is only one way the market can go.

As long time residents painlessly slash $1 million dollars off those sky high prices for homes they only paid $60,000 to $80,000 for back in the mid-1970s, you have to wonder how long before the free-fall in prices starts?

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The smell of desperation?

Faithful readers will recall posts we made at the end of March about the Marine Gateway development in south Vancouver.

It garnered notoriety as the first pre-sale condo sellout in Vancouver in over six years... an odd occurrence considering the slowing market conditions.

Even stranger was the fact that media reports documented less than 150 people in line for the sellout of 415 units in four hours.

It prompted us to wonder aloud if the Marine Gateway development hadn't fallen prey to the common industry practice whereby the marketer responsible for hawking the development strikes a deal with realtors who want to be exclusive agents to sell in the complex.  These realtors often have to pick up 5 to 10% of those options each. Once the complex is finished and all the developers suites are sold, then these realtors can sell theirs.

It means that these exclusive agents could actually be responsible for buying up to half of the pre-sales condos made available to the general public.

Did this occur at Marine Gateway? 

Is this how an estimated 130 people in line triggered a sell out of 415 units in a record four hours? Was it because these exclusive real estate agents secured half of the units (and the best ones at that... those which came with some of the limited parking spots and are the best candidates for future resale)?

Is this why, as noted on Global TV, those buyers who did actually line up early were disappointed they could only secure 1 bedroom condo units, units that were part of the contingent that came without an available parking spot?

The Marine Gateway sellout generated much needed R/E hype for the 'developments on rapid transit line' theme.

As we noted, Rennie Marketing Systems was launching a whole new theme which shifted the mantra of "location, location, location" to one of "transportation, transportation, transportation."

We observed that in the months ahead, Rennie would be expanding on this theme as he went to market with 3 more developments along the rapid transit system:

• A pre-sale of 300 units he will launched next month at another Canada Line Station - Brighouse Station in Richmond,
• a pre-sale of 230 units he will launch in September at Coquitlam Centre on the new Evergreen Line line .
• And a month after that 1,100 units, two towers, will go to market along the original Skytrain line in Vancouver at Joyce Road.

Well fast forward over a month.  

The first of those upcoming developments, the pre-sale of 300 units at another Canada Line Station - a development known as Mandarin Residences, has come and gone... with little fanfare.

According to the title page on their website (click on image to enlarge) only 203 of the 300 units pre-sold on opening weekend... a far cry from the instant sellout at Marine Gateway:

I wonder how many of those 203 'sold' units were assigned to the exclusive realtors at Mandarin Residences?

If half of the 300 units went to realtors (150 units), could it be that less than 50 units actually sold to buyer's/investors?

Is this why Global TV wasn't invited to cover that pre-sale?

I raise this question because if as few as only 50/300 units actually sold, then it would be desperation time with those 'exclusive realtors'.

And just how desperate might they be?

Would they be so desperate to as to beat the bushes of the internet to shill their condo in the comments section of a bear blog such as this one?

May I draw you attention to a comment made today as part of a recent Richmond post on this blog (click on image to enlarge):

The comment links to the website of the Mandarin Residences.

Normally I delete shill comments which link to this product or that one. But this one I'll leave up.

Take a wiff of it and remember the smell.

I'm pretty sure THAT's what desperation smells like.

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Blindsided?

Sigh.

Everywhere you look these days, it seems the media is screaming about the housing bubble.

The latest is CBC who tell us the Canadian housing market is overpriced and bubbly in many areas.

Meanwhile real setae sales data from Vancouver is just plain ugly.

Listings are shooting upward and sales are slowing dramatically. Sales for April 2012 are down 13.2% from April 2011. They dropped 2.6% from the March 2012 total, a month which was down 29.6% from March 2011.

Detached home sales are down 19.7% and the average single family house price has plummeted by $100,000 so far this year.  The surprising gain of last month has been quickly and suddenly wiped out as you can see in realtor Larry Yatkowsky's graph (click on image to enlarge):

The always strong 'Spring Market' is a complete no show.

Garth Turner reports that in the Vancouver suburb of Richmond over 75% of property deals are now going for less than the assessed value. Says Turner:

Forget bidding wars. This is becoming a realtor graveyard. Suddenly owners are doing what always happens in a market dive – realizing their paper profits will turn vaporous if they don’t cash out. Listings rise, sales don’t and prices fade – the classic vicious cycle.

But despite all the media hype, the average joe on the street is still oblivious to what is going on.

In the US, when the real estate bubble burst, many real estate investors found themselves blindsided. When everything fell apart, they never saw it coming.

Chatting with a few people today... despite all the media attention, so many are going to get blindsided by what's coming.

No one wants to see it.

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Frontline - Money, Power and Wall Street: All 4 episodes

Called one of the most complete documentaries undertaken on the financial crisis, PBS Frontline's "Money, Power, & Wall Street" series stretches from the origins of the credit derivative business with a bikini-clad pool-side Blythe Masters and her JPMorgan colleagues to the scary (but absolutely true) fact that the financial crisis never ended.

Episode One: Derivatives Spark a Credit Boom and the Mispricing of Risk.

Episode Two: Systemic Risk. Bear Sterns collapses; regulators fear its effect on the financial system.

Episode Three : Obama inherits a crisis. The President elect faces a crucial decision - Who would serve on the economic team?

Episode Four: Everybody was making money. Despite the crisis, nothing seems to have really changed the culture of Wall Street.

Watch Money, Power and Wall Street: Part Four on PBS. See more from FRONTLINE.

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