Whispers from the Edge of the Rainforest: June 2009

Tuesday, June 30, 2009

Get on board the Inflation Train.

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Well, sort of.

Following up on yesterday's post, I have a youtube clip for you. It doesn't have a catchy tune like the old schoolhouse rock diddy 'conjunction junction', but here's a 1933 pro-inflation film which attempts to explain how inflation can bring about happy days. I wonder how long until we get the 2010 version from CNN?

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Monday, June 29, 2009

USA Today: Inflation is the answer to rising national debt

Bet you thought inflation was a bad thing, right?

In an article in USA Today, (you can see it here) the paper notes that inflation is "as dead as the Wicked Witch of the West in a waterfall. The consumer price index has actually fallen 1.3% in the past 12 months. So why is everyone so worried about soaring prices?"

USA Today summarizes the inflation fears in a word: debt.

As readers of this forum are aware, the US government owes the world $11.4 trillion — $37,000 for every person in the U.S.

In the next fiscal year, the US government will add $1.8 trillion to that deficit.

USA Today debates various scenarios that could occur. What is interesting is the conclusion.

After weighing several pros and cons the article states, "as the deficits grow, the threat of inflation — with the problems that it brings — grows, too, if only because the measures the country needs to take to prevent inflation are so difficult. There are only three ways to cut the debt: raising revenue, cutting expenses or inflation."

Axel Merk, portfolio manager of the Merk Hard Currency fund, raises a question that is being asked throughout the United States right now... should the United States cure its debts by raising taxes and cutting spending?

"Sure," answers Merk sarcastically. "And then we will all fly to the moon."

So what should the United States do?

"Inflation is the answer," says Merk.

Watch, dear reader, for more such articles in the months ahead as US media outlets prepare America for 'inflation' as the solution for the nation's problems - a repeat of the 1930s pro-inflation campaign.

Like it or not... inflation is coming.

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Sunday, June 28, 2009

Sunday Funnies - June 27, 2009

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Saturday, June 27, 2009

Macleans Magazine: Don't believe the housing hype!

Back on June 7th, I made a post that questioned the validity of the 'affordability' argument being used to hype homes. That post (So what happens when it's time to renew?) can be seen here.

This week Macleans Magazine has come out with an article reminding Canadians that "there are plenty of signs that the Canadian housing market is still on some very shaky ground."

And just like my July 7th post, Macleans questions the affordability argument as well. (see the Macleans article here)

Looking at the PR coming from the Real Estate Associations, the magazine notes the Industry is trumpeting how sales are up 16% this year and how, in May, sales hit an all time monthly high.

The article pinpoints exactly what is being insinuated by this statement; "that Canada didn’t just sidestep the housing market crash that continues to plague the United States, it sailed right through it virtually unscathed."

Macleans isn't buying into that malarky, and neither should you.

The magazine notes that there are plenty of signs that the Canadian housing market is still sitting on some very shaky ground—and even the potential that Canada’s big housing crash is yet to come.

Just like we have profiled in yet another post, the magazine notes household debt is still an astonishing problem in Canada. "There is one particular statistic that suggests trouble could be brewing. Unlike in the U.S., Britain and most European countries, household debt in Canada is, incredibly, still growing."

The magazine notes that the rising debt being accumulated by Canadians is being driven largely by record-low interest rates.

"Canadians have been buying homes not so much because they can afford them, but because many believe there’s never been a better time to buy, with lending rates so low."

Macleans sees what we have been harping about... that real estate is not more affordable, but that cheap money is more plentiful. "Houses are barely more affordable now than they were during the market peak. And as people keep buying, houses may only become less and less affordable."

The article also notes that not everyone agrees with the Canadian Real Estate Association figures that suggest the market has managed such a quick and painless turnaround. According to the Teranet-National Bank housing price index, Canada’s housing market is not recovering yet. Home prices have been falling for the past eight months, according to its latest statistics. Vancouver, Calgary and Toronto have each experienced significant price drops compared to last year. This would seem more in line with what one would expect after an unprecedented six-year housing boom in which home prices shot up 80%.

And what is the doomsday scenario looming on the horizon?

"If mortgage rates go up sharply then affordability will get crunched. Things could get much, much worse. And that’s not an unthinkable scenario. Some banks have already boosted interest rates twice this year. Then there is the possibility that job losses continue and the economy doesn’t recover quickly, putting further strains on household finances. The low interest rates and continued debt problems mean that Canadians could find them themselves badly over-exposed."

BMO economist Sal Guatieri, in a newsletter last week wrote, “it’s worth remembering that the further house prices go up and the longer household finances get stretched, the greater the risk of a painful correction. Anyone who doubts that should talk to an American or British homeowner.”

The article headline says it all. "Don't believe the housing hype!"

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Friday, June 26, 2009

Unintended Consequences

The 1956 Suez Crisis is one of the most important and controversial events in British history since the Second World War. It has come to be regarded as the end of Britain's role as one of the world powers and as the beginning of the end for the British Empire.

The Suez Canal was opened in 1869, having been financed by the French and Egyptian governments and technically the area surrounding the canal proper was sovereign Egyptian territory. The canal, however, was strategically important to the British and hence to the other European powers.

To Britain, the canal was the ocean link with her colonies in India, the Far East, Australia, and New Zealand.

In 1875, the British government took de facto control of the canal proper, finance and operation. The 1888 Convention of Constantinople declared the canal a neutral zone under British protection.

At the outset of the 1950s, Great Britain was the predominant foreign power in the Middle East. The area’s vast oil reserves prompted Britain to consolidate and strengthen its position there. However, throughout 1955/56 Egypt pursued a number of policies that would frustrate British aims throughout the Middle East, and resulted in increasing hostility between Britain and Egypt.

In the summer of 1956, Egypt nationalized the Suez Canal.

Britain decided to take military intervention against Egypt, however direct action ran the risk of angering Washington and damaging Anglo-Arab relations. Therefore Britain concluded a secret military pact with France and Israel to regain control of the Canal.

At the end of October, British/French/Israeli forces seized control of the Canal.

The US attempted to force a cease-fire on Britain, Israel, and France with a UN Security Council resolution. Britain and France, as permanent members of the Council, vetoed these resolutions.

In response, US President Eisenhower ordered his Secretary of the Treasury to prepare to sell part of the US Government's Sterling Bond holdings. The US held these bonds in part to aid post war Britain’s economy and as partial payment of Britain’s enormous World War II debt to the US Government, American corporations, and individuals.

Britain's Chancellor of the Exchequer advised the Prime Minister that the United States was fully prepared to carry out this threat. He also warned his Prime Minister that Britain's foreign exchange reserves simply could not sustain a devaluation of the Pound that would come after the United States' actions; and that within weeks of such a move, the country would be unable to import the food and energy supplies needed simply to sustain the population on the islands.

In concert with US actions Saudi Arabia started an oil embargo against Britain and France. The U.S. refused to fill the gap until Britain and France agreed to a rapid withdrawal. The other NATO members refused to sell oil they received from Arab nations to Britain or France.

On November 6th, 1956 the British Prime Minister announced a cease fire, warning neither France nor Israel beforehand.

Fast forward to 2009.

America’s Achilles heel is its astonishing level of debt. China, Japan and Russia are the three largest holders of its treasuries and bonds.

Will it be the situation in North Korea, Iraq, Iran, Afganistan, or… ?

And when it comes, will America fold like the British did? Will the USA capitulate to Chinese or Russian foreign policy threats?

Or will a US President, eager to find a way to default on America’s insurmountable debt, provoke an incident to which America will opt to eat the tremendous financial pain and hardship (ie. plunging dollar, massive inflation) the selling of the treasuries would initiate?

History is rife with such unexpected twists and turns. And America finds itself in an unprecedented financial position.

War ended the Depression created by the 1929 crash. It doesn't take a Machiavellian mind to see the possibilities here.

In yesterday's profile of the MacLeans magazine article, the headline was "the U.S. is about to go broke and they’ll take us down with them."

Unfortunately that sentiment is all too true.

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Thursday, June 25, 2009

The Great Inflation Debate (Part 2)

Continuing from yesterday...

The Chinese, the Japanese and the Russians have three of the biggest piles of US bonds in the world.

What would you say if you owned $800 billion worth of bonds? Wouldn't you tell the world what a great investment they were?

...and then sell them quietly, when no one was looking?

Most observers fear this exact scenario. And if it starts to happen the US Federal Reserve will be forced to do what they don't want to do. They'll have to buy their own bonds in great quantities to keep rates down. Then, they'll have to buy more...because others will be selling them. Finally, they'll have to monetize a huge percentage of them...ultimately causing inflation rates to soar.

That's the scenario you don't ever hear the US Federal Treasury talking about. Sure they say they can yank the stimulus money quickly if the economy turns around. But that is only one scenario that scares inflationists. There are many others.

And last week Peter Schiff outlined some of those other concerns in an article in Canada's MacLeans Magazine. You can read the full article here. I highly encourage you to take the time to read it.

From the article:

Many scoff at the idea that China will suddenly say “no more” to buying U.S. debt. After all, the two countries have had a mutually beneficial relationship for years. China lends money to the U.S. and the U.S. buys masses of consumer goods from China. What’s more, it’s a long-standing relationship and many doubt that China would want to upset the status quo. Schiff sees no logic in that argument. “That they’ll keep lending indefinitely makes about as much sense as the argument that real estate prices have been rising, so they’ll rise forever,” Schiff says. “Nothing that is unsustainable will go on forever.”

But the thing is, China doesn’t have to entirely cut off the U.S. to cause problems. Even if China decided to pull back slightly there would be consequences. The U.S. would still find itself short of the cash it needs to pay its bills, and like a homeowner who misses a mortgage payment, it would have to find that money somehow.

Regardless of precisely how and when this all unfolds, the dollar will inevitably become less valuable and interest rates will rise as the U.S. scrambles to attract new lenders. That will translate into inflation and higher interest rates for the average person, too. The cost of living will go up and the value of people’s savings will decline. Canada would likely get dragged into the mess too, just as it was affected by the current downturn in the U.S. The question is how severely this will all hit.

Finally there is the law of unintented consquences.

That's the wild card element that scares inflationists the most.

We'll look at that tomorrow.

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Wednesday, June 24, 2009

The Great Inflation Debate: What's it all about (Part 1)

Had a phone call this morning from a colleague who has been reading this blog lately and he wanted me to explain to him my thoughts on inflation.

He has read the blog, read other blogs and has been trying to get a grip on why people are concerned about the threat of inflation. "A bunch of people are saying it isn't a concern. A lot of others are saying we should be 'very afraid."

In that he has a very large mortgage coming due for renewal, he is wisely trying to understand the issue.

The fact of the matter is that Canadian interest rates are directly tied into what is happening in the United States. As we saw last week, despite the fact the Bank of Canada never changed it's key lending rate, Canadian Banks raised their rates based on yields for 30 year US Treasuries having risen. The yield on the 30 year Treasury is directly linked to US mortgage rates.

So what happens in the US directly affects us here in Canada, whether we like it or not.

US Bond and Treasury sales are the way the United States government finances it's balance sheet. They come up with a budget, raise money through taxes, and any shortfall (the deficit) has to be covered by selling bonds and treasury bills.

As these bonds and treasuries are sold, a yield (or interest rate) is attached to them. If buyers are scarce, the yield has to be raised to sell them.

Higher yields mean the cost of borrowing money rises. This trickles down to the money lent by banks to you for your mortgage.

The United States Federal Treasury has kept interest rates close to zero since last December. They have achieved that through a number of means including buying their own Treasuries and bonds by (in effect) printing more money. The Fed has also lent money to financial firms in return for all sorts of assets in order to keep credit flowing through the economy.

When any other nation does this, confidence in their currency collapses resulting in hyperinflation.

So how can the US get away with it? Because the US dollar and economy has been so strong for 60 years that the US dollar has been adopted by the world as it's reserve currency. Everyone has such faith in the US that it has become the foundation upon which all other currencies are traded.

And the United States has been able to leverage that status to their advantage while keeping International confidence in their policies high.

International confidence aside, some analysts fear that as the United States swells bank reserves well above typical levels with the printing of additional money, these reserves will serve as rocket fuel for future inflation. Simply put, excessive money in the banks will lead to runaway consumer inflation.

Those who dispute the future inflation argument assert that the reserves are so large because the demand is large. When demand drops off, that money will not find it's way into the general economy to fuel inflation because the Fed will be able to drain the reserves off.

And that's the crux of the whole issue: Can the Fed do that? Can they remove the reserves before the funds find their way into general circulation and fuel inflation?

We know that the Fed's balance sheet has exploded (to $2.07 trillion). Defenders of Fed policy point out that is only half the story. Data from the St Louis Fed shows that the "monetary multiplier" has collapsed from a decade-average of 1.6 to the depths of 0.893. This means the 'velocity' of money has slowed to a crawl because those reserves are not making it into general circulation.

Apartently the banks are keeping that money in their reserves to keep themselves solvent. Without that money flowing, there can be no inflation.

And without the money flowing, the economy continues to contract. So the Fed continues to engage in 'quantitative easing' (the buying of bad debt) so that banks will gradually start to let money flow.

The problem, as Professor David Beckworth from Texas State University notes, is that the Fed's efforts to boost the money supply are barely keeping pace with the deflation shock. Stimulus is not gaining traction. The credit system remains broken.

"Where will the inflation impulse come from given that capacity use is at a post-war low of 68%c in the US, and nearer 60%c worldwide? The immediate threat is wage deflation", said Beckworth.

Tim Congdon – a hard-money Friedmanite from International Monetary Research – says the Fed is still not easing enough, perhaps because it is spooked by so much criticism or faces a mutiny by its own hawks. "If Ben Bernanke and his officials are listening to this sort of stuff and taking it seriously, they are making the same mistake as the Fed in the early 1930s," he said. The US 'output gap' is near 7%. That is a powerful lid on inflation.

Mr Congdon's prescription is what Britain did in 1931 and 1992: monetary stimulus à l'outrance (today: bond purchases), offset by spending cuts. This mix – easy money/tight fiscal – would halt debt deflation without ruining the public finances of the US, Britain, and Europe in the way that Keynesian schemes ruined Japan.

But here's the dilemma. The Fed buys their own US bonds to keep interest rates down.

If they don't buy them, the government's huge demand for credit drives up yields: greater supply of bonds leads to lower prices (and higher yields). Higher yields mean higher interest rates.

But if they do buy them, investors begin to fear inflation. Then, investors sell bonds... driving up yields: and less demand leads to lower prices (higher yields).

That's why the Fed is talking about 'keeping a lid on bond buys.' In doing so the Fed reassures investors.

The Fed is, in effect, also playing a giant confidence game with the money supply. Which brings us back to the topic of international confidence. The US enjoys a rare position as the world's reserve currency.

If that confidence erodes, the dollar could collapse and the US would be unable to finance it's debt without dramatically increasing the yields on it's bonds and treasuries.

The key people the US has to convince are the Chinese, Japanese and the Russians (the largest holders of US debt).

Last week we saw the Japanese and Russians come out and say they are one hundred percent behind the dollar and US bonds. The Japanese even say their faith is "unshakeable."

These comments helped send demand for bonds back up... after demand had dropped and yields on the 10-year note had reached 4% last week.

This, in turn, pushed yields (and interest rates) back down.

The Federal Reserve in the United States insists it can continue to walk this fine line with no problems. And when the economy does rebound, the extra money they created as stimulus funds can be withdrawn without those funds entering the general money supply (thus triggering inflation).

Not everyone believes that can be accomplished. Tomorrow we will hear from one of those doubters and why he thinks disaster looms on this colossal currency confidence game.

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Tuesday, June 23, 2009

If the rats are fleeing, what does that tell you?

If the rats are fleeing a sinking ship, how wise is it to stay on board?

The R/E shills insist that the market crash is over and that the recovery has begun. The burgeoning stock market is pointed to and the mantra of 'green shoots' is repeated week after week while the Real Estate Associations play the 'buy now or be left behind' card once again.

But is economic recovery really just around the corner?

Not according to captains of industry.

Oh, they still publically say all the right things. "The situation is not as bad as it was, the econonmy is improving, blah, blah, blah." But actions speak louder than words.

With that in mind, let me ask you a question.

If the economy is improving, and the DOW is rocketing back to it's former 14,000 point level, would you dump your stock when the DOW is only at 8,500?

According to a report from Bloomberg, CEOs, directors and senior officers of US companies have been selling their personal shares of their own companies' stock at the fastest pace since credit markets started to seize up two years ago.

Insiders of Standard & Poor’s 500 Index companies were net sellers for 14 straight weeks in data compiled by InsiderScore.com. Since these executives presumably have the best information about their companies’ prospects, what does that tell you?

“If insiders are selling into the rally, that shows they don’t expect their business to be able to support current stock- price levels,” said Joseph Keating, the chief investment officer of Raleigh, North Carolina-based RBC Bank, the unit of Royal Bank of Canada that oversees $33 billion in client assets. “They’re taking advantage of this bounce and selling into it.”

The last time there were more U.S. corporations with executives reducing their holdings than adding to them was during the week ended June 19, 2007, the data show. The next month, two Bear Stearns Cos. hedge funds filed for bankruptcy protection as securities linked to subprime mortgages fell apart, helping trigger almost $1.5 trillion in losses and writedowns at the world’s biggest financial companies and the 57% drop in the S&P 500 from Oct. 9, 2007, to March 9, 2009.

And the weasels are selling again, hmmm.

Talk the market up and then dump your shares on the suckers rushing in.

It's almost a metaphor for real estate sales in Vancouver the past few months, don't you think?

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Monday, June 22, 2009

Reality vs Fantasy

On Saturday we talked about the surge in real estate prices fueled by the goverments excessive, all time low, interest rates.

The fantasyland of a return to real estate boom times is hitting hard against the reality of the actual economy as the latest EI figures are released.

The number of British Columbians collecting employment insurance climbed again in April, rising by another 1,400 recipients. Statistics Canada said that the total number of EI recipients in B.C. hit 82,700 people, up 1.7% from the month before.

This now represents a dramatic rise in EI recipients in BC.

Since October 2008, the total percentage increase in EI is an astonishing 81.6% (37,200 people).

"Between April 2008 and April 2009, the increase in the number of beneficiaries in British Columbia was widespread, tripling in Cranbrook, Kelowna and Campbell River, and doubling in most other major centers," Statistics Canada said in a news release.

"In Victoria, the number of beneficiaries increased by 2,500 to 3,900, while in Vancouver, there were 34,500 people receiving regular benefits, an increase of 20,500 over 12 months."

Statistics Canada said that the province's hardest hit sectors in terms of job losses includes construction, transportation and warehousing, accommodation and food services, finance and insurance as well as forestry and logging.

My email box has been filled these last two days with comments from readers who despair about the latest surge in the real estate market.

"How can prices be going up?", they ask.

The fact of the matter is that our governments are desperate to stall and stave off continued declines in real estate values in the hope that the economy can be resuscitated.

It is the natural reaction of people to protect what they have (and thus the natural reaction of governments). Unfortunately we live in a capitalist oriented system, and the nature of that system is to tear down what isn't working and allow capital/resources to redeploy.

When this process happens every few generations, it triggers a very painful but necessary chain of events.

And it takes the extraordinary politician to allow it to happen.

Regrettably a politician that facilitates it will probably fail to win re-election. Thus we have politicians who meddle and that meddling often exacerbates the situation.

Thus our government has slashed the Bank of Canada rate to an astounding 0.25% in an attempt to prevent capitalism's 'creative destruction'. And the cheap money is doing it's job by stimulating buying to create a temporary effect.

But it is temporary.

The reality of our economic situation is that unemployment is at an 11-year high. Our manufacturing sector been decimated, our major car companies are bankrupt, Air Canada - our national airline - is being bailed out, retail sales are plunging and our federal government’s finances have been utterly trashed leading to the greatest deficit in the history of our country.

In light of all this, is buying real estate property at the current prices really a smart idea?

Cheap money is leveraging the market right now.

Increasing unemployment, closed up factories, rising mortgage rates, soaring energy costs, record household and mortgage debt levels and the inevitable surge of higher taxes is going to take it's toll.

The fall of the real estate market is going to be all the more harder and sharper when it comes.

The story here isn't amazement that the buying frenzy has returned.

The real story is understanding how it is that people can't see what's coming.

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Sunday, June 21, 2009

Sunday Funnies - June 21, 2009

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Saturday, June 20, 2009

Immaculate Resuscitation?

A few weeks ago I wrote about our governments desperate attempt to resecusitate the housing market by slashing interest rates to near zero (0.25%).

Fearful of the reprecussions of a housing collapse triggering the same sort of economic devestation as is being witnessed in the United States, a full court press had been launched by government, media and the real estate industry to get people buying again; to stall or reverse the decline in housing prices.

And it has worked.

Lured by a belief that homes are now 'affordable', people are lunging at the low mortgage rates and buying houses with a frenzy again.

This week Bank of Montreal Nesbitt Burns senior economist Michael Gregory trumpted that the worst of real estate slump in Canada is over!

"The worst of Canada's recession occurred through December and January of this year. Things were looking really bleak. It caused people to be cautious. Now, thanks to low mortgage interest rates and a slide in prices buyers are more confident."

Bidding wars for properties are even returning. A work collegue passes on how one west side Vancouver home he was involved in restoring was listed and sold within the week for $100,000 over asking price.

"It's crazy," he said. "It's as if the boom times have returned."

In an article in today's Globe and Mail, Garth Turner comments on this phenomenon and calls it, "The housing bubble, Part Two."

Turner sees the same things I have been ocmmenting on this past week.

“It’s all happening because of the crack cocaine of housing, which is rock-bottom interest rates,” said Garth Turner, author of Greater Fool: The Troubled Future of Real Estate. “They’re so irresistible, especially to inexperienced first-time buyers. That’s what’s propelling the market.”

In the near term Turner sees rising rates being used to get buyers to jump into the market immediately. “People are being told, ‘Your affordability is going down if you don’t buy now, you’re going to be forever shut out of the market.’ It’s the eternal siren song of real estate.”

And it's the return of the 'buy-now-or-be-priced-out-forever' mantra that is so scary. People are borrowing mortgage money to buy homes in a panic, at record prices. They are not investing, they are renting debt.

It takes 70% of disposable income for the average Vancouver family to carry the average home. That is not sustainable. You should never allow your home purchase to constitute more than 40% of your net worth, nor should you buy anything other than a distressed property in this market.

We are back to a time where delusion has replaced logic and the stage is being set for a massive body blow to the real estate market.

Just like the city itself, the Vancouver Real Estate market is perched on a massive fault line.

It will rupture. And when it does, it will not be pretty.

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Thursday, June 18, 2009

Gone Fishing, back on Saturday!

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Tuesday, June 16, 2009

The Greatest Threat to the Canadian Economy? The BOC says Household Debt.

The Bank of Canada released its bi-annual Financial System Review yesterday.

On the whole, the BOC says Canada's banks and credit markets are as strong as could be expected amid the deepest global recession since the Second World War.

The BOC has come to the conclusion that overall risks to the financial system are unchanged from its last report in December.

“Despite the severe impact of the global crisis, the Canadian financial system has continued to perform well compared with those of other countries.”

Hmm... somehow being front of the pack in a herd of turtles isn't all the comforting. And I wonder, how much of that performance is attributable to the hundreds of billions of dollars of liquidity that the Bank of Canada and other major central banks have injected into the global financial system?

Rock-bottom interest rates have lowered the cost of borrowing and slowed the the crashing housing market from it's perilous decline... at least for now.

But the Bank of Canada warns that a potentially catastrophic threat looms on the horizon: household debt. The risk posed by household balance sheets is significant. And it has grown.

The Bank of Canada reports that the level of debt to income reached a record in the fourth quarter as real net worth dropped 6.7% from the same period a year ago. While stressing that the possibility of a mass bankruptcy is remote, the ability of Canadians to repay their bank loans has replaced frozen credit markets as the main fear factor among policy makers, the report said.

“There has been a further deterioration in the financial position of the Canadian household sector as a result of the continued turmoil in financial markets, the deepening global recession, and worsening labour market conditions,” the report said.

Canadians' household debt is about 140% of disposable income, compared with about 150% in Britain and almost 190% in the United States.

The fact of the matter is that Canadians have been no different than Americans in using their homes as ATM machines and withdrawing equity to spend. That's why the Bank of Canada has been so desperate to halt the slide in real estate values. Should the economy worsen, global financial conditions could trigger a surge in interest rates. If that happens Canadian real estate values will come crashing down.

The end result? Negative equity and household debt combining to drown many Canadian families.

In the face of these conditions, Canadians are frantically trying to save more and spend less. Which is, of course, what politicians fear will devestate the economic recovery.

Unfortunately the only solution our government is working towards is trying to provide more credit for everyone.

Can you say Catch 22?

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Monday, June 15, 2009

Cramer Praises Bernanke

Ahh... Jim Cramer.

Faithful readers will recall the imfamous Mr. Cramer as the wild eyed, bald headed, investment gonzo-schtick king from CNBC who was utterly eviscerated by Jon Stewart back in March.

If you missed the classic piece, Stewart took Cramer (and CNBC) apart for his bad investment advice which totally missed the market crash. You can see the Steward Daily Show segment that started it all here...

Unabated Cramer has continued on with his investment show (Mad Money) and continues to be pillored for his not-so-prescient stock market advice.

Now comes word that the King of Poor Stock Picks penned an OP-Ed piece in the New York Magazine this past week and once again is going against the flow of popular opinion.

While many (including your faithful scribe) are highly critical of US Fed Chairman Ben Bernanke's policies of quantative easing (and the potential they create for high inflation), Cramer hearld's the Federal Reserve Chairman as a vertible saviour. From the New York Magazine article...

"More than Obama, more than Geithner, more than anyone, it is the once-maligned Federal Reserve chairman who has saved us from the second Great Depression. ... I'll just come right out and say it: Ben Bernanke will go down as the greatest Federal Reserve chairman in history. The soft-spoken academic who has toiled in the shadows of his legendarily self-promoting predecessor, Alan Greenspan, will be known as the man who averted the Great Depression Two, a sequel that could have eliminated the United States as a world financial superpower and reduced us to this century's Britain. Make no mistake about the parentage of this success story."

"President Obama pushed through a stimulus plan that will ultimately help the economy later this year, and Treasury Secretary Tim Geithner chose to adopt Bernanke's strategy of allowing banks to raise money themselves rather than bowing to calls from politicians and pundits to have taxpayers bail them out even more than they already had. But it was the 55-year-old former Princeton professor who spent his teaching career studying how the Great Depression could have been prevented who deserves the bulk of the credit."

"As credit froze and production and stocks plummeted as fast as they had between 1929 and 1932, Bernanke broke ranks with the complacency crowd and the inflationistas and relied on the lessons he'd learned back at Princeton to quickly take interest rates to an unheard-of zero percent. He turned on the Fed's printing presses, forcing dollars into the banking system, and began to buy $500 billion in mortgage bonds to force rates down to stop runaway foreclosures and keep people in their homes. That was the most aggressive policy change in the Fed's history, something that amounted to nothing short of an economic putsch that bridged the interregnum between presidents and continues to this day. And we needed it."

Cramer is a regular writer for New York Magazine and with this article he has provided an astonishing defense of Bernanke and today's central banking strategies. We will wait and see if he changes his tune if Bernanke's "aggressive policy change" produces massive inflation. I wonder how hopeful Cramer will remain if, in reaction to inflation, former Fed Chairman Paul Volcker or some other tough guy steps in and raises interest rates through the roof, setting off another slump.

Jon Stewart, I'm sure, has Jim Cramer set on TIVO. Where else does your material write itself?

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Sunday, June 14, 2009

Sunday Funnies - June 14, 2009

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Today's Funnies plus two youtube clips for your enjoyment...

The first youtube clip is an excellent spoof of the General Motors Reinvention Ad...

Do you remember this pathetic 2007 Century 21 commerical titled 'The Debate'. If you have forgotten it, check it out below and then watch next clip...

... now, here is a classic dissection of that commerical after that housing bubble bursts...

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Saturday, June 13, 2009

Ride The Wayback Machine for a Peak at '70s Inflation

So let's join Sherman and Mr. Peabody and hop into the Wayback Machine, shall we?

Destination: March 24th, 1980.

That was the date of this Time Magazine article titled 'Jimmy Carter vs. Inflation'. Many faithful readers do not recall those days so if the topic interests you, click on the link and you can read the entire 10 page article.

Here is the 'Coles Notes' version...

As Jimmy Carter stepped before the television cameras in the East Room of the White House last Friday, his task was not just to proclaim another new anti-inflation program but to calm a national alarm that had begun to border on panic. Inflation and interest rates, both topping 18%, are so far beyond anything that Americans have experienced in peacetime—and so far beyond anything that U.S. financial markets are set up to handle—as to inspire a contagion of fear.

For three weeks the White House struggled to develop a plan that would restore the public's confidence that the Government could bring the economy under control... But the dramatized search for an anti-inflation program proved slow and frustrating. So on Friday afternoon, Jimmy Carter strode into the East Room, having carefully waited until half an hour after the major financial markets had closed in the East, to (speak to the nation).

Speaking earnestly and somberly, Carter opened by stating that "persistent high inflation threatens the economic security of our country," and that "this dangerous situation calls for urgent measures."

The troubles had been building up for more than a decade, said Carter, and they could be traced largely to "our failure in Government, as individuals and as a society to live within our means." Glossing over his own record of rapidly rising spending and huge deficits, both of which contradicted his firm campaign pledges of 1976, he proclaimed his born-again fiscal faith: "The Federal Government must stop spending money we do not have and borrowing to make up the difference."

He acknowledged that his program would be "difficult politically" and, by implication, "onerous and burdensome" to some needy people, though less so than continued inflation would be... But his new plan would succeed, though three previous ones failed, he asserted, because "the nation is aroused now as it has never been before, at least in my lifetime, about the horrors of existing inflation and the threat of future inflation."

In follow-up press conferences Saturday morning, Federal Reserve Board Chairman Paul Volcker proclaimed that "the greatest risk beyond doubt" facing the economy is accelerating inflation. "There is no way we can deal with the problems... other than by placing restraint on people who individually would like more credit."

As this barrage of resolute rhetoric might indicate, inflation is not only a frightening economic problem but is rapidly becoming Carter's most dangerous political liability as well. Front Runner Ronald Reagan has been hammering increasingly harder on economic issues and said in Illinois Friday night: "It's Government that causes inflation, and Government can make it go away by cutting out deficits and stopping the printing of money."

Credit controls. They will be imposed. Said Carter: "Inflation is fed by credit-financed spending. Consumers have gone into debt too heavily. Businesses and other borrowers are tempted to use credit to finance speculative ventures."

So what happened after this?

Massive spending cuts were instituted and many government benefits were slashed. More importantly numerous steps were taken by the Federal Reserve to choke off the lending of money by banks. Raising interest rates was only part of it. A significant campaign was launched to choke off credit lending itself.

This was March, 1980.

The interest rate was 18%.

One year later, the problems still existed and the Fed interest rate was jacked up to 21.5%. You couldn't get a mortgage for less than 22%.

The lesson learned from people like then-Fed Chairman Volcker (who is now Chairman of U.S. President Barack Obama’s Economic Recovery Advisory Board)?

Next time act faster to combat inflation by raising interest rates to similar levels and don't give the economy, lenders and borrowers time to adjust.

Ominous, don't you think?

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Friday, June 12, 2009

How US Treasury Sales Immediately Impacted Canada This Week

It has been another banner week for the US Federal Treasury and Treasury sales. This week alone the Fed had to convince “investors” to buy up $150 billion worth of debt! This follows three weeks where the US auctioned off $87 Billion, $127 Billion and $138 Billion. This is an astonishing amount of debt for investors to absorb (and there's lots more to come).

This insatiable demand for debt sales has now created a historic crash of the bond market with TLT (the 20 year bond fund) losing almost 30% of its value. The ten year rose to 4% and that will take 30 year mortgages well over 6% in the United States.

This last statistic is particularly important for us because as US mortgage rates go, so do Canada's mortgage rates.

As such three of Canada's major banks decided to push mortgage rates higher yesterday despite the fact the Bank of Canada did not change it's rate and the BOC govenor wishes lending rates to stay where they are.

Nothwithstanding, the Royal Bank of Canada, the Bank of Montreal and Bank of Nova Scotia all announced they had increased the rates charged for money for homebuyers. Five year mortgages at these institutions will now cost a borrower 5.85%, four-tenths of a percentage point higher than the previous rate. Likewise, the rate for a three-year term rose 0.40 of a percentage point for the trio of banks, reaching 4.55%.

And why did they do this even when the Bank of Canada had not changed the lending rate?

CBC reported the news this way, "Analysts have noted that the cost of borrowing for longer periods of time more likely reflects the prevailing view of inflation in the next couple of years rather than the current short-term collapse in economic activity. Governments have responded to the ongoing recession by running deficits and printing money, factors that can boost short-term activity but hold out the threat of longer-run price increases. Thus, lenders will be reluctant to extend cash for longer periods without a commensurately higher interest rate."

But the Bank of Canada lending rate is still 0.25%. What gives?

The article goes on to note, "More ominously, the U.S. government got the cold shoulder from debt buyers Wednesday when Washington sold off $14 billion US in long-term bonds. Traders said Washington has been forced to flood debt markets in order to cover its stimulus spending. In bond economics, falling prices equal higher interest rates. Thus, industry experts now expect interest rates on longer-term borrowing to start rising again."

You see? It's all about US Treasury and Bond sales, which is why we follow the topic so closely.

Interestingly... Global News covered the rate increase on their 11:30pm newscast Wednesday night. The last interview of the piece was with a CMHC rep who pointed out that Vancouver prices are still falling and are expected to fall further over the next year, suggesting that future lower prices might more-than-offset future rate increases.

In other words rising interest rates are going to beat down house prices so that anyone buying at the higher interest rate will still be able to afford roughly the same size house because the lower selling prices (and thus mortgage size) will produce a similar monthly payment despite the higher interest rate.

Gee... and on what blog did you hear that prediction first?

And it's an important point, because it will happen.

When rates do skyrocket to 1981 levels (22%), anyone trying to sell their $650,000 home is screwed. They would need a buyer to assume a mortgage that will equate to a monthly payment of $11,700 per month... and that's simply not going to happen.

The only way that house is going to sell is if the price falls to $220,000.

The CMHC rep knows what all of us who were old enough to live through those times in 1981 know... that high interest rates will crush our bubble inflated Vancouver Real Estate market like a flimsy tin can.

So I ask you, what would you rather have?

(1) A $600,000 mortgage at last weeks low 2.99% variable interest rate, or
(2) A $220,000 mortgage at 1981's 22% interest rate?

Both will run you about $2,500 per month in monthly payments.

The difference? If interest rates skyrocket, you won't be able to renew your mortgage if you choose option (1). You will lose your home.

If interest rates skyrocket, as so many analysts now predict, a seller will never be able to sell a $650,000 property unless he slashes the price to $220,000 because no one can afford a $600,000 mortgage at 22%.

And when you consider how many local homeowners, who have bought in the last five years, will have to surrender their homes to banks under foreclosure when owners can't pay the monthly payments required when they have to renew under these rates... the downward pressure of forced bank sales will easily push prices down to $220,000, if not lower.

Remember banks don't keep foreclosed properties, they move them off their books ASAP.

If you buy under option (2), you still have the same monthly payment as option (1) BUT when rates go down again, you'll be laughing.

So why would anyone buy in today's market when virtually all economists are predicting a return to late 1970s style inflation and interest rates?

Why indeed.

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Thursday, June 11, 2009

But the BC economy is getting better, isn't it?

Took the dog for a walk at the beach with a friend yesterday.

He (the friend, not the dog) was keen to take issue with some of my recent blog musings.

"How can you say real estate is not going to do well. People are jumping into the market and the BC economy is getting better, isn't it?"

Uhh... no, it isn't.

Many of British Columbia's lumber mills sit idle. Coal exports are down 40%. The price of natural gas, one of our key commodities, has collapsed and the tourism industy this summer is going to suck wind, big time.

More importantly the industry that had helped fuel the province's economic growth the past 10 years - residential home and condominium construction - is suffering the "nastiest" downturn among the provinces according to a recent report.

Canada Mortgage and Housing Corp. released data this week that showed B.C. has had "arguably the nastiest residential construction recession this cycle" in the country.

But what about the 'Olympic bounce'?

We've already had that, at least in the construction industry. Any added construction oomph from the coming Vancouver 2010 Winter Olympics is gone. Most major projects are nearing completion or have been completed.

So what's the near-term outlook for the construction industry?

Peter Simpson, chief executive officer of the Greater Vancouver Home Builders Association says, "housing starts are abysmal. Builders are hesitant to put shovels in the ground when there's inventory that hasn't sold."

And with interest rates on their way back up, that inventory isn't going to be moved out quickly, creating a further drag on the real estate market.

"We're in a full-scale recession in B.C.," said Jock Finlayson, executive vice-president of the Business Council of British Columbia. "Getting out of it is going to depend on when the global economy, and the U.S. economy, bottom out, and how things look after that."

Hmmm... there's that nasty tie-in to the global economy again. So what's happening out there?

Oil is way up, closing over $71 US a barrel yesterday, the price having shot up over 100% over the last three months. This has sent the Canadian dollar up over 90 cents US and on it's way to par - a development that will kill exports and manufacturing jobs.

Meanwhile, in the US, the economy is about to be broadsided by another huge wave of defaults from Alt-A, Option ARM and commercial real estate mortgage resets (see latest article here). Estimates peg coming residential foreclosures at $1.5 trillion.

As for the global economy, it appears Europe is about to be rocked by banking issues (IMF tells Europe to come clean on bank losses). Seems that, contrary to popular belief, the German banking system was just as irresponsible as the American banking system. Turns out the German state-owned banks, who's boards of directors are filled with the politically well connected, had been a dumping ground for US toxic waste - evidently the 'benefactor' of German trade surpluses.

And Germany wasn't alone in the mad dash to lend to foreigners. Austria is up to its eyeballs in loans made to Eastern Europe. Sweden had done the same in the Baltic States. Spain pumped money in to cajas that were used to finance a property boom fueled by foreign investors. Ireland had engaged in an Florida style construction boom as well. This is only a brief summary.

Now the jig is up. Spain, Ireland and the Baltic states have collapsed into depression. Their debts will never be paid. Eastern European currencies have tumbled, massively increasing their debt burden. They either hyperinflate or default. All of these loans, in addition to the tens of billions of US toxic waste remain on the balance sheets of European banks. And for the most part they are still valued at 100 cents on the dollar.

The message here: Europe's financial crisis is just getting started.

Then there is China, the supposed economic darling who will pull the planet out of recession. Today's China Daily News reports that China's exports and imports shrank for the seventh month in a row in May as the economic downturn continued to dampen global trade (see article here). I have a question for you. Who, exactly, is China going to be selling goods to so that their economy can keep growing?

So much for global recovery.

Far from getting better, we have BC entering a "full-scale recession" with recovery dependent on US and global conditions improving. That will be compounded with rising loan costs, big energy price hikes, reduced consumer spending, more pain for the Canadian manufacturing sector, a US economy that is going to remain stagnant (if not get worse), evidence that Europe is in for some serious pain and no one with money to buy China's goods so that China can, in turn, buy Canada's commodities.

No, my friend... the outlook for BC real estate values remains gloomy. I'd be willing to bet that within a year the prime rate will be double what it is today and Vancouver will have re-taken the lead from Miami in that plunging real estate graph I posted on Monday.

The sun is setting fast on the real estate boom times.

Even my dog can see that.

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Wednesday, June 10, 2009

Wall Street Journal warns America to 'Get Ready For Inflation and Higher Interest Rates'

.Click here, listen to Laurel talk about working as an escort while married to Bill Magri.

Today the Wall Street Journal became the latest to warn of rising inflation and higher interest rates. The article, which can be seen here, ominously warns that the unprecedented expansion of the money supply could make the '70s look benign.

As we have already noted on this blog, inflation hit such a pace in the late 1970s that the only way governments could bring it under control was to dramatically spike interest rates to 21.5% in the early 1980s.

Such a move, in today's bubble inflated real estate market, would crush market prices and wipe out many who hold large, variable-rate home mortgages.

The W.S. Journal article touches on many of the issues we have already discussed. The economic crisis has triggered ill-conceived government reactions, which has been followed by an ensuing economic downturn. Throw in the unfunded liabilities of federal United States programs -- such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid -- and the you have liabilities which total a debt of over $100 trillion.

With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.

About eight months ago, starting in early September 2008, the US Federal Reserve (lead by Chairman Ben Bernanke) did an abrupt about-face and radically increased the monetary base -- which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash -- by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.

This 'quantitative easing' initiative was soon repeated by many other Western governments.

The WSJ article does a great job of explaining how quantitative easing affects the money supply and the inflationary pressures it will exert on the system. If you are intestested I encourage you to read the full article.

The most important element from the piece is that, "it's difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed's actions because, frankly, we haven't ever seen anything like this in the U.S. To date what's happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges."

Now it must be noted that Ben Bernanke insists he can walk the fine line between deflation and inflation without triggering the consequences we saw in the late 1970s.

And you trust the government not to screw up, right? Unfortunately others, like the Wall Street Journal, have their doubts.

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Tuesday, June 30, 2009

Monday, June 29, 2009

Sunday, June 28, 2009

Saturday, June 27, 2009

Friday, June 26, 2009

Thursday, June 25, 2009

Wednesday, June 24, 2009

Tuesday, June 23, 2009

Monday, June 22, 2009

Sunday, June 21, 2009

Saturday, June 20, 2009

Thursday, June 18, 2009

Tuesday, June 16, 2009

Monday, June 15, 2009

Sunday, June 14, 2009

Saturday, June 13, 2009

Friday, June 12, 2009

Thursday, June 11, 2009

Wednesday, June 10, 2009

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