Sunday Funnies May 31st, 2009

(Make sure you scroll down below the Funnies for today's post 'From Bull to Bear'. Click on individual Funnie for larger version.)

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From Bull to Bear

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As faithful readers know, I do not side with the current optomists who would have us believe the global economic crisis is ebbing and recovery is on the way.

Instead your dilligent scribe sides with the likes of longtime market analyst Bob Chapman who calls green shoots "Poison Ivy" and economist Nouriel Roubini who says those green shoots are "yellow weeds". Both these analysts insists there's lots more pain ahead.

To read the daily papers we have gone from the the worst financial crisis, economic crisis and recession since the Great Depression to a consensus that the outlook is now becoming optimistic again.

How can this be? The problems of the financial system are still severe and many US banks are still insolvent. Our goverments continue to pile public debt on top of private debt in an attempt to socialize the losses and unemployment is growing by leaps and bounds as government revenue from taxes contines to drop.

The reality is that at some point the government's balance sheet is going to break, and if that happens, it's going to be a disaster.

As for the recent stock market rise, how can it be anything but a Bear Market? As the US economy keeps contracting and the financial system suffers unexpected or manipulated shocks, the markets will surely crash again in a repeat of the 1929 - 1942 pattern.

Joining the chorus to offer warnings of what is to come is highly respected market analyst Louise Yamada. Yamada was top-ranked among her peers in 2001, 2002, 2003 and 2004 when she worked at Citigroup's Smith Barney division. Since 2005, she's headed her own independent research company. She penned the bullish tome Market Magic, Riding the Greatest Bull Market of the Century.

But as Randall Forsyth reported in the May 25 issue of Barron's Up and Down Wall Street column, Yamada bull ride has come to an end. She paints a picture of what is to come that is anything but bullish:

"It is almost uncanny the degree to which 2002-08 has tracked 1932-38", Yamada writes in her latest note to clients. She then offers her "Alternate Hypothesis" and compares this structural bear market to 1929-42:

• the dot-com collapse parallels the Great Crash and its aftermath, followed by the 2003-07 recovery, similar to 1933-37;
• then the late 2008 - early March 2009 collapse tracks a similar 1937-38 trajectory, after which a strong rally followed much like today;
• then in November 1938, the market dropped 22% followed by a 26% rise and a series of further ups and downs - down 28%, up 23%, down 16%, up 13%, and a final 29% decline ending in 1942;
• from the 1938 high (analogous to where we are now, she says), stock prices fell 41% to a final bottom.
  
  

Optomists claim we have already hit the final bottom to the market. Yamada disagrees. She says structural bear markets typically last 13 - 16 years so this one has a long way to go before "complet(ing) the repair process." She calls the current rebound "a bungee jump," very typical of bear markets. Numerous ones occurred during the Great Depression, 8 alone from 1929 - 1932, some deceptively strong.

It's yet another voice warning you, dear reader, to take care that you understand exactly what is going on around us.

Outstanding Video Clip for you:

Robert Rodriguez – Reflections & Outrage.
Some very rare truth telling in this five minute clip and a must see.


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Fool-Aid

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Last Tuesday I commented on the updated projections from our illustrious Finance Minister regarding the deficit.

Canada has gone from a $15 billion surplus in 2006 to a $40 billion deficit in 2009-10. This represents the most rapid and intense deterioration of national finances in the country’s history, a swing of more than $50 billion in a year.

A key component of that stunning swing in finances: the auto sector bailout of Chrysler and GM. Just how much money are we ploughing into this automotive black hole?

It works out to... wait for it... almost $1.5 million dollars per job saved.

That's right a mil and a half per job saved.

The government says it is a transitory debt we are occurring and that we will likely be out of it in two years.

Bullsh*t.

There is no way they can believe that and they are fools if they think any of us believe it. Transitory deficits are small ones that are incurred in extraordinary circumstances to deal with a short window of time. These deficits the Conservatives are creating will not be transitory deficits.

We are dealing with an economic problem that will be anything but short term. The circumstances of the auto bailout are certainly not extraordinary, those businesses have been foundering for years. And finally... this deficit is huge, it's not small.

$50 Billion this year and perhaps $40 Billion next year mean this so called 'transitory deficit' will quickly become a structural deficit. Remember how long and how difficult it was to overcome the $44 Billion deficit left over from Mulroney?

Yesterday we talked about Creative Destruction.

The term creative destruction was popularized by Austrian economist Joseph Schumpeter in 1942. It describes the process whereby constant innovation sustains long-term economic growth through improved productivity. This process of creation effectively destroys old products, companies and industries that are unable to compete with the new.

Creative destruction is not unique to recessions; it is a constant driver of capitalism. However, the destruction side of the theory becomes magnified in recession as low demand squeezes out companies which, in theory, are less competitive.

Steven Davis, a professor of international business and economics at the University of Chicago Booth School of Business, said the solid employment and productivity performance of the United States of the past 25 years has been driven to a considerable extent by America's success at 'creative destruction'.

Prof. Davis said the U.S. was particularly successful at evolving in the face of an economic shock because it had flexible labour market policies and low regulation in some markets, such as retail.

"This is why, after the major oil price shocks of the 1970s and the global downturn of the early 1980s, the U.S. recovered in terms of unemployment and economic growth much more rapidly than, say, continental European countries did," he said.

America had the ability to maintain productivity by slashing its workforce, this is crucial to allowing your country to be one of the first to recover from a recession.

The easier it is to fire people, the more willing and the less stressful it is for employers to decide to hire people. In the U.S., if you get a couple of big orders, you start hiring people because you know that when you don't need them you can lay them off again. It all sounds rather callous. But an efficient economy is one where the devil sort of does take the hindmost.

Canada has historically underperformed the United States in productivity. In 2008, Canadian productivity fell 1.3% compared with growth of 2.9% south of the border. In 1996-2000 U.S. productivity grew an average 2.5% a year compared with 1.6% in Canada.

Pedro Antunes, director of national and provincial forecast at the Conference Board of Canada, said solid productivity growth is crucial to maintaining a strong economy.

"The reason it's crucial is we are competing with the rest of the world and if we want to pay our salaries and have a real increase in wages, we need to ensure that productivity growth is over and above that. Otherwise, we are eroding our competitiveness."

The auto bailouts are nothing less than a giant anvil around the necks of all Canadians, and Central Canada in particular.

We need to embrace the creative destruction process, which means allowing for the destruction side as well as facilitating the creative side, of the economy.

$1.5 million per job pumped into the systemic failure of GM and Chrysler are funds which we can ill afford and which deprive, penalize prevent the creation of something better in its place.

It folly, plain and simple.

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Wither to unlease 'Creative Destruction'?

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The United States of America, the great bastion of capitalism, is having a crisis of confidence on a scale that few common Americans appreciate.

And within that crisis of confidence, a debate is emerging that will form and shape the 21st Century.

First it was President George W. Bush, now it is President Barack Obama. Both Presidents have returned America to a Keynesian economic philosophy.

What does that mean? Keynesian economics is a term that means diddly to the average American and Canadian.

John Maynard Keynes (June 5, 1883 – April 21, 1946) was a renowned economist from Britain whose many ideas on economic and political theories as well as on governments' monetary policies influenced America during the Great Depression. He advocated a government that played an active role in the lives of people regarding business, economy, etc. His ideas are the basis for the school of thought known as Keynesian economics.

Keynes spearheaded a revolution in economic thinking that overturned the older ideas which held that free markets would certainly allow full employment for all workers who agreed to lower their demands for higher wages. Shortly before the end of the Great Depression his ideas were wholeheartedly put into practice by leading Western economies. During the 1950s and 60s, the success of Keynesian economics was so resounding that almost all capitalist governments around the globe utilized its policies.

Keynes's ideas became less influential in the 1970s, after attacks from Milton Friedman and other economists who were less optimistic than Keynes about the potential for interventionist government policy to complement the free market.

The adverse economic conditions of the seventies, most especially the 1973 oil crisis and the recession that followed, unleashed a swelling tide of criticism for Keynesian Economics.

By 1979 Monetarist principles had displaced Keynes as the primary influence on Anglo-American economic policy and America saw a return to the free market principles that made it the bastion of capitalism.

'Creative Destruction' returned as a guiding force of capitalism. Officially Creative Destructions denotes a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

Creative destruction occurs when something new kills something older. A great example of this is personal computers. The industry, led by Microsoft and Intel, destroyed many mainframe computer companies and rendered them obsolete. In doing so, entrepreneurs created one of the most important inventions of this century.

But today Keynes's ideas are enjoying a revival, with Keynesian thinking being behind the plans of President Barack Obama and other global leaders to rescue America's treasury and economy.

But is that what we really need right now?

Can you imagine if the computer revolution were taking place today? The government would be scrambling to bailout IBM and other giant mainframe computer companies because they were 'integral' to the economy.

The billions thrown at the likes of IBM would keep them from failing and that would have greatly hindered the development of the home computer and the technological revolution that sprang from it.

Can you imagine a world with no internet? No home computers? Such intervention would have probably profoundly devastated its development.

And that, many fear, is what is happening now. GM, Chrysler, AIG, Bear Stearns, US Banks, Fannie Mae and Freddie Mac. The list goes on and on.

Let other car companies pick up the pieces and start anew. Let other investment bankers fill the void. Critics argue that the United States must let 'Creative Destruction' run it's natural course and allow capitalism to destroy the value of established companies that enjoyed some degree of monopoly power and allow them to fail.

This process frees up capital and labour so it can be redeployed and put to better use elsewhere.

Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid in instant photography – have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs.

Should we have prevented that?

Creative destruction is a powerful economic concept and explains many of the dynamics of industrial change; the transition from a competitive to a monopolistic market, and back again.

It lies at the heart of evolutionary economics.

The problem is Creative Destruction can also hurt.

Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. And while a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience.

This destruction lies at the heart of the American Capitalist Experience and is crucial to the American economy reinventing itself. The problem is American is now abandoning this philosophy as President Barack Obama and other global leaders attempt to rescue America's treasury and economy with a revival of Keynesian thinking.

Like the giant forest that catches fire and burns to the ground as part of a renewal process that sees it return stronger and greater than before... so must the economy burn down the deadwood of the economic forest. When men interfer in the regeneration of forests by preventing forest fires; the amount of debris on a forest floor gathers greater and greater until it sparks an even more ferocious blaze.

Critics fear this is what both Bush and Obama are doing with the American Economy.

The US Republican Party currently founders for renewal after the folly of George W. Bush and his abandonment of American's finest capitalistic principles.

Don't any of them realize that restoring America to it's status as the world's greatest capitalist nation is the path to both the party's, and the nation's, salvation?

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Vancouver Home Values Still Declining according to Teranet

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Monthly real estate sales may be increasing from their January lows and realtors may be boasting of multiple bidding wars and properties selling over ask price, but the big picture reality is that Vancouver Home values have now declined for a ninth consecutive month.

According to the Teranet—National Bank Composite House Price Index, which was released Wednesday, Vancouver prices fell 6.4 per cent between January and March. More significantly the March drop was the ninth consecutive month of decline on the financial institution’s measure.

The Teranet—National Bank index pegs Vancouver's market peak at June of 2008. Since then the market has declined almost 12 per cent.

So with all the hype from the real estate pollyanna's, should we expect to see a dramatic turnaround to that downward trend?

“I’m not making a forecast,” Simon Cote, managing director of property derivatives for National Bank Financial, said in an interview. “But if we look to previous business cycles, very seldom do we see the house-price index turn around in a direct V shape.”

He looks to the volume of sales as an indicator that the decline in values is stopping, and the sales volumes that are captured in the Teranet index were still low compared with a year ago, some 40 per cent below last year in Vancouver’s case.

“Until the year-over-year change in volume starts to pick up and be positive, even if it is low, it is going to be very difficult to see a turnaround [or stabilization] in the index,” Cote said.

The Teranet—National Bank index is calculated based on repeat sales of existing homes, known as paired sales, to capture direct examples of changes in value, rather than just measuring the average value of all homes that sell in a given month.

National Bank Financial uses the index as the basis to trade housing futures, builders or lenders to make bets on whether home prices will increase or decrease and hedge against volatility in housing prices.

It tracks housing prices in Vancouver, Calgary, Toronto, Ottawa, Montreal and Halifax.

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Are we nearing the tipping point for Real Estate?

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There's a whirlwind of pertinent news out there right now and it makes me wonder if we are at the tipping point for Real Estate, both in Canada and here in the Village on the Edge of the Rainforest.

The real estate pollyanna's are all agog at the recent sales data which has prompted the British Columbia Real Estate Association to declare that plunging prices in B.C.'s residential real estate market are levelling off.

"The majority of the decline in home prices has already occurred," said association chief economist Cameron Muir, in a report released on Tuesday. "Balanced markets are emerging in Victoria, Vancouver and the Fraser Valley. There's now little downward pressure on home prices in these areas."

Prices have stabilized because of increased demand, with seasonally adjusted home sales raising over the past three months, according to Muir. "First-time buyers were largely absent in the late fall and winter, making it more difficult for move-up buyers to sell their current homes. The chain of ownership is now being oiled."

The chain of ownership is being oiled alright, but is that chain about to fall off the drive shaft?

There have been some interesting posts over on the real estate discussion board 'Real Estate Talks'. One particular contributor, who takes great glee in dissing all bearish viewpoints, has made some interesting observations of late. He has noted several times now that, "My buddies in the business tell me that a lot of seller's are tapped out of equity in the properties that they are selling. Many of the mortgages are very close to the selling prices, ie: no equity left. Although there are a lot of first time buyers purchasing these properties, the Seller's don't have the equity to buy 'up' or buy 'down'. So maybe what we'll see is the prices at the bottom end of the market strong, but quite a weakening in the mid level prices."

And it buyer's fail to move up, Muir's optomism of recovery will fail. And its not just Muir's optomism riding on this.

The federal government has slashed interest rates in a desperate attempt to stave off both a plunging economy and plunging real estate values. That - and a highly manipulative campaign to drive first-time buyers into the market - is what is driving the current sales spurt.

For the government, this is crucial.

We have seen in the United States how much real estate values are interconnected to the financial system. The goverment is desperate to stem the collapse and forestall the decline in hopes that the 'Immaculate Recovery' will occur in the meantime and resuscitate both land values and the economy.

But beyond stemming the collapse, ominous signs of catasophe are looming on the horizon.

Statistics Canada released it's latest survey yesterday and B.C. just recorded the fastest increase in the number of employment insurance beneficiaries since comparable data was first recorded in 1997.

More critically, Economists say the new numbers show a Canadian economy that is shrinking at a pace most Canadians have never experienced with joblessness having become a central element of the downturn.

So what do we have here?

Unemployment is dramatically rising, the economy is shrinking and home sellers (who see the writing on the wall) are dumping real estate holdings at a price the gives them little or no equity after paying off their mortgage just so they can get the debt burden off their back.

Those sellers can see what is coming. And what's coming has been playing out in the financial markets over the past week.

Sales of US Treasuries fell for a fourth consecutive day, pushing 10-year note yields to a six-month high, amid concern record U.S. debt sales will overwhelm investor demand as the economy begins to show signs of stability.

Yields on long-dated U.S. debt are now in nose bleed territory, the return on the benchmark ten-year Treasury now careening quickly toward the once unthinkable "four percent" level as detailed in this report at Bloomberg.

Why is this important? Because yields on Treasury notes are the benchmark which sets the prime rate used for lending by Banks.

Noted investment advisor Marc Faber has been moved by these developments to strongly suggest the U.S. economy is on the cust of entering “hyperinflation” (see the bloomberg story here).

While Faber's views may be a little extreme, there is no doubt we will see much, much higher inflation when the U.S. Federal Reserve embarks on its campaign to normalize interest rates. It must withdrawal all the recently printed money in a manner that will not squash a nascent economic recovery, making high inflation is unavoidable.

And high inflation means high interest rates.

That will kill off the first-time entry buyers, eliminate any 'move-up' buyers, and send Real Estate values plummeting downward again.

And that's before all those who currently hold mortgages start having to renew at the dramatically higher mortgage rates.

Anyone care to wager how many of those first-time buyers, who jumped into the market with those all time low rates because it made home ownership affordable, will be able to renew next year at a 5% higher rate?

There is a very ugly nexus forming in the coming months and it is going to take a miracle to avoid it.

The tipping point is very near.

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Finance Minister admits economy worse than he thought.

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Ya gotta love it.

Do you remember in the 2008 Canadian election campaign when our Finance Minister, Jim Flaherty, bellowed that Canada would not run a deficit?

With the election safely secured, the government promptly sang a different tune.

Then, in January 2009, Flaherty conceded what we all knew... the worldwide economic downturn was going to affect Canada after all. The Minister then announced a plan for $84.9 billion in deficits over the next five years, ending 11 straight budget surpluses, as the government tried to stimulate growth with tax measures and spending.

The Jan. 27 budget projected the economy would contract 0.8 percent, down from a December forecast for a contraction of 0.4 percent. The government bases its forecast on a consensus estimate by economists.

So much for consensus.

Yesterday our intrepid Finance Minister said the federal deficit will be “substantially” greater and the economy will shrink more than he forecast in January.

The Bank of Canada anticipates a larger 3% contraction in 2009, which would be the biggest decline since 1933. The central bank has also cut its key lending rate to a record low 0.25 percent.

Canada’s economy contracted at a 3.4% pace in the last quarter of 2008 and growth in the first quarter may shrink at a 7.3% rate, the biggest drop on record, the Bank of Canada estimates.

“We’re not in the least surprised,” said Eric Lascelles, chief economics and rates strategist at TD Securities in Toronto. “We have been predicting since March that Canada would run more like a $40 billion deficit in 2009-10. The writings have been on the wall for many months -- the economic assumptions used for the original budget were no longer realistic.”

Canada has gone from a $15 billion surplus in 2006 to a $40 billion deficit in 2009-10!

This represents the most rapid and intense deterioration of national finances in the country’s history, a swing of more than $50 billion in a year.

One thing is clear. The economic 'Immaculate Recovery' had best occur with lightening speed or else our nation is in for a heap o' financial pain.

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Two Economic Clips worth watching.

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The first is CNBC's "The Call" and discussions of the US Dollar falling to it's lowest levels of the year.

The second is Peter Schiff discussing the last week of the stock market where three significant events occurred simultaneously for the first time: Stock prices fell, bonds fell and the trade weighted US dollar fell.




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Sunday Funnies May 24th, 2009

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A three dressed up as a nine?

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If you missed the late updates, there was a total of three bank failures for the list yesterday in the US.

While the US economy may be lagging, much of the postitive economic news lately has been focused on China. Part of the recent optimism in world markets rests on the belief that China’s fiscal-stimulus package is boosting its economy and that GDP growth could come close to the government’s target of 8% this year.

A significant portion of the stock market gains in Canada have been premised on China's revival and their need for commoditites to fuel that growth.

Now it apears red flags are being raised on that optomism.

Concerns are appearing that all may not be as rosy as portrayed by Bejing. Some economists suspect that the Chinese figures overstate the economy’s true growth rate. These same economists are saying that Beijing would report 8% growth regardless of the truth.

Economists have long doubted the credibility of Chinese data and it is widely accepted that GDP growth was overstated during the previous two downturns. In 1998-99, during the Asian financial crisis, China’s GDP grew by an average of 7.7%, according to official figures. However, using alternative measures of activity, such as energy production, air travel and imports, Thomas Rawski of the University of Pittsburgh calculated that the growth rate was at best 2%.

The biggest adjustment seems to have been made in 1989, the year of political protests in Tiananmen Square. Officially, GDP grew by over 4%; while analysis shows that it actually declined by 1.5%.

China’s growth in the first quarter of this year has led some to conclude that the government is up to the same old tricks. According to official figures, GDP was 6.1% higher than a year earlier. Yet electricity production in the first quarter was 4% lower than it had been a year earlier. In the past, GDP and electricity output have moved broadly together. Given that power statistics are less likely to have been tampered with than politically sensitive GDP figures, is this evidence that the latter have been fiddled?

Then there are government tax revenues. These have fallen by 10% over the past year, compared with a surge of 35% in early 2008, suggesting that incomes and output have tumbled.

Abraham Lincoln famously said you cannot fool all of the people all of the time.

If the revival in China turns out to be less than it appears... can you guess how the Canadian stock market is going to react?

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Like sand through the hourglass...

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UPDATE: Bank Failure #36 - Citizens National Bank, Macomb, Illinois
UPDATE: Bank Failure #35 - Strategic Capital Bank, Champaign , Illinois
BANK FAILURE FRIDAY UPDATE: Bank Failure #34 - BankUnited, Coral Gables, Florida

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As I said yesterday, in the end it’s all about the economy.

For several weeks now pundits have been agog about the 'green shoots' indicating a recovery may be at hand.

Balderdash.

While it is true that the markets have recovered over 30% from last year’s lows, something just doesn't add up.

First quarter corporate earnings are down over 30% and there is a serious disconnect between stock prices and economic reality - just like in late 2007. Those plunging headlong back into the market seem to think that the 50% sell-off in 2008 was overdone and great bargains are now available.

I believe those investors simply do not understand the economic maelstrom of last October.

As I have said over and over, the crash of 2008 was a once in a multi-generational event borne of systemic problems in the economy.

Economists like Peter Schiff have succinctly identified the issue and we have profiled them on this site. The North American economy must allow dead industries to die and permit the natural restructuring of capital and manpower that will rebuild the economy.

But government is interfering. Like an addled heroin addict who cannot break free of his drug addiction, our governments continue to indulge in the traditional vices of over-borrowing and over-spending. Wherever the private sector attempts to correct its behavior, a bloated federal government overrides its efforts.

Faced with a meltdown of the banking system. World governments injected trillions of dollars into their economies and changed accounting rules to ensure that a systemic banking failure was averted. Though the system has stabilized, investors seem to forget that none of the fundamental problems have been solved. We may have survived the initial catastrophe, but the system remains wrought with faults.

By diverting trillions of borrowed dollars into keeping alive vegetative corporations such as AIG, Chrysler, Big Banks and GM, our governments are preventing new enterprises from access to vital labor and capital resources. We are enshrining inefficiency.

North America needs fundamental restructuring in order to compete in an increasingly competitive marketplace. Meanwhile, profitability in those countries that do the hard work of restructuring can be expected to rise disproportionately as the world economy revives.

The news wires are already a tither about another avalanche of loan defaults and derivative failures that are coming down the pike, sham “stress tests” notwithstanding. The "stress-tests" will prove to be nothing more than a confidence-boosting whitewash of the massive problems confronting the banking industry.

As corporate earnings fail to keep pace with the blistering ascent of stock prices, look for investors to bail on the market as they did in late 2008.

Only this time the damage will be even more severe.

After the crash of 2008, investors fled to the safe havens of the U.S. dollar and U.S. government debt.

It won't happen that way next time.

China, the world’s largest gold producer, has recently doubled its central bank’s gold reserve. China also floated a preliminary idea at the recent G-20 meetings to replace the U.S. dollar with a gold-linked international reserve currency. This idea may soon catch on among creditor nations who value real money but also want the flexibility to undervalue their paper currency for the benefit of exporters.

Russia, in a news story announced yesterday, has moved away from using the US dollar as its basic reserve currency (see story here)

At the beginning of the 20th century, the U.S. dollar became the world’s reserve currency because, at the time, it was “as good as gold.” Now the world’s largest debtor nation will suddenly confront the true weight of its obligations and be forced to significantly lower its standard of living.

We are nearing the crest of some serious (and tumultuous) times. And the markets are starting to sense it.

Earlier this month, the U.S. reported the first budget deficit for April in 26 years, with spending exceeding revenue by $20.9 billion, even though that’s the month when taxpayers have to stump up to the Internal Revenue Service and the government’s coffers should be overflowing.

So far this fiscal year, the U.S. shortfall is $802.3 billion, more than five times the $153.5 billion gap in the year-earlier period.

For the fiscal year ending Sept. 30, the Congressional Budget Office forecasts a record deficit of $1.75 trillion, almost four times the previous year’s $454.8 billion shortfall and about 13 percent of gross domestic product. Bear in mind that the target demanded of European nations wanting to join the euro was a deficit no greater than 3 percent of GDP.

Meanwhile Chinese exports are dropping as the global economy weakens, with overseas shipments declining 23% in April from a year earlier. This leaves China (a nation that has already expressed concern about its U.S. investments) with less to spend on supporting that debt in the future.

This is not going to end well.

And Real Estate will be but one of the massive casualties.

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CMHC Data puts damper on Real Estate Industry enthusiasm

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CHMC lastest forecast, released on Tuesday, indicates British Columbia's real estate markets have reached a point where it is difficult to predict if they'll go down any further or begin a recovery -- or even when either might occur.

So much for the rosy expectations of the Industry the last few weeks.

Province-wide, the forecast calls for a 43-per-cent decline in housing starts compared with 2008. It estimates that builders will start work on 19,725 new housing units this year, with a 10-per-cent uptick to 21,000 new units in 2010 -- a far cry from the 34,321 built in 2008.

On home resales, the federal housing agency expects 2009 MLS-recorded sales to fall almost 16 per cent to 58,100 units before climbing again to 67,750 in 2010. Average prices are expected to hit $403,700 this year, an 11-per-cent dip, and increase a marginal 0.7 per cent in 2010.

In Metro Vancouver, the expectation is for housing starts to decline almost 44 per cent to 11,000 new units in 2009, then edge up slightly to 11,500 in 2010.

Metro housing resales are expected to drop almost 13 per cent this year to 22,000 transactions, then rise almost 14 per cent to 25,000 in 2010. Metro prices are expected to sink 13 per cent to $516,000 in 2009 and a further 2.3 per cent to $504,000 in 2010.

Meanwhile Tsur Somerville, director of the centre for urban economics and real estate at the University of B.C.'s Sauder School of Business, believes there are a lot of mixed signals in the economic data. "Canadian housing sales are up, but U.S. housing starts are down," Somerville said in an interview. "Stock markets are up, but retail sales are down. There are lots of different things [going on]."

Somerville added Canada's mortgage rates, currently at extremely low levels, also throw a wrench into forecasts. He said one model used to calculate home values suggests that, with mortgage rates where they are, "housing is affordable in Vancouver, and prices could rise." But with B.C.'s weaker economic conditions, he doesn't believe that will happen.

Economic forecasting, Somerville said, works better when conditions are in some kind of equilibrium, and doesn't do as well trying to figure out when things will change.

"Right now you're trying to figure out when a complex world economy is [going to turn] around, how fast it's turning around, and where it's turning around," he added. "It's just a very, very difficult environment to turn around."

In his most recent quarterly report, Rudy Nielsen, president of the research firm Landcor Data Corp., noted that the recent trend of rising sales over the past few months could be signalling that the downturn is near its bottom and represents "a light at the end of the tunnel."

Or, Nielsen said, the blip in sales "could be a grizzly bear with a flashlight. It's tough to guess right now where the hell we're heading."

I guess that's 'data-speak' for sitting on the fence.

In the end it's all about the economy, both in Canada and the United States.

Are the fundamentals there for recovery? Or are the 'green shoots' actually the yellow weeds of a bear market trap?

You all know my thoughts on that one.

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Sunday Funnies - May 17, 2009

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(click on image to enlarge)

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Psst... Wanna buy a used car dealership?

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The automaker crisis is about to hit the rest of Canada as the impact of the GM/Chrysler debacle spreads beyond the Ontario border with the slashing of the vast dealer networks of both companies.

General Motors of Canada Ltd. is poised to cut almost half its Canadian dealerships and force 310 businesses to close.

This is a bitter pill for the dealerships. Downturns in the auto sector in the past have always hit assembly centres such as Oshawa and Windsor. Dealers would see their sales shrink, but they have never had to face closings and thousands of job losses.

Welcome to the new reality. What's worse is that dealers don't know yet who will get the axe.

Marc Comeau, GM Canada's vice-president of sales and marketing, told Canadian dealers yesterday that their number will be reduced to 395 from 705 and those who are being cut will be informed during the new few weeks.

Meanwhile Chrysler Corp. said it would dump 789 of its dealers by early June.

In the United States, dealers who sell less than 35 cars a year were among those notified in the first round of cuts.

One imagines there is significant angst in dealerships across the country this weekend.

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Email: village_whisperer@live.ca

Another warning about the market and... it's BFF.

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Robert Prechter is a longtime technical analyst who forecast the 1987 stock market crash and authored a book in 2002 ("Conquer the Crash") in which he warned of the dangers of a U.S. debt bubble and deflationary depression.

His take on the current stock market? He predicted this week that U.S. equities may plunge to half their lows hit in March as a deflationary depression bites.

Prechter is now the chief executive at research company Elliott Wave International in Gainesville, Georgia. In an interview this week with Reuters, Pretcher said he also believes Oil and U.S. Treasury bonds are locked in long term bear markets, while corporate bond prices will plunge precipitously by next year as broad economy, banking system and company earnings sustain more damage from a financial crisis that's akin to the Great Depression.

"It's not the start of a new bull market.Our models are (showing) right now that it is a much bigger bear market than most people realize, something along the lines of 1929-1932.It's a very rare event."

Prechter says The U.S. central bank will not be able to control the government bond market and prevent yields from rising, regardless of how much money the Fed uses to buy Treasuries. He believes that next year, U.S. corporate bond prices will probably fall below their extreme price lows of December during the market panic of 2008 when investors fled riskier assets.

Curiously, however, Prechter also painted a bleak picture for commodities like silver and is largely unenthusiastic about gold, believing the precious metal made a major peak when it rose above $1,000 last year.

Bank Failure Friday

Prime Minister Harper said two months ago that, "there won't be a recovery until the U.S. financial system is repaired." So we watch the US banking developments with keen interest. As faithful readers know, bank failures in the US always seemed to be delayed until late on Friday afternoons, prompting Friday to be renamed 'Bank Failure Friday' by many economic blogs. Currently the carnage is up to 33 failures in 2009.

Updates in red/blue at the top of this post as they come in from the FDIC (click on blue portion to see press release from FDIC).

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Email: village_whisperer@live.ca

There must be a pony around here...

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Ahh... the credo of the eternal optomist as adopted to the real estate industry. You could walk into a house and be up to your knees in manure and a real estate agent would cheerfully tell you... "Gee, this place must come with a pony."

Once again the Real Estate pollyanna's shill about the return of good times, the underlying message the same as always... Don't be left out, you better buy now!

The latest is the Real Estate Board of Greater Vancouver telling us that the Greater Vancouver housing market "has entered a more moderate and balanced state," with sales and benchmark prices both up in April compared to March.

And don't kid yourself, the local real estate community is doing everything it can to whore values higher.

The industy is eagerly pointing at 3% mortgages and homes being up to 15% more affordable than they use to be. The carrot is dangled furiously at people who wanted to buy in the past, but could not. "Now," the pollyanna's proclaim, "they can."

As we have documented here in the past month the crucial first-time buyers are being relentlessly prodded into action.

The pollyanna's hook their prey and trumpet that the Federal government will let them raid $25,000 from their RRSPs, tax-free, to buy a home. The Feds will also donate $750 to help them close. Then real estate industry creates media releases about young buyers rushing into the market in this, perhaps the best (and last) time, to buy into the market.

Even the mighty CKNW, the radio station that bills itself as "BC's News Leader and the station you turn to in an emergency", has turned to pimping for the real estate industry. Surely you have heard the sickening PSA's that tell everyone that 'now is the time to buy'.

For shame. It's peer pressure at it's manipulative best.

And what about the real news? The economic winds are not blowing kindly.

The public service abounds with rumours of slumping revenues, pending cuts in spending, and a much bigger-than-budgeted deficit.

Watch for a new provincial budget on the heels of the BC Liberal election majority that cuts services, raises taxes and slashes funding to municipalities.

What is it they say? Shite rolls down hill? Municipalities will, in turn, cut services and raise - wait for it - property taxes. And the hikes will be significant.

All of this comes on the heels of yesterdays news that bankruptcies in B.C. are soaring and that heavy job losses are taking their toll on individual residents. B.C. has the dark distinction of having posted Canada's third-largest increase in consumer bankruptcies, behind Alberta's 99.8-per-cent increase and Newfoundland's 88.9-per-cent rise.

Mark my words, if the economy does not perform the Immaculate Resuscitation investors in the stock market are being hoodwinked into believing, all those being sucked into buying now are going to be very, very bitter.

Maybe they can console themselves as they hunt around their new house looking for the pony.

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Email: village_whisperer@live.ca

Tug O' War

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There's nothing like a good 'ole fashion Tug-O-War to get the competitve juices flowing, is there?

Yesterday we profiled Meredith Whitney, a former stock analyst at the investment bank Oppenheimer & Co. Inc, an insider who became one of Wall Street’s first bears when credit markets started to freeze in 2007. Early this week, after government evaluations of their financial health, she said banks are “grossly overvalued” and that "at a core basis, I would not own these stocks. Their business models are not going to come back."

Enter Bill Miller, fund manager of Legg Mason's Value Trust mutual fund. Miller is famous for having beat the Standard & Poor’s 500 Index for a record 15 straight years (before stumbling in 2006) and he proudly proclaims that financial companies are his favorite investment for the rest of the decade.

Now there's bravado for you! And if there is something investors love, it's confidence.

Miller is a self-titled 'value investor', someone who seeks the cheapest companies relative to earnings or assets. Last week he said, “financials have the biggest potential to outperform” and boldly named his favorite picks as San Francisco-based Wells Fargo & Co., Capital One Financial Corp., and New York-based American Express Co.

And faithful readers know how much the Whisperer has been picking on Wells Fargo of late.

So it is with great interest that we will watch the great Bill Miller and his stock market advice because, make no mistake, it is at stark odds with what the Whisperer has been saying.

Miller’s says his bets hinge on U.S. home prices stabilizing this year and an economy that performs better than projections from the Federal Reserve. Whisperer believes both will do the opposite.

To his credit, in the first three months of 2009, Miller bought about 3.77 million shares of Wells Fargo (who, btw, is the largest U.S. mortgage originator) and almost quadrupled his position in credit-card company Capital One, according to data compiled by Bloomberg and Legg Mason’s Web site. Miller also increased his stake in American Express, the biggest U.S. credit-card company by purchases, by about 22 percent.

With a maasive wave of foreclosures yet to come and a tsunami of credit card write-downs in the offing, what does Miller see that Whisperer does not?

Perhaps a lot.

Miller can currently boast tremendous success with his investments. Since March 31st Wells Fargo has gained 70%, Capital One 96%, and American Express 77%.

But as we saw in yesterday's post when we profiled Whitney, there is significant concern bank stocks will decline because the gains aren’t matched by improvements in their businesses.

“The underlying core earnings power of these banks is negligible,” cited Whitney, who quit Oppenheimer in February to start her own firm, Meredith Whitney Advisory Group LLC in New York. U.S. banks will likely return to “negative earnings” after posting first-quarter profits and the largest companies must sell assets after expanding at an unsustainable pace in the past two decades.

Furthermore home prices are likely to be down 50 percent from peak levels, which makes gains unlikely and a recovery in consumer spending (which accounts for 70 percent of the U.S. economy) may be undermined as banks and card companies slash $2.7 trillion in credit lines by the end of 2010.

It's a classic battle of viewpoints. What makes it so compelling is that the viewpoints are such polar opposites. And the impact from the winner will affect stock markets and real estate worldwide.

We do indeed live in interesting times.

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Email: village_whisperer@live.ca

Insider issues warning about US banks and their stock

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As you already know, Whisperer has been critical of US Banks like Wells Fargo. Their stunning turnarounds in profits have been a large factor in the current market rally that continues to gather steam.

Enter Meredith Whitney, a former analyst at the investment bank Oppenheimer & Co. Inc.

Whitney, who has her own firm now, is renowned for calling out the problems with banks' toxic assets before the issue became widespread. What's her take on the great bill of health given to banks by the recent stress tests?

Whitney thinks Banks are overvalued and the government enabled them to have better first quarter earnings than they should. "At a core basis, I would not own these stocks," she said on CNBC. "Their business models are not going to come back."

Whitney also said that consumer spending is still going to remain slow. "There's a massive retraction in consumer liquidity," said Whitney. "Credit contraction is happening at an accelerated pace. Consumer spending is going to be less than people expect going forward."

Whitney also issued an ominous warning for stock market investors when she said that the rules of trading have changed because of the government's role. "For investors, you invest on what you know to be the rules of the game," said Whitney. "But with the government involved, no rules apply."

Whitney said the changing rules create a big problem for investors going forward. "The biggest danger here is having the retail investor shut out for a period of time because they don't know who to trust on market values."

Day after day more warnings come out about the health of this market rally and how it is not based on solid fundamentals.

The Whisperer encourages you to take heed.

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Email: village_whisperer@live.ca

Sunday Funnies May 10th, 2009

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(Click on image to enlarge)

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Email: village_whisperer@live.ca

April Job Loss Numbers

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So did you catch April's job numbers from Stats Can?

After most economists and observers were predicting another 53,000 jobs lost, Stats Can reported the following stunning job GAINS!

"Employment grew by 36,000 in April, the result of an increase in self-employment. Despite this increase, overall employment has fallen by 321,000 since the peak in October 2008. The unemployment rate was unchanged at 8.0% in April, remaining at its highest level in seven years, with the growth in employment coinciding with an increase in the labour force."

On the strength of this news the TSX jumped over 270 points and the Canadian dollar surged ahead over a cent and a half.

What great news for the economy, right?

Well... not so fast. You know how all those statistical survey's say they are accurate to within 2 or 3 points four out of five times? And the fifth time they are way, way off?

Whisperer will bet you that this is one of those surveys: way, way off.

Here's why.

First of all, everyone - and I mean everyone - was floored by these results. Secondly, things get awfuly fishy when you examine those results a little closer.

"Statistics Canada said 35,900 positions were added during the month, driven by an increase in self-employment... The biggest employment gains were in Quebec, up 22,000, and British Columbia, up 17,000."

17,000 jobs gained in British Columbia??? BC, the province which has been recording closure after closure, gained 17,000 jobs? What manner of new math is this?

"Quebec's employment increase of 22,000 in April was accompanied by a slight rise in the unemployment rate to 8.4%, the result of more people in the labour force. Since last October, employment in Quebec has declined 0.8%, less than the 1.9% drop at the national level."

"In British Columbia, employment rose by 17,000 in April. The unemployment rate remained at 7.4%, as there were more people in the labour force. Despite April's gains, employment has declined by 52,000 (-2.2%) since October 2008."

Wait a minute and hold the phone, here! Quebec's unemployment rate went up? BC's rate of unemployment did not change? So how is there an increase in jobs???

Explore the data a little further and you discover that most of the jobs were 'created' in the self employed sector, 9 out of 10 jobs created. And the people that filled these jobs were phantom workers (those workers who were previously not counted as unemployed).

And how do they get these numbers? Well, on page 53 of the report it says, "the statistics contained in this report are based on information obtained through a sample survey of 53,000 representative households across the country."

So they phoned up 53,000 homes (presumeably 5,000 in BC and 5,000 in Quebec) and they find that the same number of people are out of work in BC and more people are out of work in Quebec than last month... but 36,000 jobs were gained across the country because a whole bunch of people said they were now working for themselves at home.

Marvelous.

And what are they doing? Collecting pop cans for the deposit?

Trade is still down -23% year over year (YOY). Manufacturing is doing better, but it is still down -6% YOY and only comprises 7% of the employment. If you look at Table 6-1, page 50, both employment participation and employment rates are down for the lower mainland.

And the same number of people who were unemployed in BC in March are still unemployed. And in Quebec, even more people are unemployed. Yet the 36,000 job gain came from these two provinces.

Marvelous.

Clearly this is that 1/5 survey that is skewed and non-representative of reality.

Funny how it comes at a time when politicians are desperate to nuture and protect what they see are precious 'green shoots' of improvement in the economy.

And the 15-second soundbyte on the news is all it takes for the market to zoom upward.

Now you know why markets collapse they way they do, months down the road, when investors suddenly 'discover' stock gains aren't really based on sound fundamentals after all.

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Email: village_whisperer@live.ca

Bank Failure Friday, More Inflation fears and Hockey Trivia

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UPDATE: Bank Failure #33: Westsound Bank, Bremerton, Washington.

UPDATE: No failures yet, but FDIC so busy they will open temporary East Coast Satellite Office to help close banks.

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Well... it's the day after the results for the infamous US Bank Stress Tests has been released. Will it also be Bank Failure Friday as well?

As faithful readers know, bank failures in the US always seemed to be delayed until late on Friday afternoons, and there have been so many regular failures week after week that Friday has jokingly come to be called 'Bank Failure Friday' in many economic blogs.

2009 is off to a record breaking year with 32 failures so far. Updates in red/blue at the top of this post as they come in from the FDIC (click on blue portion to see press release from FDIC).

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INFLATION FEARS

Bond market watchers are all a tither. Check out this chart (click on image to enlarge)

This is the intraday chart on the long bond futures. For those who follow such things, this is one nasty chart. The dramatic line going straight down represents the drop in demand for US bonds. As a resuIt the yield (interest rate paid on those bonds) had to spike upward in order to sell the bonds. The US government just sold $14 billion of long bonds at a whopping 4.288% yield. That was far above pre-auction forecasts for a yield of 4.192%, according to Bloomberg.

This prompted China to issue its clearest warning to date about worldwide inflation.

"As more and more economies are adopting unconventional monetary policies, such as quantitative easing (QE), major currencies' devaluation risks may rise," the People's Central Bank of China said in its quarterly report.. The bank fears a "big consolidation" in the bond markets, clearly anxious that interest yields will surge as western states try to exit their QE experiment.

Simon Derrick, currency chief at the Bank of New York Mellon, said the report is the latest sign that China is losing patience with the US and aims to diversify part its $1.95 trillion (£1.3 trillion) foreign reserves away from US Treasuries and other dollar securities.

This has a tremendous potential to impact our economy and the real estate market so we will explore this in the coming week.

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HOCKEY TRIVIA

Meanwhile the Village on the Edge of the Rainforest Canucks let one slip away from them last night. Series is tied 2-2 instead of the Canucks being up 3-1.

Therefore two hockey trivia questions for you today in symmetry with the 2-2 series deadlock.

Who has his name on the Stanley Cup the most times AS A PLAYER (11 times)? Click here for the answer.

Now... who has his name on the Stanley Cup the most times (10 as a player, 7 as a club executive, total 17 times)? Click here for the answer.

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Email: village_whisperer@live.ca