When the truth is found to be lies, and all the joy within you dies...

Over the course of the last year the Vancouver Real Estate Market has rebounded in stunning style. As lotusland R/E values achieve breathtaking new highs, some have taken to doubting what we all know: that Vancouver R/E is in a massive bubble that will burst in spectacular fashion.

Deep down we all know what's happening.

Emergency interest rates have acted like crack cocaine to house-lusting buyers who have irrationally reinflated the housing bubble. All fueled by a federal government that has plowed $70 billion tax dollars into a ravaged Canadian financial system so that they could buy up mortgages from the big five banks through the Canadian Mortgage and Housing Corporation and hide the bad debt by taking it off the books of the banks.

Another $200 billion was then used to establish a fund to backstop the banks – money the banks could borrow if they needed it.

The Harper government called it the 'Emergency Financing Framework'.

Yet so many on the Wet Coast have ignored the obvious and rationalize that our Canadian banking system is among the soundest in the world. This fairy tale has convinced us that the R/E market resuscitation is legitimate and actually the work of the free market directing overseas investment into the prosperous and undervalued Olympic City of Vancouver.

Uh-huh... Balderdash!

Last week, in the Burnaby Newsleader paper, we got a taste of what has really been driving the market.

According to Angela Calla, a mortgage broker with Dominion Lending Systems and the host of CKNW’s Mortgage Show, 70% of the province’s real estate purchases last year were first-time buyers.

“The average income we were seeing last year was $45,000, either combined or from one person,” said Calla. “And a 5% down payment was the average from that same demographic.”

Given that we are the 'land-of-the-million-dollar-single-family-homes', those are chilling statistics.

Our housing market is being driven by over leveraged buyers who exist solely because the federal government now insures virtually all mortgages through CMHC.

This bit of fiscal magic is what has greased the wheels of the credit machinery in Canada and put the North America real estate collapse in abeyance here in Canada.

As Murray Dobbin noted on his blog, the Harper-lead federal government did all of this as deliberate political policy.

In an effort to prop up the real estate market in 2008, the Harper government directed the CMHC to approve as many high-risk borrowers as possible to keep credit flowing. CMHC described these risky loans as “high ratio homeowner units approved to address less-served markets and/or to serve specific government priorities.”

The approval rate for these risky loans went from 33% in 2007 to 42% in 2008. By mid-2007, average equity as a share of home value was down to 6% — from 48% in 2003.

According to CMHC numbers Canadian banks increased their total mortgage credit outstanding by only 0.01 per cent from the beginning of 2007 to January 2009.

It means the Canadian government has been almost 100% responsible for all the mortgages issued over the last three years.

And in 2009, as we have just learned from Ms. Calla, 70% of the province’s real estate purchases were from first-time buyers whose average income was only $45,000, either combined or from one person.

Classic sub-primers.

Canadians have been borrowing money at unprecedented levels and now owe a record $1.41 trillion, putting Canada in the No. 1 spot among OECD nations in terms of consumer debt to financial assets.

Every week I get emails from people asking me for investment advice.

It's simple.

Understand what is going on around you and position yourself to take advantage of it.

Real Estate is about to implode massively, hundreds of thousands of Canadians are going to be financially ruined and the Canadian government will be on the hook so badly we will make the Greeks look like fiscal conservatives.

Read the writing on the wall... a once-in-a-multi-generational opportunity is about to present itself.

Get out of debt, get liquid and invest in that which will explode in in value in this environment.

You can't prevent what's coming nor can you help those who are going to be wiped out. But since you can see what lies ahead, get ready to take advantage of it.

What more do you need to know?

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Panic?

So much going on.

BBC Newsnight held another great financial round table discussion which brought together Hugh Hdenry, Gillian Tett and Jeffrey Sachs.

Hugh Hendry is a Scottish fund manager who has become prominent in the UK for his commentary on the financial crisis and is known as the most high-profile Scot in the controversial Hedge Fund sector.

His take on what is going on in Europe? "I would recommend you panic. The European banking system is in a crisis... Let's purge this system of its rottenness. Let's take on a recession. It's going to be tough, people are gonna lose their jobs. They are going to lose their jobs anyway. We can spread this over 20 years, or we can get rid of it over 3 years."

You can see the full segment here.

Speaking of banks, Murray Dobbin has another excellent post on his blog about the Canadian banking system which you can see in it's entirety here (hattip to the faithful reader who posted the link in the comments section).

Dobbin succinctly summarizes how Canada has subsidized it's banking system making Canada the third worst of the G7 countries (behind the US and Britain) in terms of financial stabilization costs.

I highly encourage you to read Dobbin's article.

It outlines exactly why Canada has a housing bubble and shows how we are simply a pinprick away from it all blowing up.

As Hugh Hendry says, I would recommend you panic.

Time is running out to prepare for what is coming.

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Sunshine, lollipops and rainbows everywhere

Ahh... ya gotta love it.

Almost as if on Que, enter the Canadian Real Estate Association trying to slap down yesterday's bank economist's attempts to piss on the R/E parade.

"Don't expect big drop in B.C. home prices," trumpets the CREA. "If you are waiting for housing prices to drop substantially in B.C., it's probably not going to happen."

Of course not, real estate only ever goes up.

CREA Chief Economist Gregory Klump predicts a small decline in the average price in B.C. in 2011. "After that it will likely stabilize so what's going to happen is over time incomes will continue to rise as well. So that's going to return the ratio to its long term average. It's going to take longer than elsewhere in Canada because you're farther away from a long term average than other provinces are."

But if Klump's prognosis is still no pessimistic for you he quickly adds that "the price-to-income ratio may be affected by investors - again skewing the market upward."

Leslie Gore would be so proud.

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The Trigger

Just getting back from my own long weekend and it's gonna be too late for a proper post. Perhaps the most interesting developments on the real estate front this weekend is the release of two seperate reports that conclude that most homes in Canada are overvalued.

Doesn't exactly rate as a 'newsflash' to this blogs faithful readers, but I was drawn to this tidbit from CIBC bank economist Benny Tal:

“The fact that prices are overvalued today does not necessarily mean that they will crash tomorrow. A violent market correction needs a trigger such as the sub-prime crisis which ignited the U.S. real estate meltdown, or abnormally high interest rates as was the case during the 1991 property crash in Canada. Fortunately, that is not on the horizon this time around.”

I'm not sure which is more stunning. Seeing the big banks finally admit that real estate prices are overvalued... or the sheer audacity of denying that there are triggers present that could ignite the real estate powderkeg.

More on this during the week.

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It's Different Here

Last September I wrote a post about Mike "Mish" Shedlock, a top indie blogger from the United States. His blog (MISH'S Global Economic Trend Analysis) is consistently rated one of the top blogs on the internet.

On Saturday he posted an email he received from Canada defending the Canadian Housing Market and gave his reply. You can see it on his site here. I am going to reprint it here. Needless to say, I agree wholeheartedly with Mish.

• In response to (a post I made titled) Canada's Household Debt Reaches Record $42,000 a Person, I received an email from Paul Kilby of Canada (city unknown), who thinks it's different in Canada. After correcting at least 20 typos and spelling errors,
  Paul writes...
  
  As a Canadian I take great umbrage at yet another irresponsible bearish article from you.
  
  Reasons:
  
  1)Your type of advice has lost investors a double over the past 15 months,
  2)You have no understanding of how high ratio mortgages are funded in Canada(hint: Its not the cowboy Fannie, Freddie, package them and sell them as AAA debts etc),
  3)Canada's vast natural resources and tiny population largely insulate us from all but the direst long lasting downturn which we are obviously not having worldwide nor are we likely to,
  4)Our banks are very solidly capitalized and would require a 25% downturn in real estate values to even begin to dent this solid position as well as vast defaults on other debts. That's nationwide. We are not, I repeat not, oversupplied in housing in the vast majority of the country,
  5) Barring a worldwide collapse that would make 08-early09 look like child's play what calamity do you have in mind that would knock Canadian RE values for such a loop,
  
  Even you must admit the most likely scenario now is a world muddling through the next 3 to 5 years, hardly the stuff real estate collapses are made of.
  
  Do I think we will have a correction in overheated markets (Van to Calgary. Yes, but nationally this will likely translate into a 10 to 15 % overall decline and likely take 18 months to 2 years to complete.
  
  In case you haven't noticed, Bernanke, Geithner et al will not permit asset prices to collapse worldwide, the US dollar be damned. As an American this must be very upsetting to you but please don't pretend to know anything of Canada s economic position as you clearly don't.
  
  Paul Kilby
  
  
  Dear Paul...
  
  It is not different in Canada no matter what you think.
  
  However, let's start at the beginning of your rant. For starters, I did not cost anyone in Canada a dime. Most of my readers believe as I do and were not about to plunge into an overheated market no matter what I said.
  
  The rest are fools like yourself who think laws of economics do not apply to Canada because "It's different here". Those people bought regardless of what I said.
  
  Secondly, I am very aware of how the Canadian mortgage system works. Your system is arguably much worse than the US system of passing the trash to Fannie and Freddie.
  
  Canadian banks can and do directly pass every garbage loan to the Canadian Central Bank. In the US, Fannie and Freddie (in spite of their numerous faults), were actually among the more sane players in avoiding subprime slime.
  
  The worst of the trash in the US went to hedge funds, pension plans, foreign investors, etc.
  
  Canada's policy avoided the bank failures we saw in the US, but at the expense of bloating the central bank balance sheet with garbage. That policy will work until it doesn't.
  
  Paul, I have heard it all. I received taunts in 2005 about my housing crash call, in 2006 about my deflation call, in 2007 about my commercial real estate crash call, also in 2007 about my Europe is as bad as the US currency call.
  
  I even received taunts from deflationists telling me that it was irrational to believe in deflation and gold at the same time.
  
  My second favorite taunt came in October of 2007, the very day the market peaked. That day, I received an email from someone telling me "Mish, we are having Turkey for Thanksgiving and you are the turkey"
  
  My favorite set of taunts came during summer of 2008 when crude hit $140. That week I received numerous emails calling me an idiot for saying all time record lows across the entire curve were coming in US treasuries.
  
  Now, I have you telling me it's different in Canada. You sound just like the clowns who thought it was different in Florida, it was different in Las Vegas, it was different in San Diego, and it was different in Portland.
  
  Well I have news for you. It was not different in any of those places and it is not different in Canada either.
  
  That said, I certainly am not always right, especially on timing.
  
  I freely admit I was surprised that Canada was able to keep its housing bubble going. The same applies to Australia where I greatly sympathize with Australian economist Steve Keen who recently lost a high profile bet on home prices down under.
  
  As for "In case you haven't noticed, Bernanke, Geithner et al will not permit asset prices to collapse worldwide", that is one of the most ridiculous statements I have ever heard, because it it ignores hindsight, which should be 20-20.
  
  The S&P crashed. The Nikkei crashed. China crashed and in spite of world record stimulus from numerous central banks, home prices in the US are still falling.
  
  Thus, regardless of what Bernanke wanted, asset prices did crash, and they never fully recovered, especially housing.
  
  Finally, you tell me it's different in Canada because of natural resources. Pray tell, what percentage of the Canadian population works in mining or natural resources sectors?
  
  A Canadian housing crash is a given. Timing it is the only issue. Furthermore, the bigger the bubble the bigger the crash. Only fools believe "It's different in Canada".
  
  The pool of greater fools always exhausts itself. Timing it is the only problem. One timing indicator that frequently marks the top is taunts from the true believers who think "It's different this time."
  
  It never is.
  

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It will be complete chaos

You've seen me say it before. And I will say it again... the financial crisis of 2008 was a profound earthquake, the reprecussions of which we still do not fully appreciate.

The aftershocks continue.

Yesterday the German government announced they were banning short-selling of the banks or betting against bonds.

They are doing this because they think the financial crisis is going to get worse.

And, as this article from the Telegraph notes, the response of the markets is expected to be extreme. Traders greeted the move with a mixture of anger and astonishment.One bond trader said he expected Wednesday's trading session to be one of the most volatile in living memory:

"It will be complete chaos, I really don't know what the Germans think they are doing... Without the two-way flow the German market is likely to become utterly dysfunctional... and it raises the long-term question of who is now going to want to buy their debt.""

Will German bonds (called Bunds) collapse today?

The story of the decade will be sovereign debt, a tale which will ultimately drive interest rates sky high.

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Meltup - the youtube video

Spent last night watching this 55 minute video from Inflation.us that is now making the viral rounds.

It has some parts I don't agree with and but it outlines, in simple language, economic facts which are undeniable.

Inflationist or deflationist, I think it's worth checking out.



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Pardon?

I simply shake my head.

What else is there to do?

Listening to one of my colleagues this week tell me about Mary (not her real name), a single mom who is employed in our company who had bought a home in New Westminster recently.

A $725,000 home.

And Mary, after raiding her RRSP of $7,000, scraped together the 5% downpayment and was now the proud owner of a $695,000 mortgage.

This on an annual salary (including overtime) of just over $64,000.

How is this possible? Emergency level interest rates combined with CMHC insurance, of course.

With this as a backdrop, I almost choked on my morning coffee yesterday when I read that Finance Minister Jim Flaherty had proclaimed that "there does not appear to be a bubble in the country's housing market and that the level of consumer defaults has not increased in any significant way."

Heaven help us!

As many of you are probably already aware, a report by the Certified General Accountants Association of Canada released on Tuesday showed that Canada ranks first in terms of debt-to-financial assets ratio among 20 OECD countries.

The report, titled "Where Is the Money Now: The State of Canadian Household Debt as Conditions for Economic Recovery Emerge", showed Canada ranks first in terms of debt-to-financial assets ratio among 20 OECD countries. We are ahead of the Slovak Republic and - remarkably - Greece.

The U.S. came in a close fourth.

"When household indebtedness is measured as a ratio of consumer debt to financial assets, it becomes clear that Canadian households rely much more heavily on consumer credit than their counterparts in other countries," the report explained. Canadians' debt-to-income ratio reached 144% by the end of 2009.

Household debt in Canada reached a new high of $1.41 trillion in December 2009. If household debt was spread among all Canadians, each person would hold more than $41,740 in outstanding debt - an amount 2.5 times greater than 1989, according to the study.

Experts in the report point out if mortgage rates go up by just two percentage points, mid-income to mid-to-high income families could face having to cut 9% to 11% from "other expenses," in order to maintain their current standards of living.

And we all know full well that this isn't a hypothetical situation that the report is posing.

(everyone, that is, except Minister Flaherty)

Mortgage rate increases have already begun as lending institutions, anticipating that the Bank of Canada will increase its key lending rate in July or sooner, have already increased their fixed mortgage rates.

Watch what is happening in Greece, Portugal, Spain... and soon the UK.

Because when interest rates spike upward, and the Government of Canada (through the guarentees of the CMHC) is called upon to reimbuse the $650 Billion in secured mortgages... you will see the bond vigilantes turn against our country in a dramatic and violent fashion.

It will not be pretty.

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Inflation in Argentia is at 25%

I'm always amazed at the number of people who scoff at the suggestion that inflation is a concern right here, right now.

It is taking hold around the world as we speak.

The latest example comes from Argentia.

Annual price increases in South America’s second-biggest economy are more than 25%, which would make Argentina’s inflation rate the second highest in the world behind Venezuela. Argentina’s statistics agency said prices rose 9.7% in March from a year earlier.

Quickening inflation in South America’s second-biggest economy isn’t a concern only for those trying to buy groceries. Doubts about the government’s data mean investors demand higher yields on Argentine bonds, said Edwin Gutierrez, who manages $5 billion in emerging-market debt at Aberdeen Management Plc in London. The current yields on Argentine debt of about 12% percent are unsustainable, he said.

The extra yield investors demand to buy Argentine bonds over U.S. Treasuries is 696 basis points, or 6.96%, according to JPMorgan Chase & Co.

Compare that to Iraq where the so-called spread for Iraqi bonds is 3.88%. Even the Dominican Republic, whose $46 billion economy is barely one-tenth of Argentina’s, sold $750 million of bonds last month yielding 7.5%. Argentina’s dollar bonds due in 2015, by comparison, yield more than 12.5%.

Surging government spending is behind the price increases, said Daniel Kerner, an analyst at the Eurasia Group in New York. Government outlays before interest payments rose 40.1% in March from a year earlier as revenue increased 39.9% the government said.

Surging government debt, eh?

Good thing we aren't looking at a problem like that here in North America.

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The Story of the Decade: Sovereign Debt

As I said a few months ago, the story of the coming decade will be sovereign debt.

The Swiss-based Bank of International Settlements (BIS), the oldest international financial institution in the world, has issued a working paper written by three senior staff economists (“The future of public debt: prospects and implications”). In that paper the BIS warns that Greece isn’t the only Western economy that is setting off alarm bells.

The BIS names 11 more economies of concern: Austria, France, Germany, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, Britain – and the United States.

Without “drastic measures,” BIS says, all of these countries will hit a wall of debt.

When the senior economists at BIS warn 12 of the richest countries on Earth that they must take drastic action to reduce debt, you know the situation is bad.

The BIS paper notes that the public debt of 30 OECD countries will (on average) exceed 100% of GDP within the next year, “something that has never happened before in peacetime.”

But that isn't half of the concern. The BIS goes on to warn that conventional debt-to-GDP ratios are misleading – missing “enormous future costs” that are already authorized by past fiscal commitments, that will inexorably inflate public debt further still.

By the end of 2011, the BIS economists calculate, U.S. government debt will have risen from 62% of GDP in 2007, not quite three years ago, to 100%. Britain’s debt will have risen from 47% of GDP to 94%. Italy’s debt will have risen from 112% of GDP to 130%. All together, the public debt of the 12 countries will have risen from 73% of combined GDP to 105%.

At this debt level, the risk of sovereign default rises rapidly. And the BIS analysis says this unprecedented debt level will itself increase “precipitously” in coming years.

Each of the individual countries insist that those levels will fall.

The BIS says - not a chance and that these increases in debt are untenable.

What you should take note of is what the BIS report says comes next. The BIS says the financial markets won’t permit these debt increases to exist as such.

The only mystery, the BIS report says, is exactly when the markets will intervene.

History shows, the report says, that when the markets do rebel, they often do so instantaneously and decisively – often without much warning.

“When, in the absence of fiscal actions, will investors start demanding a much higher compensation for the risk of holding the increasingly large amounts of public debt that [these countries] are going to issue to finance their extravagant ways?” the BIS economists ask. “The question is when will markets start putting pressure on governments, not if.”

Translation: high interest rates, like what we saw in the late 1970s, are coming.

Meanwhile, in other news...

Yesterday the United States posted their 19th straight monthly budget deficit, $82.69 billion (just for the month of April) - an amount that was nearly four times the $20.91 billion shortfall registered in April 2009 and the largest on record for that month. It was more than twice the $40-billion deficit that Wall Street economists surveyed by Reuters had forecast.

On another front, the 10 Year US Tresury note auction results were also released yesterday. It seems that one quarter of the accepted bids came from direct (anonymous) bidders. This was a huge jump from April and represents the highest participation rate from this group since the crisis began. The drop in primary dealer participation rate to 33% was shocking. Remember these numbers and trends the next time someone suggests the sovereign debt crisis is limited to Europe or within the euro zone. As Zero Hedge noted, "there is no way that the Federal Reserve is not directly or indirectly interfering with auction take downs."

What you will start to see in the coming months is that people around the world will begin waking up to the dire circumstance our western economies are in.

This is already creating a mini-panic and rush on precious metals, a trend which will only intensify.

Reports surfaced yesterday suggesting the panic buying of phyiscal gold in Europe is threatening the depletion of the Austrian Mint. Yesterday the Mint said that it had sold 243,500 ounces of gold in coins and bars in the last 2 weeks. That's more than it sold in the entire first quarter. The Mint reports that the gold orders are coming entirely from Europe and are a sign of "panic buys".

And it's not just gold that is falling to panicked buying from Europeans who openly fear the demise of their currency.

Now, courtesy of Slim Beleggen, it appears the situation in the silver market is just as bad and has spilled over from Austria to Germany. Beleggen suggests the contagion is no longer one of sovereign debt, but of precious metal physical inventory. The primarily silver focused (but holding gold as well) Kronwitter precious metal online retailer is not only not accepting any orders, but has entirely taken down its website.

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

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

They are right.

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

That's why back on January 11th I said the next big spike would take gold to over $1,650 US an ounce.

I believe we're on our way to that level in the next couple of months.

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If Greece Is Bear Stearns, Will the UK Be Lehman?

Great little piece on CNBC yesterday which posed the above titled European debt contagion question.

Sunday’s news of a 750 billion euros ($951 billion) stabilization fund and European Central Bank assistance for the European bond market averted a full fledged liquidity crisis, but many remain sceptical that the crisis has past.

Can the governments in Greece and Portugal live up to their end of the bargain and significantly cut government spending in the face of bitter opposition from voters?

“The big question I am asking myself is whether Greece is Bear Stearns,” Anthony Fry, senior managing director at Evercore Partners, said. “What I really fear is that if Greece is Bear Stearns then the UK is Lehman Brothers.”

Fry, it should be noted, worked for Lehman before its collapse.

There is an insistance that the UK will be alright because it has the ability to sell government bonds internally.

Steven Barrow, the head of G10 Research at Standard Bank, holds that opinion. “I am confident about the prospects for the pound,” Barrow said.

The difference between the UK and Greece, according to Barrow, is that Britain has more room for maneuver. “The UK can devalue and print money, the UK will not default, the UK will not need the IMF,” he said.

Sounds like a recipe for currency collapse to me.

And Anthony Fry is adamant that such analysis is nonsense.

“I can’t believe (the UK) can avoid trouble," he said. "The current coalition talks are like arguing over a birthday cake. Once they decide how much of the cake they get they realize no one bothered to bake the cake.”

Fry makes the exact same point I have been making the past few months; with a lot of money needing to be raised over the coming months and years, UK borrowing costs are going to move sharply higher.

“My big fear is that after (Chancellor of the Exchequer) Alistair Darling refused to support the EU/IMF/ECB bailout of the euro zone bond market, the euro zone may stand by and do nothing when the UK gets into trouble,” Fry said.

Fry remains worried about the problems facing Greece will spread to Spain and Portugal despite Sunday night’s unprecedented support.

“Tuesday was a correction post Monday’s huge short squeeze," Gallagher said. "The big question now is whether institutional investors will return to the European bond market.”

Meanwhile Pimco, the world’s largest mutual fund, made the decision to stay clear of a proposed Greek dollar-denominated bond auction last month and that decision was one of the key moments leading up to Sunday’s rescue package. The coming weeks and months, July in particular, will be crucial. That's when €227 billion redemptions come up in the euro zone and with Spain needing to refinance significantly that month.

“What we are likely to see is a two-tier Europe," Michael Gallagher, director of research at IDEAglobal, tpld CNBC. “A double-dip recession in Southern Europe is increasingly likely. Core Europe will slow, but do OK. The outlook to the South is far worse.”

All these agreements are predicated on the EU governments meeting strict budget targets and stepping up debt consolidation efforts. Which means the Achilles Heel in Sunday's agreement is governments resisting expansionary, deficit financing once its economic fortunes begin to falter.

The United States has been unable to break that cycle, what makes anyone think the PIIGS will be able to?

So, if if Greece is Bear Stearns and the UK is Lehman, who will be AIG?

“No comment," Fry said.

I'm willing to be it will be California.

As I said last week: first the PIIGS, then the UK and then... the United States.

Are you prepared?

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Meanwhile... on the local real estate front

If you read my little blog you know that I (and my colleagues) believe that the Village on the Edge of the Rainforest is in for the mother of all real estate collapses.

How big of a collapse?

We stand by our prediction of a minimum drop of 40%-50% in the value of single family houses from the highs, and likely much more.

Strengthening that conviction are reports like this one from the Canadian Association of Accredited Mortgage Professionals (CAAMP).

CAAMP simulated the impact of mortgages hitting 5.25% – a rate which isn't even 2% higher than the current average of fixed-rate loans outstanding - and the impact will result in about 500,000 mortgage holders who will be in trouble.

When you add in the 375,000 who are already having difficulties, you have a total of about a million mortgage holders who very shortly be falling on difficult times with their payments.

How significant is that?

About 9.3 million families own houses in this country and 5.5 million have mortgages. So if rates rise less than 2%, 2 out of every 10 mortgage holders will be under significant 'financial stress'.

That's 20%.

The US housing market dominoes started falling on far less than this.

Ramping up the heat on this percolating mess is the fact that approximately 2 million mortgage holders carry variable rate mortgages. Economists are predicting that those prime variable mortgages will be going (in very short order) from the current 2.25% to 5%.

That's a jump of almost 3%, higher that the forecast increase of less that 2% which could cause so many 'problems'.

'Financial Stress' are going to be the buzz words of the coming next two years. Followed very quickly by the companion catch phrases of 'default', 'bankruptcy' and 'foreclosure'.

In the United States these conditions were a recipe for real estate implosion.

Thank God it's different here.

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Marching headlong down the road to Q.E. to infinity

Some interesting comments to the last post about the stock market's wild ride. Thank you to those who emailed and posted.

Agree or disagree with my comments, here's a thought for you from Jim Sinclair.

When the DOW is down 500 points in the blink of an eye, this is considered extremely bad and needs to be investigated. And in this flash crash all Market orders placed are considered bad and are cancelled!

But on a day when the Dow is up 500 points in the blink of an eye, this is considered good and congratulations are in order. Yet in this flash boom, all Market orders placed are considered good?

Uh-huh.

Yesterday European leaders committed to do “whatever it takes” to defend the single Euro currency.

This is a repeat of what US policymakers were forced into in the wake of the Lehman Brothers collapse. Not until the US Treasury and Federal Reserve promised (in effect) to bailout every bank and financial institution that looked like it was sinking did the hurricane begin to abate.

Europe will be hope for a similar result from yesterday’s initiatives and the initial response of markets is encouraging, but this is not an entirely done deal and there is still much to come.

Euro nations have in effect taken another giant step down the road to fiscal and political union by agreeing to cross guarantee the loans of weaker nations. What is even more significant is that the European Central Bank has been dragged kicking and screaming into conducting a programme of quantitative easing – buying up public and private debt securities – similar to that already carried out in Britain and the US.

What is becoming increasingly clear is that all national debt is now going to be bailed out.

Next... all debt of individual US states will be bailed out.

Regardless of the first knee jerk market reaction, the fact of the matter is that we have taken the nuclear option of adding more debt to entities failing because of debt.

Steel yourself for more unrest, in markets and in currencies.

The reaction you saw in the markets is being spun as a mystery... and there for it's branded an anomaly.

No one wants to admit that it was a selloff of significance... and therefore indicative of further problems.

The truth of the matter is that what you saw here was a combination of computer based flash trading, below the horizon computer based exchanges, and algorithms gone wild.

It's proof that computer markets lack specialists and are ticking time bombs of illiquidity. This condition remains and you can be sure we will be looking for more repeat performances.

With the $350 billion the US Federal Reserve threw in to support the EU, we had about One trillion in Quantitative Easing initiated today.

And when you consider how much more will have to be thrown at currency markets to sustain the Euro at $1.29 (at which it must be sustained to declare any market success), and it's clear we are inescapably down the road to Quantitative Easing to Infinity.

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Mr. Toad's Wild Ride

An evening post for you.

Mr. Toad's Wild Ride. How else to describe this crazy day in the stock markets?

At one point the DOW had fallen 1,000 points - a drop more precipitous than any day in 2008. By the close that market had recovered - somewhat - and closed down only 430 points.

Only.

Perhaps the most stunning development of the day occurred on the NASDAQ. From Bloomberg:

"Nasdaq OMX Group Inc. said it will cancel all trades of stocks at prices that were 60 percent above or below the last price at 2:40 p.m. or immediately prior. The exchange operator said in a statement it will cancel all trades greater than or less than 60 percent away from the consolidated last print in that security at 14:40:00 or immediately prior. Nasdaq said it coordinated the decision with all other exchanges."

Cancel all trades? Ummm... so the market was crashing big time at the end of the day and the Exchange intervened to say... "never mind, your trades which pummelled stock prices at the end of the day are... cancelled????"

Will tomorrow be Black Friday, 2010?

As I have said all year, the magical rally of the past year is a false recovery.

The bounce off the February lows has resembled a low volume Ponzi scheme. It has been driven by technically oriented buying from the Banks and the hedge funds.

Stunningly the anchors on financial television are trying to blame the sell off on a 'fat finger' order that caused Procter and Gamble to drop 20 points in 45 seconds. Are we to believe a typist inputting an order to sell 16 million shares typed "B" for Billion instead of "M" for Million?

"Oops. Crashed the free world. Sorry about that - my bad."

Bullsh*t.

The market plummetted because of its highly unstable and artificial technical underpinnings. Wall Street right now is nothing more than a casino, dominated by a few big Banks and hedge funds.

I invite you to watch this 7 minute interview with Gerald Celente which echos a lot of what has been said here all year:



Meanwhile we now learn that the US Federal Reserve is printing up another $105 billion to send to Greece to help with its debt problem.

Huh?

Why?

Is it being done to bail out more US Banks?

You know, the ones we were told had little exposure to sour European debt? Last week Bloomberg reported that JPMorgan Chase & Co., the second- biggest U.S. bank by assets, has a larger exposure than any of its peers to Portugal, Italy, Ireland, Greece and Spain. JPMorgan’s exposure to the five so-called PIIGS countries is $36.3 billion, equating to 28% of the firm’s Tier-1 capital, a measure of financial strength, Meanwhile Morgan Stanley holds $32.4 billion of debt in the region, which equates to 69% of its Tier 1 capital.

Make no mistake. Bernanke isn't supplying Greece with $105 billion in bailout money to save Greece. He's actually bailing out U.S. Banks—again!

Quantitative Easing is plowing ahead full bore. And we are going to reach a point where nothing will be able to stop this money from eventually entering the money supply.

And when it does, inflation is going to hit with a vengence.

1981 is going to look like a cakewalk of cheap interest rates when all this finally plays out.

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First the PIGS, then the UK, then the United States

The biggest fear from the debt saga playing out in Greece right now is contagion.

Concern is rampant that next up will Portugal, Italy, and Spain. After that will come the UK. And finally the problems will spread to the United States.

Imagine if you could turn back time... back to, say, 2006/2007.

If you saw Goldman Sachs betting against their own mortgages, betting on a complete US mortgage meltdown, would you invest differently?

Knowing what you know now, would you take steps to prepare, perhaps even position yourself to take advantage if the big banks were making similar such bets?

Well, according to a wall street journal report, big banks like JP Morgan, Bank of America, and Citigroup are preparing for that contagion's spread to new world by buying financial instruments that essentially allow them to short sell (or bet against) U.S. cities and states.

These banks are trading in so-called municipal credit default swaps which can be used by investors to bet that insurance contracts protecting holders of municipal bonds will default.

Some states say the derivatives not only scare away potential buyers of municipal bonds by creating a perception of risk, but ultimately drive up states' borrowing costs.

The California treasurer is just one of a number of state treasurers that have launched a probe into the sale of these derivatives and the sale of municipal bonds by big Wall Street firms that might reveal "speculative abuse of CDS in the muni market," says one regulator.

Clearly these big US banks see a looming debt crisis in the United States and fully expect the Greek contagion to work it's way to North America.

Of course if individual US States or cities go bust, the US federal government will have to bail them out.

Which means printing more money, injecting more liquidity into the system, etc.

What was it that Bernanke said about the basic laws of arthmetic?

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The Swirling Winds

Hi Gang.

Sorry for the lack of posts recently. Tax week combined with other matters have kept me busy.

Sovereign debt remains front and center on the world stage and the concern is gaining momentum.

As I have stated over and over again, we still do not fully understand the depth and breadth of the financial earthquake that rocked our financial system in 2008.

Even now, a year and a half later, we still do not realize it's significance.

It has been downplayed so much that the average person is completely oblivious in Canada to what is going on.

I note with keen interest that there were another 7 bank failure in the US on the most recent 'Bank Failure Friday'. And despite the almost complete lack of press coverage, last week's losses were extremely serious. They were the largest in any single week since the failure of IndyMac Bank on July 11, 2008.

IndyMac had assets of about $32 billion and deposits of $19 billion. Its failure cost the FDIC an estimated $8 billion.

The seven banks that failed this week had combined assets of about $25.8 billion and deposits of $19.6 billion. These failures cost the FDIC an estimated $7.33 billion.

Prior to this week, the FDIC’s estimated losses from 57 bank failures in 2010 stood at about $8.6 billion. This week’s failures practically doubled that figure, to $15.93 billion.

According to an AP article posted Friday, the FDIC’s deposit insurance fund “fell into the red last year, hitting a $20.9 billion deficit as of [Dec. 31, 2009].” With this year’s losses, the fund’s deficit has grown to at least $36.8 billion. In addition, the FDIC has a huge exposure for worse-than-expected losses on some $165 billion of assets taken over by acquiring banks.

That pretty much wipes out the $45 billion the FDIC announced it was going to raise by requiring banks to pre-pay premiums for the period, 2010 through 2012. Obligations of the FDIC will soon become obligations of the U.S. taxpayer, adding billions of dollars each year to already out-of-control federal deficits.

Speaking of out of control sovereign debt, I notice that Warren Buffett has finally broken his 'everything will be alright' facade and is now acknowledging what is coming.

From the article: "The financial crisis was stemmed by massive monetary and fiscal intervention in developed economies like the U.S. and the U.K. That's shifted a private-sector debt mountain on to governments, increasing concern about sovereign risks. One concern is that governments will print lots of new money to pay debts, undermining the value of currencies and triggering a damaging bout of inflation. 'Events in the world over the last few years make me more bearish on all currencies in terms of holding their value over time,' Buffett said."

Interest rates and inflation: the watch words of the next 10 - 15 years.

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No laws are more basic than the laws of arithmetic

So what is quickly developing as the central story in world finances right now?

Sovereign debt.

And yesterday there was a dramatic worsening of the eurozone sovereign debt crisis as Standard and Poor's downgraded Greece's credit rating by three notches to junk status, citing concerns about the country's ability to implement the reforms needed to slash its budget deficit.

The agency also cut Portugal's rating by two notches to A minus.

This, of course, led to heavy falls for European and US equities as investors sought sanctuary in German and US government debt, gold and the dollar.

The moves came towards the end of a European session that saw mounting uncertainty over whether Greece would secure financial aid in time to meet a refinancing deadline on May 19.

In view of the popular opposition in Germany to helping Greece, markets have grown increasingly concerned about just how Angela Merkel, Germany's chancellor, can push the country towards participating in a bail-out.

Jane Foley at Forex.com said: "If Germany doesn't come through with a loan for Greece, it would seem unreasonable to expect cash-strapped economies such as Spain, Ireland and Portugal to help make good the shortfall - meaning that an EU loan could yet fail. Even if Germany does present a loan to Greece, there would be no guarantee that there would be an end to Greece's problems. Until Greece can prove it can live within its means its bond yields will carry an inflated risk premium on the open market reflective of higher default risk."

Five-year credit default swaps on Greek government debt, a measure of insuring against debt default, hit a record yesterday of 800 basis points, up from 710bp on Monday. The spread of Greek 10-year government bond yields over Bunds - the premium demanded by investors to hold Greek rather than German debt - hit a record wide of 718bp.

"Risks are mounting and governments should move swiftly to take additional corrective measures to improve their outlook and bolster market confidence."

What is most interesting is the way investors are seeking sanctuary in the the US dollar and US Treasuries.

Mark my words... it will be a shortlived strategy.

As has been stated on this blog earlier this year, the UK and the US are not that far removed from Greece and Portugal.

In fact on the very day all this transpires, US Federal Reserve Chairman Ben Bernanke is warning the United States that America's debt is unsustainable.

And perhaps the most significant quote was this little gem: "Failure to cut the deficits would push interest rates higher - not only for Americans buying cars, homes and other things - but also for the government to service its debt payments," Bernanke said.

Which brings us to our insular little world in the Village on the Edge of the Rainforest.

So many of the R/E cheerleaders living in denial and delusion have clung to Bernanke's comments about keeping the Federal funds rate low for an extended period of time, even as the economy appears to be recovering.

But as I have cautioned time and time again, that does not mean interest rates for the common mortgage holder won't rise.

Today Bernanke came out and said so.

What is happening in Greece and Portugal today will - soon enough - play out in the UK and the United States.

Many of the individual States in America are in dire financial straights. And the federal balance sheet, as Bernanke notes, is unsustainable.

"No laws are more basic than the laws of arithmetic: For fiscal sustainability, whatever level of spending is chosen, revenues must be sufficient to sustain that spending in the long run," Bernanke told President Barack Obama’s commission to tackle the soaring deficit yesterday.

The bond market is going to drive interest rates up.

And I don't think it's a stretch to imagine that if the Bank of Canada raises the BoC rate by 3% over the next six months that the bond market also won't drive up rates an additional 3% as well (we've already seen them boost rates 1% with no raises from the BoC).

That would be a rate increase of 6% added to the current five year rate of 6.25%; for a mortgage rate of 12.5%.

Perhaps that's why BoC Governor Mark Carney was telling a Parliamentary committee that Canadians should get ready for more expensive money and less expensive houses. “We see a marked weakening in housing over the course of our projection (into 2012), starting from the second quarter of this year and over the balance,” he said.

Central Bankers choose their words with extraordinary care.

And when Carney says he sees a "marked weakening in housing" between now and 2012, you should pay particular attention.

Perhaps he sees what a 12.5% mortgage rate will do to it.

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They did what?

And you thought twice in two weeks was a shock?

How about three for three?

Monday's, if you hold a mortgage, will soon be approached with absolute dread.

Yesterday the country’s largest bank, Royal, announced another round of mortgage-rate hikes. The rate on a five-year closed mortgage is now 6.25 per cent, an increase from the previous rate of 6.10 per cent. A one-year closed rate will, as of Tuesday, be priced at 3.80 per cent. All rates were increased by 15 basis points.

And all while the Bank of Canada rate hasn't moved a single point.

Canadian banks are preparing for an era of rising interest rates and these are just the early days of what is coming.

The bond market has now pushed rates up about 1% in just three weeks. And when the Bank of Canada makes it's moves (3% spread over 6 months to a year), don't expect rates to only move in tandem with the BoC.

They aren't now... what makes you think they will when Carney finally acts?

With that in mind I invite you to check out this well done youtube video by Vancouver Condo Info.

The video is a roller coaster simulation of the last 35 years of the Vancouver Real Estate market. The actual graph you're riding is the inflation adjusted value of a house in Vancouver BC based on data collected by Royal LePage and calculated by the UBC Centre for Urban Economics and Real Estate. Some of the peaks and troughs have been rounded to keep the train from flying off the tracks, but other than that slight modification it is a precise scale model of the red line on this graph.

Enjoy.



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Don't be fooled...

"Don't be fooled by the quick recovery". That's Bank of Canada Governor's bit of sage advice to Canadians.

Carney went to great pains on this weekend to tell consumers, executives and investors that they would be wrong to conclude it is business as usual these days.

“Anyone who sits and looks at what happened and says, ‘Well, that wasn’t a Great Recession,’ hasn’t appreciated the scale of what was done to ensure an outcome that wasn’t as extreme as before,” Carney told reporters on Saturday. “Particularly on the fiscal side. Anyone who doesn’t appreciate the gravity of the last couple of years hasn’t thought through or appreciated the scale of what will be required to adjust fiscal back to normal.”

Think about that for a moment.

Carney is emphasising what we have been saying on this blog all year. And 'adjusting' back to 'normal' isn't going to be an easy process.

And what concerns Carney most of all?

Why... sovereign debt, of course.

“We’ve seen war-like spending in peacetime,” Mr. Carney said. And the fact of the matter is that the world economy still is being powered mostly by hundreds of billions in government spending and extraordinary monetary stimulus. The growing debt – mostly public, but also private, as consumers in countries such as Canada took advantage of record-low interest rates to borrow and spend – is fundamentally changing the makeup of the global economy.

“What we are seeing with Greece, and what we have been seeing over the last few weeks, are the indications of the limits of fiscal stimulus,” Mr. Carney said. “There are a number of countries that are having to make adjustments, or will have to make adjustments, to more sustainable fiscal paths and I think that is an increasingly shared realization.”

And two of the countries foremost on the list of those that are going to have to make adjustments are the UK and the United States.

“We have to look at that and think of how to rebalance our own economic activity,” he said, referring to the relative weakness of Canada’s primary trading markets in the U.S. and Europe.

Make no mistake... there are serious hard times ahead. We're in a false recovery, and no one is more acutely aware of that than is Mark Carney.

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Sunday Funnies - April 25, 2010

(click on image to enlarge)

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In BC... we are not Alfred E. Neuman

In the last post I talked about blissful ignorance, a comment triggered by Financial Post article which covered a recent poll by The Investors Group to find out if homeowners across Canada were concerned about the recent rate rises.

Now one thing stuck out in my mind.

Could people living in the Greater Village on the Edge of the Rainforest really be that ignorant?

Turns out Vancouver Sun columnist Pete McMartin was wondering the same thing. Working with Sun colleague Fiona Anderson, the pair advises that the Investors Group had seperate statistics on the issue for B.C., in general, and Vancouver in particular.

Seems we are not as 'blissful' as the rest of the country. And with good reason.

Among all respondents, British Columbians reported carrying the highest mortgages, with a median amount of $180,000, or $50,000 more than the national average.

But that median mortgage amount of $180,000 was for all of B.C.

Kevin Lutz, regional sales manager and mortgage specialist with the Royal Bank, said he figures new mortgages in the Metro area average around $350,000. Brian Peterson, president of the Mortgage Brokers Association of B.C., who canvassed some mortgage brokers in the Metro Vancouver area, said local brokers were telling him it was not uncommon to see new mortgages in the $400,000-$450,000 range, typically for buyers who are stretching their borrowing powers to the limit so they might get into the market.

I have 17 friends who are also stretched and each have mortgages over $500,000.

Make no mistake. The Vancouver real estate market is leveraged on cheap money and low interest rates.

Meaning... it's all about those rates.

Mark my words, if the variable rate rises to 8% (with double digit 5 year rates), Vancouver will make California's crash look like a dress rehersal.

I suspect Neuman's iconic famous motto isn't the mantra of the local mortgage carrying crowd.

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Blissful Ignorance?

On a day when the Bank of Canada makes news for what it doesn't say, and Macleans magazine states the obvious, the item that catches my eye is a poll by the Investors Group which concludes that Canadians "may be overly confident that they can take higher borrowing costs in stride."

You got that one right!

Discussing Canadians' apparent confidence to deal with rising mortgage rates, Peter Veselinovich (the Investors Group's vice-president of banking and mortgage operations) said: "Part of that may be because they are fully knowledgeable about what's going on because they have a financial plan, they've had discussions, they've looked at what their risk tolerance is and what their affordability tolerances are. Or part of it may be some blissful lack of knowledge."

The reason for the overconfidence/blissful ignorance?

No one believes rates will rise more that about 3%.

This also comes on the day we learn that, in the UK, inflation rose at a higher rate than expected. It's up sharply to 3.4% in March from 3% the month before.

Watch for a similar scenario to start becoming evident in North America as well. As we pointed out last week, reports are surfacing that significant inflation is working it's way through the inventory replacement process.

After summarizing his experiences, one volume importer of industrial hardware (mostly out of Asia), who just received his April ocean freight rate update, concluded that "anyone who tells me that there is no inflation on the horizon is delusional and in for one hell of a shock.”

That's going to be pretty much every person with a mortgage in this country.

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Can you see it yet?

Interest rates.

Have I mentioned that this is what the story of real estate in Vancouver will revolve around?

Garth Turner picked up on the theme last night and drew attention to some projections from TD economics which indicate that TD is expecting Bank of Canada Governor Mark Carney to raise interest rates on 11 separate occasions over the next two years, taking the BoC from its current 0.25% all the way to 3%.

Now that may not seem like such a big deal, but what are the ramifications for mortgages?

A 3% BoC rate would elevate the prime rate at the chartered banks to 5%, and have the same effect on VRMs.

On a typical $600,000 Vancouver mortgage with the prime Variable Rate Mortgage conditions change profoundly.

At the current 2.25% the monthly payment is $2,616 and the qualifying income is $94,200.

At 5% the monthly is payment jumps to $3,500 and the income required to service it is $126,000. That means a 2.75% increase in the mortgage rate means your income has to rise by 33% to afford the same house.

At a time when listings are exploding, and 7,000 boomers a day in North America are retiring (the vast majority of whom are dependent on selling their house to fund their retirement), what does this mean?

It means one hell of a lot of people will be unable to buy their house at that price. And boomers will have to significantly lower their asking price in order to sell. With a simple raise in the BoC rate to 3%, the asking price has to come down far more than most people are going to have planned (read 'expected') to complete the sale.

So often I hear people in denial claiming, "the government won't allow that to happen."

Hate to break the news, but they will.

As Turner notes, Carney won't hold the line on rates "because it ain’t his job to run the economy or protect us from ourselves. The central bank is there to safeguard the money supply, print currency, stabilize the value of the dollar, handle the federal government accounts and, above all, corral inflation. Already the cost of living increases exceed the bank’s target, thanks in part to the housing bubble. Failure to stomp out the flames of inflation now will only lead to a forest fire requiring water-bombers and far higher interest rates a year out."

Those would be interest rates like the 21.5% kind we experienced in the early 1980s.

Carney has to raises them now, or he has to raise them significantly later. And this doesn't even figure into the equation what the bond market will do (you remember them... the element responsible for the recent two hikes in two weeks to mortgage rates?)

Either way, the real estate story has begun it's next chapter.

Can you see finally see what's coming?

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A time to reap, and a time to sow.

Persusing the blogosphere, the sense of anticipation and glee from bears is palpable.

After months of self-doubt, the inevitable chain of events and how it will impact the great Canadian housing bubble now seems clear.

But like a watched pot that never seems to boil, be prepared to watch this play out agonizingly slow.

Now don't get me wrong. Those Canadians who have been lured by cheap money over the past decade have pushed credit levels to a record high. For every $1 of disposable income, Canadians owe a record $1.47 and we are fast approaching a day of reckoning.

And when it comes to real estate in the Village on the Edge of the Rainforest, that reckoning will be profound.

I once again re-iterate my prediction that we will see a correction that is a MINIMUM of a 40% drop in single family homes and 50% drop in condos. I believe the reality will be closer to 70-75% for single family homes.

But that reckoning will take time to play out.

Canadians can't simply walk away from mortgages. As the domino's fall, families will move and protect financial assets, delay, dither and extend before finally succumbing to the ultimate remedy - bankruptcy.

After all of this, the foreclosure process in this province can take more than a year and a half to play out.

It took almost 8 years for people to realize that we were in a Depression in the 1930s.

And the effects of the financial earthquake of 2007 will take just as long to be fully felt.

But make no mistake about what is coming. The future for the economy of Canada is written clearly on the wall.

For the first time ever during a recession, Canadians took on more debt during the downtime's. Our nation will rue the day it decided to make borrowing even cheaper than it was before 2008. Household debt has surged three time faster than income in recent years and now stands at a record high of more than $1 trillion. With debt levels this high, even a small hike in interest rates will be ugly for those whose incomes aren't rising fast enough to meet their day-to-day expenses.

Our nation has been astonishingly arrogant during this crisis.

Easier credit terms and fierce competition among lenders have created conditions that, even when the recession hit in late 2008, left Canadians far more confident than Americans. This was due, in part, to a fictitious belief in a better housing market and stronger financial institutions.

Consumer confidence in Canada is only about 20% below where it was in 2007 whereas it's 60% lower in the U.S.

The higher confidence level and stronger banks meant Canadians were far more eager to borrow during the recession than Americans, said Benjamin Tal, senior economist at CIBC World Markets.

In a recent report, Mr. Tal concluded that “Canadian consumer fundamentals are weaker than they have been in almost 15 years.”

“There's been a real frenzy just to get in [to a house] at all cost, because if you don't get in you may never get in,” said Scott Hanah chief executive of the Credit Counselling Society, a non-profit group based in Vancouver that helps people sort out their debts. His organization has seen a 10% increase this year in the number of people seeking help. “Last year we saw an increase in activity of over 50%; So to have a further 10 per cent increase on top of that is significant,” he added.

That's something that concerns officials at the Bank of Canada. If consumers run into trouble with their mortgage payments, that in turn can lead to “wider problems with other consumer loans, such as credit card debt,” David Wolf, a Bank of Canada economist, said in a speech in January. “Consumers may also have to curtail other spending to cope with their debt burdens, creating adverse spillovers to the real economy.”

We haven't avoided the day of reckoning which began when the housing market retreated over a year ago. We've only delayed it.

It will play out.

As of now, “no matter how you look at it, Canadian households are currently in a decent financial position,” says National Bank Financial Group. The cost to carry all that debt has actually fallen (as a percentage of disposable income) to 7.6%, from 10.2% in 1990.

But consumers are squeezed and even a small rise in interest rates will cause them to turn down the taps on their spending. Can you now see what lies ahead for the economic recovery?

A stagnant economy, inflation, higher interest rates and waves of boomers retiring with no savings except for their plans to cash in on the equity in their homes to fund retirement. It is a confluence of circumstances that can only spell disaster for real estate.

A survey last year by the Certified General Accountants Association of Canada showed 21% of respondents could barely meet the interest payments on their loans. The group is about to release a similar survey this year and, said the group's chief executive Anthony Ariganello, the level of those struggling to cope has climbed to about 23%... and the spectre of rising interest rates has only just begun.

Bulls have chortled that the bears have been wrong these past 12 months.

They haven't been wrong about the analysis... just the timing.

To everything there is a season, and a change of season's is in the air. After 10 long years, the era of cheap money is ending.

It's all about interest rates.

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