Thursday, July 16, 2009

Who ya gonna trust?

Canadian Real Estate Association president Dale Ripplinger tells us “the worst of the recession may be behind us.”

On the basis of this heady news, "potential buyers who moved to the sidelines late last year when economic uncertainty peaked are returning to the housing market."

The government engineered cheap mortgage rates have created a mini real estate frenzy and, according to the CREA, prices have just reached a new all-time high, surpassing the record set in the second quarter of 2008.

To these shills, er... economists... buying at the peak right now is the thing to do because tomorrow there will be a new peak.

So, faithful reader, who are you gonna trust? These salesmen... or your own logic.

Is the recession behind us?

There will be no recovery in Canada until there is recovery in the land of our largest trading partner, the United States.

And what is happening in America?

The US Bureau of Labor Statistics preliminary estimate for job losses for June at 467,000, which means 7.2 million Americans have lost their jobs since the start of the recession. The cumulative job losses over the last six months have been greater than for any other half year period since World War II, including the military demobilization after the war. The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.

The first major mistake these 'salesmen' are making is viewing this recession like previous ones.

This isn't like past recessions. If you are going to compare circumstances you have to compare this recession to those that started with the bursting of a giant speculative bubble. When you do you, see slow recoveries. The reason you see slow recoveries is that asset values at bottom are so low that investor confidence returns only gradually.

But even those who predict a more gradual recovery as investors slowly tiptoe back into the market, will be proven to be wrong.

This recession is very deep.

And in a recession this deep, recovery doesn't depend on investors. It depends on consumers who, after all, are 70% of the U.S. economy. Consumers have been crushed in this recession and until they start spending again, you can forget any recovery.

The problem is, consumers won't start spending until they have money in their pockets, or until they feel reasonably secure.

They don't have the money, and it's hard to see where it will come from.

In recent times, Americans found myriad ways to fuel spending, even as incomes stagnated: borrowing against the once rising price of their homes and tapping plentiful credit cards.

No longer. They can't borrow like that because one out of ten home US owners is under water - owing more on their homes than their homes are worth. American homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings.

The paycheck has returned as the primary source of spending, and pay is eroding even for those who have jobs. This process is nowhere near complete, and, until it is, the economy will barely grow, if at all, and may well oscillate between sluggish growth and modest decline for the next several years until the rebalancing of the excessive debt has been completed. Until then, the private economy will be deprived of adequate profits and cash flow, and businesses will not start to hire. Nor will they race to make capital expenditures when they have vast idle capacity.

US unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can't are hunkering down, as they must.

Meanwhile in Canada unemployment is also rising quickly, over 2 million people are out of work and household debt equals almost 140% of disposable income.

A new federal report warns our budget deficit will top $50 billion for at least a couple of years, and then Ottawa’s finances will be in the red for a decade. This, says economist Dale Orr, will add $200 billion to the federal debt, wiping away what 15 years of the GST and higher taxes were supposed to eliminate.

Don't you remember those times?

Our immediate future will be one of slashed government spending. And as our goverment must borrow more and more, interest rates will soar back to double digit rates as the mushrooming debt becomes more expensive to finance.

Economic growth alone (if there is much) won’t balance the books so governments will have to raise taxes – BC is already pounding the war drums on cutting services in health care due to lack of funds.

And this economy can't get back on track because the track we were on for years -featuring flat or declining median wages and mounting consumer debt - simply cannot be sustained.

Low interest rates and government stimulus can only delay an economic reckoning until the economy begins to recover. But that economy won't "recover" because it can't go back to where it was before the crash.

It means there is still a lot of "economic adjustment" ahead of us, regardless of what these polished R/E salesmen... err... economists may say.

In other words, there are many more reasons today to expect the downturn to continue than to expect a turnaround.

You only have to look at what is happening around us to see this yourself.


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