Fascinating OP ED piece yesterday in the New York Sun newspaper.
Alan Greenspan was at the Council on Foreign Relations in New York City and also gave a speech.
Among his remarks, according to the Sun, was a statement by Greenspan that central bankers should be paying attention to gold (which, as you know, is something this blog recommends as well).
Asked why Gold was hitting new highs, here is what Greenspan had to say;
“Fiat money has no place to go but gold."
Greenspan said that he’d thought a lot about gold prices over the years and decided the supply and demand explanations treating gold like other commodities “simply don’t pan out.”
Greenspan concluded that gold is simply different.
At one point during his speech, Greenspan spoke of how, during World War II, the Allies going into North Africa found gold was insisted on in the payment of bribes. Said the former Fed chairman: “If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets."
I will say it again, the biggest and most confounding debate that's going on right now in all of finance is determining what the final outcome of the US Federal Reserve's market manipulative actions will be.
Gold is sending out a very strong signal and Greenspan says, "central banks should pay attention to it.”
First up today is more bubble denial. Today's treatsie first came to me via our friends at VREAA (although I am told it was posted earlier on the chatboard Real Estate Talks by contibutor SethM).
Back on September 7th, 2010 Pierre Marchildon, of Marchildon Property Investment Partners, posted a video commentary, The Vancouver Real Estate “Bubble”. Marchildon dismisses all this bubble talk and explains how there are merely ups and downs in the market. No crash, no collapse.
“A bubble is when there is a major dramatic drop… but you can see there is a bunch of ups and downs on their way up. Every decade, real estate doubles… that’s the point of this exercise. Don’t try to time the market.”
Translation: Buy now or be priced out forever!
Here is Marchildon's analysis (and don't tell Pierre that the entire graph he's pointing to is the first half of the bubble)...
As I said two days ago, the biggest and most confounding debate that's going on right now in all of finance is determining what the final outcome of the US Federal Reserve's market manipulative actions will be.
Once again Lira has made some interesting points and, if the topic interests you, I invite you to visit his blog and read his lengthy post.
Finally some insight from an article in Macleans magazine.
Canadian economists Derek Holt and Gorica Djeric of Scotia Capital recently observed that most commentators are “overly sanguine with respect to the state of Canadian household finances.” Debt as a share of personal disposable income for Canadian households is at record levels, they note. While the U.S. reduces its household debt load through forced austerity measures, Canada’s number keeps getting bigger. And by some measures, the trajectory of house prices in Canada appears strikingly similar to that in the U.S. prior to the bust.
Tis true folks. According to the real estate 'pumper-in-chief', CREA's Cameron Muir, "the number of new residential listings in the province has fallen 30% since April. With fewer new listings, total active listings are now on the decline, signaling that an end to the buyer’s market may be on the horizon."
Woohoo... perhaps Andruff was right and it IS time to pack in the blog.
Meanwhile let's turn our attention to the inflation that isn't (because government doesn't count it anymore).
The quantitative easing and stimulus money are working their way into the commodity sector which is allowing the dogs of inflation to slip their leashes and work their havoc.
Take a look at the way food prices are being driven to unseemly high levels once again just as they were in 2008.
Corn is coming up on $5.00, wheat is more than $7.00, soybeans are over $10, sugar is over $0.24/pound, cotton is closing in on $1.00, coffee is up near $2.00 pound wholesale (which is a 13 year high), cattle are just shy of $1.00/pound, bellies are trading over $1.50/pound for fresh product.
What does it all mean? It means the consumer is on the verge of watching his disposal income be decimated by high food prices. In Canada this comes at a time when most Canadians are living paycheque to paycheque and are saddled with the highest levels of household/mortgage debt ever. Disposable income is at an all time low. In the USA, a record number of Americans are on food stamps and are either unemployed or underemployed.
The only saving grace is that energy prices have not YET begun moving up alongside the rest of the commodity complex. But it's only a matter of time. When the crude complex gets involved you will see home heating bills, home cooling bills, industrial energy costs and gasoline prices join the list of soaring costs nationwide.
But don't worry. None of this counts towards the Consumer Price Index anymore. Thus... there is no inflation.
The technical term is 'Cost Push Inflation'. And it's insidious havoc is silently taking root.
I had a post yesterday regarding local real estate for you, but I have set it aside for now.
A couple of weeks ago, on August 24th, I made a post (which you can read here) on a theoretical framework for the arrival of hyperinflation. It was reprinted from the blog of Gonzalo Lira and Lira's thread went viral on the internet.
One of the reasons it garnered so much attention is because the issue cuts to the biggest and most confounding debate that's going on right now in all of finance: what will the final outcome of the Fed's market manipulative actions be?
Will the end result be deflation, inflation or hyperinflation (which is a distinctly different phenomenon from either of deflation or inflation).
Lira's post infuriated some hard core deflationists who continue to refuse to acknowledge the possibility that in its attempt to inspire inflation at all costs, the Fed may just push things beyond the tipping point of monetary imprudence.
Recently Mish Shedlock came out with a rebuttal to Lira in a podcast on Global Edge with Eric Townsend and Michael Hampton. In the podcast, Shedlock's conclusion was that Hyperinflation is the endgame, "so it is unlikely."
Yesterday Lira responded saying that Shedlock had turned the issue into a personal attack and that Mish had taken many of his points out of context (you can see a portion of Lira's response in yesterday's comments section). Lira has proposed an open debate with Mish on the topic. We will see if Mish accepts.
I bring all of this up because it triggered a comment in yesterday's comments section AND a whole whack of emails to my inbox.
As I said at the start of this post, this topic is THE biggest and most confounding debate that's going on right now in all of finance.
With that in mind I note that John Williams has come out with another bold statement today.
John Williams runs a website (www.shadowstats.com) on which he provides a stunning amount of real, unmanipulated government data.
Williams received an A.B. in Economics, cum laude, from Dartmouth College in 1971, and was awarded a M.B.A. from Dartmouth's Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. For nearly 30 years he has been a private consulting economist specializing in government economic reporting.
His website, Shadow Stats, often paints a dramatically different picture of the state of the economy from the spin offered by government. Williams will, for example, offer you statistics on the Consumer Price Index as it existed prior to 2000. That was the year the formula for calculating inflation was changed. If you were to calculate inflation today using the same formula used before 2000, the rate is in excess of 6%!
Considering we are now force-fed statistics that pacify the masses by stating there is not inflation, that is significant.
Of course it's because the government has changed the way that figure is now calculated so - voila! - there is no inflation (even though you are feeling it in your pocketbook).
The impact of this cannot be understated. Inflation is just as present now as it was in the early 1970s. The only difference is the government now claims that many of those higher costs simply don't count (four legs good, two legs bad becomes four legs good, two legs better).
John Williams is yet another economist who has stated his firm believe that hyperinflation is in the offing. In 2009 he put out this analysis.
And today he has just released a note to clients in which he warns that hyperinflation may hit as soon as 6 to 9 months from today.
With so many established economists and pundits seeing nothing but deflation as far as the eye can see, and the US Federal Reserve doing all in its power to halt the deleveraging cycle, both in the open and shadow economies, what is Williams' argument?
Here, if you interested, is the statement from John Williams. I personally think it is important to read the likes of Lira, Shedlock and Williams to try and understand this important debate and make up your own mind on this critical economic issue.
Excerpts from statement from John Williams of the blog Shadow Stats
SUMMARY OUTLOOK: Systemic Turmoil is Unthinkable, Unacceptable but Unavoidable.
Pardon the use of the Aerosmith lyrics in the opening headers, but the image of tap-dancing on a land mine pretty much describes what the Federal Reserve and the U.S. Government have been doing in order to prevent a systemic collapse in the last couple of years. Now, as business activity sinks anew, much expanded supportive measures will be needed to maintain short-term systemic stability. Such official actions, however, in combination with global perceptions of limited U.S. fiscal flexibility, likely will trigger massive flight from the U.S. dollar and force the Federal Reserve into heavy monetization of otherwise unwanted U.S. Treasury debt. When that land mine explodes — probably within the next six-to-nine months, the onset of a U.S. hyperinflation will be in place, with severe economic, social and political consequences that will follow. The Hyperinflation Special Report is referenced for broad background. The general outlook is not changed.
What does this mean for US financial markets?
In these circumstances, the financial markets likely will be highly unstable and volatile. Looking at the longer term, strategies aimed at preserving wealth and assets continue to make sense. For those who have their assets denominated in U.S. dollars, physical gold and silver remain primary hedges, as do stronger currencies such as the Canadian and Australian dollars and the Swiss franc. Holding assets outside the U.S. also may have some benefits.
If the Lira/Shedlock debate comes together, I'll let you know.
Perhaps we can retitle this post: "My Daddy sold real estate and now so do I, so listen up!"
Vancouver Realtor Greg Andruff proudly proclaims on his website, "I sell houses on the Westside." As such he's not too impressed with all this talk about a Vancouver Housing Bubble, a condition he proclaims is a 'myth'.
And Greg has the experience to make such a claim. From his website citing his qualifications:
After growing up in a “Real Estate Family” and many years in the service industry, Greg decided to prepare himself to join his family’s business by working for a year in the conveyancing department of one of the top real estate conveyancing law firms in Vancouver. Greg then achieved his real estate license as a Residential Sales Representative and joined (the family business) to continue with his passion of great service.
Today our buddy Greg proudly sets out to 'Debunk the Bubble' on his website.
After citing the Canadian Centre for Policy Alternatives published study 'Canada’s Housing Bubble: An Accident Waiting to Happen', Andruff tells us there are holes in the bubble plan because,"As a Vancouver Realtor® I can only comment on my knowledge and experiences from the point of view of the Vancouver Market."
I don't think it will come as much of a surprise that Andruff's point of view is that all this 'bubble talk' is hurting business and is, therefore, a bunch of B*llsh*t!
Andruff dismisses concerns about overextended buyers and the other concerns about the state of our market by telling us that "in Canada we do have several intelligent organizations closely monitoring these “factors” to ensure that we do not follow the American path."
You can follow the link to the read his weak analysis for yourself.
Andruff says that "the Vancouver market is not currently approaching any triggers to burst a bubble such as wide spread job loss or a rapidly rising interest rates. Vancouver’s housing inventory is balanced. Interest rates are at historic lows (they will go up eventually just yesterday short term rates when up a quarter point) but at the moment they are remaining relatively flat (and fixed rate mortgages have recently dropped). We will likely see slow and moderate growth and we are currently experiencing high net migration of wealthy 'high net worth' Asian immigrants creating demand that is currently being met with a somewhat balanced supply of housing stock. "
Bottom line: we're immune from the evolving worldwide economic collapse and we've got that 'hot asian money' coming in.
Gee Gary... thanks for that. How could I possibly see things differently after that explaination.
If you come to this blog, I think it's a pretty safe bet you are aware of what is going on in real estate right now.
For Vancouver, September is shaping up to be another dismal month for sales with today being horrendous.
Sales results for all of Vancouver on September 9th indicate there were 274 new listings, 103 price reductions and only 69 sales.
Granted this is not indicitive of every day this month (it's actually the lowest number of sales in a day so far this month). But the totals for the other days of September are not going well either. After 3 consecutive dismal months, the fact of the matter is that September is trending to make it four consecutive months.
Even the ever upbeat real estate industry can't gloss over what is going on.
Which brings us to to this tidbit from another colleague of mine who happens to be on an email list for a realtor friend of his.
As a measure of the state of the market, here is an excerpt from the latest missive to his clients:
Hello again! I hope you had a great summer and enjoyed the spectacular weather we had. With the end of Summer comes Fall and in terms of the real estate market, the start of the 2nd most active time seasonally. However, given the current market conditions such as tighter lending guidelines, the application of the HST on the new sales and mortgage rates which are higher than they were in the Spring, we may not experience much of a fall strengthening. In fact, as concerns about our real estate "bubble" become public via various media sources we may experience a continued slowing of our market through the Fall. This month I have decided to share with you some of the media stories on the state of our real estate market below. Feel free to call or email me if you have any questions or concerns. Have a great September! Cheers!
Links are then provided to various youtube clips of the news stories on Global and BNN which have chronicled the stagnating market.
Awareness is starting to permeate the masses but there is still a general lack of understanding of the state of the market within the mindset of the average joe. Media coverage may be picking up, but the 'man on the street' is still oblivious.
And the general public is even more oblivious to the overall state of the average homeowner's balance sheet.
In case you didn't catch it, there was a stunning tidbit from Scotia Capital and a report they recently released on the risk posed by household debt on the economy.
We are in a period of record low interest rates. While this should mean Canadians are realizing a ton of savings during this period of near-zero interest rates, they aren't. The low rates (and the prodding by the pimps of the R/E industry) have induced Canadians to rush into home ownership by buying the maximum amount of house they could afford.
This is, of course, what has caused housing values to soar.
But, as Scotia Bank notes, the end result is that mortgage principal payments as a share of income are now double what they were in the early 1990s (a time when interest rates were in double-digit territory).
This means that despite nearly two decades of declining interest rates (with rates now as low as they can go, Canadians have saddled themselves with record levels of payments that they must shell out each month.
Consider that as the economic recovery struggles to gain any traction.
Our consumer based economy is founding and consumers aren't consuming largely because the monthly mortgage payments of Canadians (as a share of their monthly income) is twice what it was 20 years ago. There simply isn't much money left over to jump start the consumer economy.
Yet the consensus is that everything is alright.
Doesn't anyone see the ominous conditions looming on the horizon?
Consider...
If the main tool government uses to control inflation is to raise interest rates - and you believe government won't ever raise interest rates because of the havoc that will trigger on the economy - does that mean that government will be powerless to contain and control inflation in the coming months and years because they will never raise rates?
Or do people simply assume that interest rates will never go up AND inflation will never again rear it's ugly head?
That must mean they assume, by extension, that the economy will never recover.
But if that's the case, how the hell do they figure real estate will keep going up year after year?
First off is the Bank of Canada rate increase today of a quarter point to 1%. This is the third consecutive increase in rates and the BOC rate is now quadruple what it was four months ago.
The focus today is on the language used by the Governor, Mark Carney. Everyone seems to think the message is that this will be the last rate hike for a while.
The central bank said, the global bounce-back from the worst downturn since the Depression is "proceeding but remains uneven, balancing strong activity in emerging market economies" (such as China and India, though the central bank didn’t name them) against "weak growth in some advanced economies."
At the same time, the central bank appeared to downplay the effect that the global turmoil is having on Canada, calling the country’s 2-per-cent annual growth rate in the second quarter "slightly softer" than what policy makers had expected, even though their latest forecast in July was for a 3-per-cent pace.
The Canadian recovery will be "slightly more gradual" than the central bank expected in July, but consumer spending and investment have "evolved largely as anticipated," it said, reflecting the fact Mr. Carney’s forecasts have warned of a slowdown for several months because of factors such as the fading impact of government stimulus and the cooler real-estate market.
In the future, consumption growth will "remain solid" and business investment - which had a surprisingly strong pickup in the second quarter, Statistics Canada data last week showed - will "rise strongly," the central bank said. For now, as the U.S. recovery proceeds in fits and starts, investor demand for safer investments such as bonds is pushing borrowing costs down and helping consumers and companies, the bank noted.
"Financial conditions in Canada have tightened modestly but remain exceptionally stimulative," the central bank said. Policy makers also said dynamics affecting inflation in the country-- which has been tame for months - are "essentially unchanged" from their July forecast.
As the Globe notes, all this suggests that the Bank of Canada is still uncomfortable with an overnight lending rate so far away from what most economists consider "neutral," or about 3.5% to 4%.
Both the Globe and I took Carney’s comments on the Canadian economy as a sign the BOC still leans towards raising rates.
On another front, I attend a retirement luncheon today where one retiring colleague, age 60, was asked about several properties he owns and whether he intends to sell any of them (two houses in the Dunbar area and a vacation property).
Naturally I offered my opinion.
His response? "Every time I talked about buying, I was told I was making a mistake, that prices were going to be going down. They were the best moves I could have ever made. I'm content to sit on what I have, I can afford to wait out a 5 year recession"
A comment I think speaks volumes.
Despite the continuing coverage of a possible housing bubble in Canada, and the lessons of the United States, the general public is still completely oblivious to what is going on and the paradigm shift that is taking place.
Finally there is the North Delta condo for sale by a friend that I mentioned in yesterday's post.
Spoke with him today and he said he didn't mind if I gave some more information on this blog. Believing that any publicity is good publicity, he sent me the MLS listing link which you can see here.
Curiously the property is still listed at $144,000 on MLS, but on other sites the price has been reduced to $139,000.
Bought about 5 years ago for $54,000, my friend (who does read this blog) is firm in his belief that this almost 40 year old property (although completely renovated) is worth the price he is asking and he is hesitant to consider offers much below that price.
He dropped the asking price from $144,000 to $139,000 (the price which he feels is the lowest he is prepared to go) because the MLS listing has received zero hits in the past 3 weeks.
I told him that the vast majority of people who visit this site may boost traffic numbers to the listing, but I suspect few would be interested in meeting his price.
As he reiterated to me, any publicity is good publicity.
Just before the housing bubble collapsed in the United States, real estate mortgages had reached absurb proportions.
You could actually buy a house with nothing down and get money back from the bank when you bought... in essence you could get paid to buy a house.
One of the items making the rounds in the Canadian blogoshpere today is this article in the Globe and Mail which notes that Canadian banks are struggling to boost loans as demand ebbs in the weak economic rebound.
Royal Bank chief executive officer Gordon Nixon said the banks must now find ways to build their lending operations – a key driver of their profits – without being coaxed into making unattractive loans just to get more business in the door.
“What you hope you don’t see happen is banks starting to do stupid things again,” Mr. Nixon said in an interview, referring to the past several years where credit was easy to come by, and banks around the world were all too eager to lend.
“Right now we’re in an environment where demand for credit is very, very low... It’s not that credit isn’t available – there’s not a lot of demand.”
Well I've got news for Mr. Nixon. Canadian banks are doing stupid things as he says this.
In the comments section from yesterday's post comes this link from Rob to an offer from CIBC.
Seems CIBC will you cash back based on your mortgage amount and term, and is available if you are approved for a 3, 4, 5, 7 or 10-year closed, fixed-rate residential mortgage. For example, if you have a $500,000 mortgage and select a 10-year term, you will receive 7% cash back, or $35,000!
And since your 5% downpayment is only $25,000, you can basically buy the home with nothing down and get PAID $10,000 for making the purchase.
Good thing our conservative banks aren't making the same mistakes the Americans did. Again I ask, is it so hard to see what is coming?
Meanwhile I am watching with keen interest as a colleague attempts to sell his one bedroom condo.
He bought the condo several years ago for %54,000 and has moved his girlfriend's house. As a result, the condo has been listed for sale.
After consulting with his realtor, the property was listed for $144,000 - right in the middle of the price range for what comparable apartments were selling for.
So I asked him, "if you get a low ball offer, what would you accept?"
His reply was that he would go as low as $139,000!
Now that's a measly 3.5%, but perhaps that sums up the current mindset of sellers right now. Despite having paid only $54,000 a few years ago, he firmly believes his property is worth almost three times what he paid. And he isn't prepared to move on the price... because 'that's what it's worth'.
Of course... that was three weeks ago.
After receiving the sum total of ZERO hits on the MLS listing, his realtor recommended adjusting the asking price.
This week it was dropped to $139,000. No comment on if he's adjusting the amount at which he is willing to accept.
In the United States, the economy in general, and real estate specifically, is about to enter a critical phase.
Over the last 18 months, America has rolled out just about every program it could think of to prop up the ailing housing market. Tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance. All of it was intended to keep values up and delinquent borrowers out of foreclosure.
The objective has been to stabilize the market until a resurgent economy created new households that demanded places to live, thus reflating the housing market.
This, btw, is not too far off the mark from the strategy that has been employed in Canada.
But the economic recovery is nowhere to be found.
And as the anemic economy sputters and the stimulus wanes, housing sales in the United States have plunged again. In July US housing sales sank 26% from July 2009 and there is a growing sense of exhaustion with government intervention.
Politicians made a bet that a rising economy would solve the housing problem. But several years into the financial crisis they are out of options and they don’t really know what to do.
Now some economists and analysts are urging a dose of shock therapy: let the housing market float on it's own. And if it crashes, so be it. When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.
In Canada, after a brief hiatus, Canadians continued on with it's housing bubble due to direct government intervention. Lured by cheap money, we have carried on buying houses we can’t really afford.
And because we have taken advantage of historic low interest rates to maintain spending our nation now has the highest consumer debt to financial asset ratio among 10 OECD countries, including the U.S.
So dire is that debt situation that, according to the Canadian Association of Accredited Mortgage Professionals, 375,000 mortgage holders in Canada are already challenged by their current payments and may not be able to handle higher rates.
Think about that for a minute... interest rates at the lowest point in history and 375,000 mortgage holders have so badly plunged themselves into debt by buying the maximum amount of house they could afford that they may not be able to handle higher rates?
The Bank of Canada is well aware of the precarious position Canadians have placed themselves in and have spent the better part of the last six months issuing warnings to Canadians to be careful - and to prepare for an end to these emergency interest rate levels.
Now... the time may have come let the Canadian housing market float on it's own.
“The need to take the Canadian consumer away from the credit punchbowl remains a pressing one,” says Bank of America Merril Lynch, which is why you will see the Bank of Canada hike the interest rate again on Wednesday (and will keep hiking rates for the time being).
Minor mortgage rule changes, the HST and two simple rate increases by the Bank of Canada have plunged housing sales downward the past three months. And still there are calls for the Bank of Canada to keep raising rates.
The C.D. Howe Institute’s monetary policy council said last week that the bank should raise its“overnight rate (the short-term rate it targets for monetary policy purposes) from 0.75% to 1% on Tuesday and keep on hiking it until it reaches 2.25% a year from now.
In its statement, the monetary council said the recommendation “reflected a view that the Bank of Canada should continue to unwind the emergency measures adopted after the 2008 financial crisis.”
Carney spent the first half of the year issuing warnings of what was coming. And now that punchbowl is going to be gradually taken away.
Is it really so hard to see how things are going to play out?
Last month we talked about how Vancouver's Condo King, Bob Rennie, was involved in developments in Kelowna (Invue) and Vancouver (Fairmont Estates) that were slashing prices by 40% and we wondered... is Rennie simply moving to get ahead of a crash he can see coming down the pike?
Since Rennie's Kelowna move there have been 3 consecutive months of decade low sales stats.
Tales abound of stagnating conditions throughout the Okanagan.
And now more evidence that the market on the periphery of the Village on the Edge of the Rainforest is collapsing.
Could it be Rennie has accurately anticipated the market?
As you can see onthis realtor website, the 40% correction (as a start to the great real estate collapse) has now come to Whistler.
One of the suites in the luxury Four Seasons development at the base of Blackcomb Mountain (which sold in 2002 for $400,000) has sold in a court ordered sale for $250,000, more than 40% off the original 2002 price.
And with tourism down dramatically from an American economy in tatters combined with the negative press from a bankrupt ski resort prominent in people's minds, are more such sales all that unexpected?
Meanwhile, on the Sunshine Coast, statistics from the Real Estate Board of Greater Vancouver show that the benchmark price for detached homes is down by 14% in one single month! A precipitous mounting collapse if the trend continues.
Mainstream media are now picking up on the story, and as news stories trumpet the collapse, no amount of R/E cheerleading is going to lure potential buyers who fear they may be catching a falling knife.
Surrounded by real estate that is starting to collapse, is Vancouver really different from everywhere else?
On September 8th the Bank of Canada will be announcing their next move. Speculation is that interest rates will rise another .25%.
What will another rise in interest rates do?
Will the upper end of Boomers, those within five years of retirement - 70% of whom have no funds set aside for retirement and are dependant on cashing in on their bubble inflated real estate - realize what is going on around them?
Will they begin a dash to list their homes for sale in advance of their planned retirement?
Having paid $60,000 for a westside home 40 years ago which is now appraised at $1,600,000; how many will slash their asking price dramatically knowing they are still realizing a massive profit but must cash out now before the market crashes?
There is still time to salvage their retirement plans if they move aggressively, but the clock is ticking fast.
On the real estate chat boards there is some evidence that dramatic action may already be occuring in other parts of the Lower Mainland.
Posts talked about a listing at 1405 Apel Drive, Oxford Heights in Port Coquitlam. From the listing:
"Beautifully renovated 5-Bedroom Home in the prestigious Oxford Heights neighbourhood of Port Coquitlam. Bright and sunny backyard, great floor plan and room for everyone! This home is a MUST SEE! Just steps to an elementary school, parks, nature trails & transit, and just a short drive down the hill to shopping, groceries, restaurants and coffee shops. Fully fenced yard with loads of room for the kids to play!"
Listed for the below market price of $379,900, the MLS listing (V848662) appears to no longer be available. Was it immediately snapped up as a way below market opportunity - setting the benchmark for what is to come?
And if we see similar 'rush-to-sells' - moves which will almost assuredly push prices down 30-40% right off the bat - what will become of all those who bought in the last three years with 5% down? Those 3-5 year mortgages are coming up for renewal, and they will be massively underwater.
An excellent 46 minute video produced in Sweden explaining the development of the housing bubble from the ashes of the dotcom burst and terrorist attacks in 2001, the 2008 financial crisis and the evolving stimulus bubble.
I highly encourage everyone to watch it. 2010 is to 2008 as 1931 was to 1929. If you know your history, the market's recovered over 60% after the 1929 crash (which was induced by a massive credit bubble). Events are playing out as they did back then. There was another big crash later in the thirties and the stock market ended down 89% from the October 1929 highs.
"When we tell people there is going to be a bailout bubble, and they see the equity markets up 50 to 60%, they don't wanna believe it's another bubble. They want to step right back to that table and throw their dice and try to win their hand at the wheel of fortune that wall street is spinning. So people still don't want to believe that the worse is yet to come. It's easy to think of these predictions as much too gloomy. But that's exactly what people said the last time when these experts predicted the 2008 financial crisis."
Watch the first five minutes... you will watch it all.
Well, the August sales numbers for real estate are now coming out.
The benchmark price, an average for typical homes sold, was down almost 3% in Metro Vancouver to $576,597 compared to the peak $593,419 which was hit in April.
In the Fraser Valley, the benchmark price for a typical detached home dipped almost 2% to $510,107 in August compared with $520,423 in April.
As we mentioned yesterday, the exception to all of this were the statistics for the west side of Vancouver where prices rose last month.
And while that bit of new is a silver lining, the stats are bad news and it marks the third consecutive gloomy month.
Look for fall the be battle royale against this developing trend.
Bank of Montreal is leading the assault to overturn this looming tide. BMO has chopped its benchmark five-year mortgage rate to 3.59%, down from 3.79%, making it one of the lowest five-year rates ever offered by a Canadian bank.
Trumpeting the news is Martin Nel, a senior BMO official, who said “It’s a great time to buy a home,” in a news release announcing the change. He added that people who take advantage of the offer will benefit and went on to stress, “if ever there was a time to buy, it is now.”
You can almost sense the desperate undertone. Listings are up, sales are down and prices are starting to slip.
In the industry this is called 'downward pressure' and it's not hard to see what will be coming this fall to counteract this.
Watch for a plethora of news items trumpeting the fact mortgage rates coming down to their lowest points ever and that low mortgage rates and lower housing prices mean that prices will be shooting up again soon.
You know the drill: Buy now... or be priced out forever.
Later this week the sales totals will come out for the month of August and they will continue a trend that has defined the past three months.
The summer months of 2010 have been marked by a dramatic decline in sales, building inventory and price reductions galore. And bearish market watches sit poised to gleefully herald the long anticipated market correction.
But while August stats will be ample fodder for this outcome, the month's statistics also contain a foul element for the bearish community.
Back in springtime the average price of a detached house price in Vancouver broke through the $1,000,000 mark. And while it declined to $941,275 in July, the August figure has jumped back up to $999,407.
A prime example of some of the bizarre sales of high end homes, this 4-bedroom, 5-bathroom 2,462 sq. ft home (with a measly 33 ft frontage) located at 4036 West 19th Aven. was assessed by B.C. Assessment in July 2010 at $1.508 million.
That, however, was 'assessed' value. The owner listed the house way over assessed value and asked $2.388 million
After 9 days on the market it sold for $2.39 million.
And that has been the hallmark of the Vancouver market and one of the surest signs we in are a massive bubble: when people massively overpay for an asset.
Those conditions are clearly at play now. And even with a dramatic reduction in sales, those houses that are selling are exchanging hands at values dramatically higher than assessments.
The end result is that the average price rises despite the dearth of sales, such are the ridiculous asking prices currently being trotted out by speculators and long time owners alike.
Even this house, which sold below asking price, sold at a ridiculous price.
Located at 3946 West 30th Ave. in Vancouver, the house was purchased in 1981 for $195,000.
This summer it was listed with an asking price of $2,188,000. After 51 days ti sold for $2,050,000.
Thus is the state of the Vancouver Real Estate market, North America's most bubbly real estate market.
The R/E cheerleaders will point to this sales as an example of why it's different here... hallmarks of Vancouver's resiliency.
History is replete with stories of excess at the end of boom times. And the Village of the Rainforest is no different from those tales.
The start of a new month and the chatter on the local real estate boards is about another month of collapsing sales.
One contributor to the VCI comments section notes that the market for condos in Vancouver-West have all but crashed. Vancouver-West includes all the condos in the downtown core.
As we noted at end of July the local market research firm, MPC Intelligence Inc., counted 6,659 condo units being put into the marketing phase between March 1 and July 1, 2010. This compares with just 1,937 that were on the market in 2009 and 5,066 in 2008.
So have have sales of new condos performed in August?
The worst August in the last 15 years was 2008 in which only 24 new condos sold. Previous to that the worst year was 1994 with 32 sales.
2010?
As of August 30th only 16 new condos had sold! A stunning new low is about to be set.
Another contributor to the comments section makes a hobby of tracking townhouses in Coal Harbour and False Creek North (waterfront townhouses).
A particularly keen observer, he keeps track of the total time a property has been on the market, even when it is re-listed with a new agent.
He advises that the average number of days listed for all townhouses in this area is a stunning 358 days on the market.
He also advises that the worst performing property has been on the market now for an astonishing 927 days.
And our intrepid source also provides us with the history of this unit. It has has never been lived in since being built at the end of 2007. From the listing:
"GORGEOUS NEW TOWNHOME AT the award winning POMARIA, a concrete building, which is LEED certified and has received the UDI award for the best highrise in 2007. Unique 3 storey, 2 bedroom and den with its own private entrance, 200sq.ft rooftop deck with outdoor fireplace, barbeque hookup. Geothermal heating and cooling Loft style, double height ceilings on main floor, floor to ceiling windows, Luxurious interior with spa style bathrooms, and gourmet kitchen, GREAT BUILDING with the convenience of a 24 hour concierge, health spa, gym, steam room & guest suite."
The property was Initially listed on February 11 2008. Asking price: $989,000
On March 4 2008 the price was reduced to: $969,000 On April 17 2008 the price was reduced again to: $899.000 The property was re-listed on July 31 2008 for: $799,000 Then, on July 21 2009, it was relisted again for: $699,000
The market, as you all know, then started to reflate. Rather than move the property, the condo was re-listed June 10 2010 with the price jacked back up to: $759,000.
On June 24 2010 that asking price was reduced again to: $749,000.
Do you weep for the trials and tribulations of this seller? Our diligent VCI observer notes that the unfornate owner has already paid $20,000 in maintenance fees alone with no rent on a place he has never lived in.
Perhaps it is sweet justice, but another contributor to VCI provides further information.
The property was purchased on February 4th, 2008 for $749,900.
That means our poor, languishing owner turned around and re-listed his $749,900 condo with pie-in-the-sky dreams of flipping it for a quarter-million dollar profit.
Now... it languishes with an asking price of $749,000a and $20,000 in maintenance fees having been paid and two years of property taxes... a significant loss.
The silver lining? The VCI contributor reveals that the owner will save a fortune on commissions.
As noted yesterday, British Columbia's R/E pumper-in-chief (Cameron Muir of the British Columbia Real Estate Association) came out on the weekend with this OpEd piece in Vancouver's two daily papers calling on R/E naysayers to 'get real'.
Muir likes to insist that the real estate landscape is doing fine, thank you very much, and is fully supported and justified.
Seems the Canadian Centre for Policy Alternatives (CCPA) failed to pick up their copy of the weekend paper.
In a study they released today the CCPA finds that for the first time in 30 years, six of Canada's hottest real estate markets are in a simultaneous housing bubble. Canada’s Housing Bubble: An Accident Waiting to Happen examines trends in house prices in Toronto, Vancouver, Calgary, Edmonton, Montreal and Ottawa between 1980 - 2010 and finds price increases in those cities are "outside of a historic comfort level."
In the past 30 years, while all six major cities have never been in a simultaneous bubble, the report notes that Canada's housing market has undergone three bubbles in individual cities.
The report defines the existance of a bubble when housing prices increase more rapidly than inflation, household incomes and economic growth.
In each of those previous individual bubble situations, the bubble was punctured by only a 1% rise in interest rates over two years (those individual situations occurred in Vancouver in 1981 and 1994 and Toronto in 1989).
Think about that for a second... 1%.
David Macdonald, the research associate who authored the report, sounds the alarm bells and not only declares that the Canadian housing market has entered bubble conditions, but that it would take only a 1% to 1.25% mortgage rate increase by Canada's big banks to cause a housing crash similar to the one the U.S. is grappling with.
(And they call me a bear!)
In Canada's other major markets — Calgary, Edmonton, Ottawa, and Montreal — prices remained stable from 1980 to 2001 at around $150,000 to $220,000 in today's dollars.
But since 2001?
"The concern today is all six major markets, not just Vancouver and Toronto, are out of that comfort zone," Macdonald said. "All six major markets now have an average price of over $300,000."
The report, naturally, zeros in on factors that have been discussed here over and over again. Canadian homes remain affordable because mortgage rates sit at record lows, but home affordability will change rapidly if rates return even partway to their historic norms. If that happens, young families who have over-extended themselves and seniors relying on selling their house for retirement income will be tremendously affected.
The title of the CfCPA report says that Canada's housing market is an accident waiting to happen.
As we travel through the dog days of summer, the real estate debate is entering an interesting stage.
Real estate sales have dropped off dramatically. August will be the third consecutive month where sales totals are among the lowest in over a decade. In the case of August 2010, sales will probably be the second or third lowest in the last 15 years.
But sales totals are merely a signpost. The real measure of the market is value. Is the market collapsing in value?
So far there are minor reductions. So far others have not followed the lead of Bob Rennie with 40% reductions in asking price.
In the great bull/bear debate, the doomsayers have long called for a massive correction on par with what has been witnessed in most of the rest of the western world. My own belief is a minimum correction of 40% for houses and 50% for condos, with a correction on the line of 60/70 far more likely. But that correction won't be as immediate or as dramatic as we have seen in many places in the United States.
And the comparative slo-motion unfolding our bubble saga is making R/E watching very interesting.
Mainstream media is starting to pick up on the story which has the effect of reinforcing that there is a potential downturn ahead. The end result: crucial buyer confidence evaporates.
The R/E machine has tried trotting out the P/R fluff articles which promote the 'buying opportunities' in the market. But the campaign has failed miserably. Sales continue to crater.
The dearth in sales has started to create some panic amongst realtors. A commission based professions, no sales mean no income. As we mentioned earlier this month, a colleague's condo sale only completed because both agents (representing the buyer and the seller) agreed to take a 50% reduction in their commissions. But even this drastic move is not enough and it appears there is genuine concern with some Realtors.
Around the blogosphere, significant attention has been paid to this BC realtor who posted a letter he sent to his MP on his facebook page.
In an attempt to lobby against the recent change in mortgage qualifying regulations, the Realtor notes that the market in his area is "completely dead. I have 140+ listings from new houses at $140,000 in Port Renfrew (even though it is Port Renfrew, I should be getting 100's of calls across Canada to find out where Renfrew is. Nothing). Brand new houses in Sooke, down to $299,900 from $399,900, no calls. The market has dried up all due to financing... Last month there were 300 home sales on the Lower Vancouver Island with 4700+ listings. One of the worst ratios ever."
Our Realtor friend can also see the writing on the wall for the future. Stagnating sales will lead to a severe reduction in prices and when that comes - lookout.
"I talked to 7-10 mortgage brokers and many agents while I was at the Victoria Real Estate Board golf tournament and everyone is scared. Hundreds of foreclosures coming, about 75% of the home owners could not qualify to buy their own houses (especially with suite). So what happens when their term of mortgage is up and the banks need them to re qualify? They are doomed."
Of course this sort of panic doesn't to much to inspire that all important buyer confidence. If realtors are laying out a scenario of collapsing prices and looming foreclosures, why buy?
This prompted head R/E cheerleader, Cameron Muir of the British Columbia Real Estate Association, to come out with this OpEd piece in Vancouver's two daily papers on the weekend.
Dismissing the concerns, Muir admonishes all the naysayers to "get real". Muir stresses we merely need to wait for the world economy to recover. In the meantime he hits on all the stereotypes that so many cling to in the Vancouver market. BC's population in growing (they will buy keeping demand high), the largest component of that population growth is immigration from wealthy foreigners - particularly from China (they can afford the high prices), and the worldwide downturn hasn't hit our real estate values yet so West Coast households are on relatively solid financial footings.
In other words, it's different here so don't worry.
But will our preferred destination status by wealthy migrants underpin the housing market and keep it inflated at levels that make Vancouver the most unaffordable city in North America for the people who live here?
Can a steady stream of the world's wealthy come in fast enough to replace those who live here as homeowners?
Because if sales stall and prices begin to fall, that 'solid financial foothold' will crumble like a dry cookie.
As we have already noted, this scenario will almost certainly play out when interest rates rise again. When they do, our market is going to be crushed.
But even without the rise in interest rates, our market has stalled (stats for the month will show prices are starting to fall). As our realtor friend on facebook noted, the current mortgage regulations already have a significant number of current homeowners in a bind. Their mortgages only work if calculations permit suite income.
People who live here simply can't carry their home mortgage on their own.
Thus, even with the lowest five year mortgage rates in history, the market stagnates because buyers aren't entering the market.
Meanwhile sellers, believing we will see a repeat of 2008 where financial stimulus resuscitated the market back into a buying frenzy after a 10% correction, wait and refuse to lower their selling prices significantly.
Will the market rebound in the fall? Or will the dog days of August stretch into winter and spring?
I suspect that September will drag on in the same manner as June, July and August with buyers and sellers maintaining their current viewpoints and prices continuing their slow descent.click here to listen to Laurel (magri) Archer talk about working as an escort/prostitute. ==================
I get a lot of grief from my colleagues where I work. They think I'm all negative and pessimistic.
Naturally I disagree.
Take for instance my reprinting of another blogger's take on how hyperinflation will play out that was posted on Tuesday.
It was not well received. 'Gloom and Doom' was the way it was perceived.
Gonzola Lira has posted a follow up and, if you are interested, you can see ithere.
I won't repost all of his article, but I will focus on this part:
"I’m not repeating this insight as an empty comfort to my readers — I’m saying it as a trading strategy. When things are at their crazy worst, when everyone believes the Apocalypse is well nigh here, that’s when thing are about to turn for the better. This applies to every situation — including and most especially in a hyperinflationary situation... So if the currency goes up in flames in a hyperinflationary fire, of course there will be a period of terrifying instability — but it will pass. Either the currency will be repaired somehow (as Volcker repaired the dollar back in 1980–’82). Or the currency will be completely and irrevocably trashed —and then be replaced by something else. Because—to insist—people need a stable medium of exchange.
If Treasuries tank and commodities shoot up so high that they essentially break the dollar, civilization will not come crashing down into anarchy. At worst, there’ll be a three-four years of hell—economic hell. Financial hell. But then things will settle down into a new normal...
What I do know is (1) a hyperinflationary event will happen, following the crash in Treasuries. (2)commodities will be the go-to medium for value storage. (3) all asset classes will collapse in short order. And (4) and most importantly — civil society will not collapse along with the dollar. Civil society will stumble about like a drunken sailor, but eventually right itself and carry on with a new normal.
During that stumble, opportunities will present themselves. I hope I have explained why."
Yes, opportunities.
Whether it be the looming real estate crash, or the inevitable economic fallout from the massive amount of debt being built up in other areas of our economy, it isn't doom and gloom... it's all about opportunities.
Peering presciently across what (for some) are the gossamer waves of time and recognizing the obvious conditions of the real estate bubble is not about preaching doom and gloom.
It's about seeing beforehand what will soon be obvious to all and positioning yourself to take advantage of it.
The most striking thing about real estate in the Village on the Edge of the Rainforest right now is just how oblivious everyone is to what is going on in the United States.
On Tuesday, a report said that sales of existing homes in the USA plunged 27.2% in July to the lowest rate since the National Association of Realtors began counting in 1999.
Confidence in real estate in the United States has evapourated. As a result, so have sales.
Nothing seems to be able to change that. The interest rates for 30 year mortgages are at historic lows. Generous tax breaks abound. Goverment subisdies ($8,000 gifts just to buy) aren't working.
Real Estate continues to plunge.
And perhaps the most damning statistic to come out is the fact that sales of expensive homes in America have completely evaporated.
Guess how many homes priced above $750,000 managed to sell in July?
Answer — zero. That's right... zero.
And that's been the case for the second month in a row.
In the Village on the Edge of the Rainforest, the month of August is coming to a close and real estate sales are on pace to tank for a third consecutive month. August 2010 will be the 2nd worst August in the last 15 years.
Confidence is evaporating. People are starting to understand.
And this is all happening despite a 5 year mortgage rate that has dropped even lower the past month.
I have always maintained that we will see a correction of a minimum of 40% for houses and 50% for condos. I suspect the reality will be more like 60/70 or more.
Popular opinion is that the market will rebound in October in the same fashion that it bounced back last time.
Baring the introduction of American-style 30 year fixed mortgage rates at levels similar to the current 5 year rates, I don't see any rebound happening.
Back in March, Alec Pestov came out with an in-depth analysis of the Canadian housing market. The original paper explored the subject of a possible housing bubble in Canada and examined a diverse array of factors that may have contributed to the rise in house prices.
Pestov concluded that market fundamentals had become insignificant in affecting house prices, and that price-momentum conditions characteristic of a bubble now exist. Pestov proposed that the extreme decoupling of the market prices from the underlying fundamentals suggested a correction in housing prices in Canada was coming.
Pestov has just completed the follow up to his original report.
Quoting Pestov, "This second edition of the report is the first of the semi-annual sequels for the original paper to provide timely updates on the state of the housing market in Canada. This document introduces a structure of the semi-annual releases, and your comments and suggestions regarding it are always welcome."
In my little stint of bumming people out with this blog, I am constantly told that I am a negative doomsayer.
Shortly after being reminded of that, I am often asked what I perceive is the worst case scenario for what looms for real estate and the economy. Go figure.
(I guess it's like one of them bad accidents on the highway where every single person slows down to make sure they get a good look at the carnage).
If I am pressed, I usually answer the question in a word: FEAR.
The way western governments have responded to the crisis is of tremendous concern. And the worst case scenario would see the Law of Unintended Consequences kick in. And the catalyst trigger will be fear.
I continue to maintain the we still do not fully appreciate the depth and the breadth of the financial earthquake that shook the world in 2008 or of the repercussions that still emanate from it.
The fallout is causing some people to loose confidence - in government and in fiat currencies.
And while it is all fine and dandy to say that people are irrational to be buying gold, the fact of the matter is that markets can often be driven by irrationality. By fear.
Yesterday I came across this speculative post on Quantitative Easing and Hyperinflation by Gonzalo Lira.
I do not agree with all of it, but if offers a very well laid out sequence of events detailing how a dollar crisis could be triggered.
I think it is well written and worth reading even if you don't agree with it.
I hope you will indulge me and find it worth your time.
How Hyperinflation Will Happen
Right now, we are in the middle of deflation. The Global Depression we are experiencing has squeezed both aggregate demand levels and aggregate asset prices as never before. Since the credit crunch of September 2008, the U.S. and world economies have been slowly circling the deflationary drain.
To counter this, the U.S. government has been running massive deficits, as it seeks to prop up aggregate demand levels by way of fiscal “stimulus” spending—the classic Keynesian move, the same old prescription since donkey’s ears.
But the stimulus, apart from being slow and inefficient, has simply not been enough to offset the fall in consumer spending.
For its part, the Federal Reserve has been busy propping up all assets—including Treasuries—by way of “quantitative easing”.
The Fed is terrified of the U.S. economy falling into a deflationary death-spiral: Lack of liquidity, leading to lower prices, leading to unemployment, leading to lower consumption, leading to still lower prices, the entire economy grinding down to a halt. So the Fed has bought up assets of all kinds, in order to inject liquidity into the system, and bouy asset price levels so as to prevent this deflationary deep-freeze—and will continue to do so. After all, when your only tool is a hammer, every problem looks like a nail.
But this Fed policy—call it “money-printing”, call it “liquidity injections”, call it “asset price stabilization”—has been overwhelmed by the credit contraction. Just as the Federal government has been unable to fill in the fall in aggregate demand by way of stimulus, the Fed has expanded its balance sheet from some $900 billion in the Fall of ’08, to about $2.3 trillion today—but that additional $1.4 trillion has been no match for the loss of credit. At best, the Fed has been able to alleviate the worst effects of the deflation—it certainly has not turned the deflationary environment into anything resembling inflation.
Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative)—in short, everything screams “deflation”.
Therefore, the notion of talking about hyperinflation now, in this current macro-economic environment, would seem . . . well . . . crazy. Right?
Wrong: I would argue that the next step down in this world-historical Global Depression which we are experiencing will be hyperinflation.
Most people dismiss the very notion of hyperinflation occurring in the United States as something only tin-foil hatters, gold-bugs, and Right-wing survivalists drool about. In fact, most sensible people don’t even bother arguing the issue at all—everyone knows that only fools bother arguing with a bigger fool.
A minority, though—and God bless ’em—actually do go ahead and go through the motions of talking to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary environment—where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking—inflation is impossible. Therefore, hyperinflation is even more impossible.
This outlook seems sensible—if we fall for the trap of thinking that hyperinflation is an extention of inflation. If we think that hyperinflation is simply inflation on steroids—inflation-plus—inflation with balls—then it would seem to be the case that, in our current deflationary economic environment, hyperinflation is not simply a long way off, but flat-out ridiculous.
But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same—because in both cases, the currency loses its purchasing power—but they are not the same.
Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.
Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency.
Right now, the U.S. government is indebted to about 100% of GDP, with a yearly fiscal deficit of about 10% of GDP, and no end in sight. For its part, the Federal Reserve is purchasing Treasuries, in order to finance the fiscal shortfall, both directly (the recently unveiled QE-lite) and indirectly (through the Too Big To Fail banks). The Fed is satisfying two objectives: One, supporting the government in its efforts to maintain aggregate demand levels, and two, supporting asset prices, and thereby prevent further deflationary erosion. The Fed is calculating that either path—increase in aggregate demand levels or increase in aggregate asset values—leads to the same thing: A recovery in the economy.
This recovery is not going to happen—that’s the news we’ve been getting as of late. Amid all this hopeful talk about “avoiding a double-dip”, it turns out that we didn’t avoid a double-dip—we never really managed to claw our way out of the first dip. No matter all the stimulus, no matter all the alphabet-soup liquidity windows over the past 2 years, the inescapable fact is that the economy has been—and is headed—down.
But both the Federal government and the Federal Reserve are hell-bent on using the same old tired tools to “fix the economy”—stimulus on the one hand, liquidity injections on the other.
It’s those very fixes that are pulling us closer to the edge. Why? Because the economy is in no better shape than it was in September 2008—and both the Federal Reserve and the Federal government have shot their wad. They got nothin’ left, after trillions in stimulus and trillions more in balance sheet expansion - but they have accomplished one thing: They have undermined Treasuries. These policies have turned Treasuries into the spit-and-baling wire of the U.S. financial system—they are literally the only things holding the whole economy together.
In other words, Treasuries are now the New and Improved Toxic Asset. Everyone knows that they are overvalued, everyone knows their yields are absurd—yet everyone tiptoes around that truth as delicately as if it were a bomb. Which is actually what it is.
So this is how hyperinflation will happen:
One day—when nothing much is going on in the markets, but general nervousness is running like a low-grade fever (as has been the case for a while now)—there will be a commodities burp: A slight but sudden rise in the price of a necessary commodity, such as oil.
This will jiggle Treasury yields, as asset managers will reduce their Treasury allocations, and go into the pressured commodity, in order to catch a profit. (Actually it won’t even be the asset managers—it will be their programmed trades.) These asset managers will sell Treasuries because, effectively, it’s become the principal asset they have to sell.
It won’t be the volume of the sell-off that will pique Bernanke and the drones at the Fed—it will be the timing. It’ll happen right before a largish Treasury auction. So Bernanke and the Fed will buy Treasuries, in an effort to counteract the sell-off and maintain low yields—they want to maintain low yields in order to discourage deflation. But they’ll also want to keep the Treasury cheaply funded. QE-lite has already set the stage for direct Fed buys of Treasuries. The world didn’t end. So the Fed will feel confident as it moves forward and nips this Treasury yield jiggle in the bud.
The Fed’s buying of Treasuries will occur in such a way that it will encourage asset managers to dump even more Treasuries into the Fed’s waiting arms. This dumping of Treasuries won’t be out of fear, at least not initially. Most likely, in the first 15 minutes or so of this event, the sell-off in Treasuries will be orderly, and carried out with the idea (at the time) of picking up those selfsame Treasuries a bit cheaper down the line.
However, the Fed will interpret this sell-off as a run on Treasuries. The Fed is already attuned to the bond markets’ fear that there’s a “Treasury bubble”. So the Fed will open its liquidity windows, and buy up every Treasury in sight, precisely so as to maintain “asset price stability” and “calm the markets”.
The Too Big To Fail banks will play a crucial part in this game. See, the problem with the American Zombies is, they weren’t nationalized. They got the best bits of nationalization—total liquidity, suspension of accounting and regulatory rules—but they still get to act under their own volition, and in their own best interest. Hence their obscene bonuses, paid out in the teeth of their practical bankruptcy. Hence their lack of lending into the weakened economy. Hence their hoarding of bailout monies, and predatory business practices. They’ve understood that, to get that sweet bail-out money (and those yummy bonuses), they have had to play the Fed’s game and buy up Treasuries, and thereby help disguise the monetization of the fiscal debt that has been going on since the Fed began purchasing the toxic assets from their balance sheets in 2008.
But they don’t have to do what the Fed tells them, much less what the Treasury tells them. Since they weren’t really nationalized, they’re not under anyone’s thumb. They can do as they please—and they have boatloads of Treasuries on their balance sheets.
So the TBTF banks, on seeing this run on Treasuries, will add to the panic by acting in their own best interests: They will be among the first to step off Treasuries. They will be the bleeding edge of the wave.
Here the panic phase of the event begins: Asset managers—on seeing this massive Fed buy of Treasuries, and the American Zombies selling Treasuries, all of this happening within days of a largish Treasury auction—will dump their own Treasuries en masse. They will be aware how precarious the U.S. economy is, how over-indebted the government is, how U.S. Treasuries look a lot like Greek debt. They’re not stupid: Everyone is aware of the idea of a “Treasury bubble” making the rounds. A lot of people—myself included—think that the Fed, the Treasury and the American Zombies are colluding in a triangular trade in Treasury bonds, carrying out a de facto Stealth Monetization: The Treasury issues the debt to finance fiscal spending, the TBTF banks buy them, with money provided to them by the Fed.
Whether it’s true or not is actually beside the point—there is the widespread perception that that is what’s going on. In a panic, widespread perception is your trading strategy.
So when the Fed begins buying Treasuries full-blast to prop up their prices, these asset managers will all decide, “Time to get out of Dodge—now.”
Note how it will not be China or Japan who all of a sudden decide to get out of Treasuries—those two countries will actually be left holding the bag. Rather, it will be American and (depending on the time of day when the event happens) European asset managers who get out of Treasuries first. It will be a flash panic—much like the flash-crash of last May. The events I describe above will happen in a very short span of time—less than an hour, probably. But unlike the event in May, there will be no rebound.
Notice, too, that Treasuries will maintain their yields in the face of this sell-off, at least initially. Why? Because the Fed, so determined to maintain “price stability”, will at first prevent yields from widening—which is precisely why so many will decide to sell into the panic: The Bernanke Backstop won’t soothe the markets—rather, it will make it too tempting not to sell.
The first of the asset managers or TBTF banks who are out of Treasuries will look for a place to park their cash—obviously. Where will all this ready cash go?
Commodities.
By the end of that terrible day, commodites of all stripes—precious and industrial metals, oil, foodstuffs—will shoot the moon. But it will not be because ordinary citizens have lost faith in the dollar (that will happen in the days and weeks ahead)—it will happen because once Treasuries are not the sure store of value, where are all those money managers supposed to stick all these dollars? In a big old vault? Under the mattress? In euros?
Commodities: At the time of the panic, commodities will be perceived as the only sure store of value, if Treasuries are suddenly anathema to the market—just as Treasuries were perceived as the only sure store of value, once so many of the MBS’s and CMBS’s went sour in 2007 and 2008.
It won’t be commodity ETF’s, or derivatives—those will be dismissed (rightfully) as being even less safe than Treasuries. Unlike before the Fall of ’08, this go-around, people will pay attention to counterparty risk. So the run on commodities will be for actual, feel-it-’cause-it’s-there commodities. By the end of the day of this panic, commodities will have risen between 50% and 100%. By week’s end, we’re talking 150% to 250%. (My private guess is gold will be finessed, but silver will shoot up the most—to $100 an ounce within the week.)
Of course, once commodities start to balloon, that’s when ordinary citizens will get their first taste of hyperinflation. They’ll see it at the gas pumps.
If oil spikes from $74 to $150 in a day, and then to $300 in a matter of a week—perfectly possible, in the midst of a panic—the gallon of gasoline will go to, what: $10? $15? $20?
So what happens then? People—regular Main Street people—will be crazy to buy up commodities (heating oil, food, gasoline, whatever) and buy them now while they are still more-or-less affordable, rather than later, when that $15 gallon of gas shoots to $30 per gallon.
If everyone decides at roughly the same time to exchange one good—currency—for another good—commodities—what happens to the relative price of one and the relative value of the other? Easy: One soars, the other collapses.
When people freak out and begin panic-buying basic commodities, their ordinary financial assets—equities, bonds, etc.—will collapse: Everyone will be rushing to get cash, so as to turn around and buy commodities.
So immediately after the Treasury markets tank, equities will fall catastrophically, probably within the next few days following the Treasury panic. This collapse in equity prices will bring an equivalent burst in commodity prices—the second leg up, if you will.
This sell-off of assets in pursuit of commodities will be self-reinforcing: There won’t be anything to stop it. As it spills over into the everyday economy, regular people will panic and start unloading hard assets—durable goods, cars and trucks, houses—in order to get commodities, principally heating oil, gas and foodstuffs. In other words, real-world assets will not appreciate or even hold their value, when the hyperinflation comes.
This is something hyperinflationist-skeptics never quite seem to grasp: In hyperinflation, asset prices don’t skyrocket—they collapse, both nominally and in relation to consumable commodities. A $300,000 house falls to $60,000 or less, or better yet, 50 ounces of silver—because in a hyperinflationist episode, a house is worthless, whereas 50 bits of silver can actually buy you stuff you might need.
Right now, I’m guessing that sensible people who’ve read this far are dismissing me as being full of shit—or at least victim of my own imagination. These sensible people, if they deign to engage in the scenario I’ve outlined above, will argue that the government—be it the Fed or the Treasury or a combination thereof—will find a way to stem the panic in Treasuries (if there ever is one), and put a stop to hyperinflation (if such a foolish and outlandish notion ever came to pass in America).
Uh-huh: So the Government will save us, is that it? Okay, so then my question is, How?
Let’s take the Fed: How could they stop a run on Treasuries? Answer: They can’t. See, the Fed has already been shoring up Treasuries—that was their strategy in 2008—’09: Buy up toxic assets from the TBTF banks, and have them turn around and buy Treasuries instead, all the while carefully monitoring Treasuries for signs of weakness. If Treasuries now turn toxic, what’s the Fed supposed to do? Bernanke long ago ran out of ammo: He’s just waving an empty gun around. If there’s a run on Treasuries, and he starts buying them to prop them up, it’ll only give incentive to other Treasury holders to get out now while the getting’s still good. If everyone decides to get out of Treasuries, then Bernanke and the Fed can do absolutely nothing effective. They’re at the mercy of events—in fact, they have been for quite a while already. They just haven’t realized it.
Well if the Fed can’t stop this, how about the Federal government—surely they can stop this, right?
In a word, no. They certainly lack the means to prevent a run on Treasuries. And as to hyperinflation, what exactly would the Federal government do to stop it? Implement price controls? That will only give rise to a rampant black market. Put soldiers out on the street? America is too big. Squirt out more “stimulus”? Sure, pump even more currency into a rapidly hyperinflating everyday economy—right . . .
(BTW, I actually think that this last option is something the Federal government might be foolish enough to try. Some moron like Palin or Biden might well advocate this idea of helter-skelter money-printing so as to “help all hard-working Americans”. And if they carried it out, this would bring us American-made images of people using bundles of dollars to feed their chimneys. I actually don’t think that politicians are so stupid as to actually start printing money to “fight rising prices”—but hey, when it comes to stupidity, you never know how far they can go.)
In fact, the only way the Federal government might be able to ameliorate the situation is if it decided to seize control of major supermarkets and gas stations, and hand out cupon cards of some sort, for basic staples—in other words, food rationing. This might prevent riots and protect the poor, the infirm and the old—it certainly won’t change the underlying problem, which will be hyperinflation.
“This is all bloody ridiculous,” I can practically hear the hyperinflation skeptics fume. “We’re just going through what the Japanese experienced: Just like the U.S., they went into massive government stimulus—hell, they invented quantitative easing—and look what’s happened to them: Stagnation, yes—hyperinflation, no.”
That’s right: The parallels with Japan are remarkably similar—except for one key difference. Japanese sovereign debt is infinitely more stable than America’s, because in Japan, the people are savers—they own the Japanese debt. In America, the people are broke, and the Nervous Nelly banks own the debt. That’s why Japanese sovereign debt is solid, whereas American Treasuries are soap-bubble-fragile.
That’s why I think there’ll be hyperinflation in America—that bubble’s soon to pop. I’m guessing if it doesn’t happen this fall, it’ll happen next fall, without question before the end of 2011.
The question for us now—ad portas to this hyperinflationary event—is, what to do?
Neanderthal survivalists spend all their time thinking about post-Apocalypse America. The real trick, however, is to prepare for after the end of the Apocalypse.
The first thing to realize, of course, is that hyperinflation might well happen—but it will end. It won’t be a never-ending situation—America won’t end up like in some post-Apocalyptic, Mad Max: Beyond Thuderdome industrial wasteland/playground. Admittedly, that would be cool, but it’s not gonna happen—that’s just survivalist daydreams.
Instead, after a spell of hyperinflation, America will end up pretty much like it is today—only with a bad hangover. Actually, a hyperinflationist spell might be a good thing: It would finally clean out all the bad debts in the economy, the crap that the Fed and the Federal government refused to clean out when they had the chance in 2007–’09. It would break down and reset asset prices to more realistic levels—no more $12 million one-bedroom co-ops on the UES. And all in all, a hyperinflationist catastrophe might in the long run be better for the health of the U.S. economy and the morale of the American people, as opposed to a long drawn-out stagnation. Ask the Japanese if they would have preferred a couple-three really bad years, instead of Two Lost Decades, and the answer won’t be surprising. But I digress.
Like Rothschild said, “Buy when there’s blood on the streets.” The thing to do to prepare for hyperinflation would be to invest in a diversified hard-metal basket before the event—no equities, no ETF’s, no derivatives. If and when hyperinflation happens, and things get bad (and I mean really bad), take that hard-metal basket and—right in the teeth of the crisis—buy residential property, as well as equities in long-lasting industries; mining, pharma and chemicals especially, but no value-added companies, like tech, aerospace or industrials. The reason is, at the peak of hyperinflation, the most valuable assets will be dirt-cheap—especially equities—especially real estate.
I have no idea what will happen after we reach the point where $100 is no longer enough to buy a cup of coffee—but I do know that, after such a hyperinflationist period, there’ll be a “new dollar” or some such, with a few zeroes knocked off the old dollar, and things will slowly get back to a new normal. I have no idea the shape of that new normal. I wouldn’t be surprised if that new normal has a quasi or de facto dictatorship, and certainly some form of wage-and-price controls—I’d say it’s likely, but for now that’s not relevant.
What is relevant is, the current situation cannot long continue. The Global Depression we are in is being exacerbated by the very measures being used to fix it—stimulus is putting pressure on Treasuries, which are being shored up by the Fed. This obviously cannot have a happy ending. Therefore, the smart money prepares for what it believes is going to happen next.
I think we’re going to have hyperinflation. I hope I have managed to explain why.
“The Federal Reserve is now a government within a government. It is totally out of control. Congress doesn't control it. It's funded by the banks and we either have constitutional government or we don't."
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