Xanadu

When all is said and done, the story of Vancouver Real Estate at the turn of the millennium is going to make for compelling reading.

Caught up in the world-wide flood of liquidity after the dot-com bust of the late 1990s, the Village on the Edge of the Rainforest saw it's real estate values skyrocket in tandem with the bubble conditions that engulfed rest of North America.

But the lessons of the bubble folly, currently being hammer home in the United States, are lost in the land of the maple leaf - and particularly on the left coast.

As Americans wallow with 25% of mortgage holders in an underwater postion, Seattle is discovering that most of the homeowners facing underwater mortgages financed their properties between 2005 and 2008 and used adjustable-rate mortgages.

Just like Canadians are doing.

The only reason our nation is not awash in a similar disaster is because our nation has effectively forstalled the real estate collapse.

The warnings and dangers of the housing meltdown are there for everyone to see. The Canadian situation is not too far removed from the fate befalling our American cousins and that realization is gaining acceptance on a daily basis in our mainstream media.

Even the Governor of the Bank of Canada now issues warnings to Canadians that they need to wake up and smell the coffee regarding the impact of looming interest rates.

But are Canadians getting the message? Are they using the opportunity to secure and save themselves from the inevitable pain that looms on the horizon?

Last week, in Toronto, we read in the national news about the return of condo lineups and buying frenzy's.

Just to demonstrate that Vancouverites can be just as brain-dead as their eastern contemporaries, the gullible have returned to their foolhardy ways and lined up for hours in a downpour on the weekend to get first dibs on pre-sale condo units being sold at "The Mark" by Onni, a new tower in Yaletown.

"We're blown away by the turnout," said an Onni rep as about 50 investors scrambled around a model of the building in the pre-sales centre.

190 units in the first 26 floors of the tower are up for grabs and will not be completed until 2013. The prices ranged from about $320,000 to more than $900,000.

All of this comes as the global debt and credit crisis continues to haunt developments in former real-estate hotspots like Dubai in the United Arab Emirates,

And in move that clearly demonstrates just how scared officials are about the fallout from stunning announcement of a de-facto default on the Dubai World development, the UAE has blocked distribution of the U.K. Sunday Times newspaper today due to its coverage of the Dubai debt crisis

Cam Good of the Onni Group said on Sunday that Vancouver is back in boom times. "The [real-estate] strength in Vancouver is unlike anything in the world," Good said.

Yeah... but that's exactly what they said about Dubai.

Daily its proven that we are living in fool's paradise.

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Sunday Funnies - November 29th, 2009

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Only a matter of time...

With each passing week, more and more investment professionals are warning that it is only a matter of time before interest rates rise.

The latest is Lisa Myers, co-manager of Templeton Global Income Fund.

Myers is reminding investors that interest rates have already risen in countries such as Australia and Norway and more will follow in the next six to nine months, starting with Asia. The picture is less clear in North America, but most experts believe it is only a matter of time before rates rise in the United States. When they do, Canada's would soon rise in sympathy.

Meyers notes that it's a counterintuitive fact that bond prices fall as interest rates rise. Over the past 30 years, interest rates have mostly fallen, which means bond prices rose. Hence, a protracted bond bull market.

But now Meyers and her firm are publicly warning the 30-year bull market for bonds may be over.

Joining the chorus is AlphaPro Management Inc. president Ken Mc-Cord. In his firms newsletter, The MoneyLetter, he warns, "The end of a 30-year bull market in bonds is near. It's time to prepare."

For three decades, bonds seemed to go only in one direction -- up -- with minimal volatility or nasty surprises. The idea of bonds as a safe harbour "is about to change." McCord says.

The problem is we have had such low rates for so long now that the average Canadian seems completely unable to fathom the seriousness of these warnings.

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Dubai

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DUBAI UPDATE: Dubai crisis jolts markets, but early fears ease - AP

Yesterday was Thanksgiving in the United States and markets were closed.

Good thing.

The stunning development of the day was news that a debt-laden Dubai state corporation was unable to meet its interest bill.

Dubai World, a company owned by the Arab emirate of Dubai, told creditors it wants to delay payments on $59 billion US of debt for six months as it seeks to restructure money-losing investments.

This news sent global equity markets reeling and generated a safe haven flow into the US Dollar as carry trades are unwound and a flight away from risk occurs. Dubai has for all practical purposes defaulted on its debt. Needless to say, this came with little to no warning and has sent the financial markets into quite a tizzy.

A default by Dubai World would be the biggest by an agency of a national government since Argentina halted bond payments on $95 billion US in 2001. It comes on the heels of an extraordinarily difficult year for the tiny emirate. The 2008 financial crisis has hit Dubai hard, with real estate prices dropping as much as 50% in the past year.

In London, British banks with the heaviest exposure to Dubai suffered some of the steepest losses, sending the Financial Times 100 down 3.2% — its biggest plunge since March.

Shares of Royal Bank of Scotland fell 7.8%, while Barclay’s Bank ended down 8%, and Lloyd’s Bank dropped 5.8%.

HSBC, the biggest lender in the United Arab Emirates, fell 5.8%. HSBC had $15.9 billion US in loans outstanding at the end of June. In Germany, shares of Deutsche Bank tumbled 6.8%. The biggest bank in France, BNP Paribas, fell 5.1%, while Societe Generale, the second-largest French lender, dropped 5.5%.

In Canada, S&P/TSX financials fell 1.7%, with Scotiabank slipping $1.15, or 2.3%, to $47.91, TD Bank off $1.34, or 2%, to $65.84, and the Royal Bank down $1.32, or 2.3% to $55.88.

This sort of news is extremely disturbing. After all, we are talking about the financial hub of the Middle East. Imagine the repercussions that would occur should London have announced this sort of news and you can understand why stock markets were pummeled overnight.

This is the kind of news that could cut off all market rallies right at the knees. The reason – it creates fear and uncertainty, two of the prime ingredients in a selling binge. If Dubai could go under, then who or what might be next becomes the question.

Scotia Capital currency strategist Sacha Tihanyi warned “the thing that would make anyone nervous is the fact that this is a financial-sector shock. It was financial-sector shocks that played such an intensive role in the recession and financial crisis.”

“Dubai is the most indicative of the huge global liquidity boom, and now in the aftermath there will be further defaults to come in emerging markets and globally,” said Nick Chamie, chief of emerging-market research at RBC Dominion Securities.

Some saw the Dubai issue coming. Scotia Capital economists Derek Holt and Karen Cordes told clients in a report that Dubai's borrowing excesses and asset bubble risks were unsustainable.

“In some sense when we look back upon it, maybe this isn't such a surprise after all. There was always something a little Land of Oz-like to Dubai, as if it were a modern-day Rome, symbolic of an overstretched empire in the years of leveraged bubble excess,” they said.

Today we will see the impact in the United States and whether the reaction is temporary or if this is the start of something larger.

You may recall our post of November 14th. SeekingAlpha had laid out three different scenarios that presented a serious concern for the ecnonomy. One of them spoke of concerns that circumstances could precipitate a rapid US dollar rally. A rapid US dollar rally has the potential to spell disaster.

Such a development would force all those people shorting the US dollar to sell stocks to pay off their shorts, a move that would force stocks to collapse (again). US Treasuries would rise, solvency issues would again take hold as China et al would panic and rush to buy US debt for safety's sake, even at low interest rates. The Asian stock markets would then burst in spectacular fashion, wiping out the dramatic gains of the last 8 months.

Yesterday... that scenario began to play out.

Capital has, once again, begun to flee to the security of the US Dollar and the dollar index is up dramatically.

At the time this is written, DOW futures are down almost 300 points.

Later today the US markets will be open.

It's going to be an interesting day.

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Carefree

The rebellion against the U.S. dollar is gathering steam and in the latest development Russia's central bank has announced it is diversifying out of the US dollar and into several currencies - including Canada.

A senior Bank Rossii official in Moscow triggered a sharp gain for the loonie Wednesday and contributed to the U.S. dollar's slide to a 15-month low when the Bank signalled its intention to add the Canadian dollar, and possibly one or two other currencies, to its foreign exchange reserves – the third-largest in the world.

At one point last night Gold had shot up to $1,195 an ounce on the news.

Such a shift brings Russia into line with the currency diversification strategies being weighed or launched by China, Indonesia and a handful of other major central banks holding vast amounts of U.S. Treasuries.

It's another sign of what's to come.

There is no denying that the long-term trend toward currency diversification is acquiring more urgency over growing worries that soaring U.S. government deficits will eventually trigger a nasty bout of inflation. That, in turn, would severely erode the value of dollar holdings in central bank coffers around the world.

Currency specialist David DeRosa, president of DeRosa Research of New Canaan, Conn said, “there's no sign of inflation right now, but if you are a foreign central bank holding a lot of U.S. dollars, you should be concerned about whether or not the dollar is going to be destroyed by future inflation.”

And as countries move away from investing in the US dollar, how long before bond vigilantes begin pushing interest rates up on government debt?

The spectre of rising interest rates and it's effect on Canadians with mortgages has been the focus of the media for the last couple of weeks. You have also seen the Governor of the Bank of Canada, bank presidents, and economists of all strips coming out with statements of concern.

Perhaps they are noticing that in the United States, nearly one in four homes with mortgages are in an 'underwater' position (the home is valued for less than the amount their owners owe the banks holding their mortgage loans.

You can rest assured that none of those US homeowners were the least bit concerned with the first homes starting going under in 2006. But as the domino's started to fall, it dragged the rest of the nation down with them.

Wither the Canadian Alfred E. Neuman's out there who are piling on maximum debt with 5% down and huge 35 year amortizations. Are they worried?

What of the bidding wars these hyper-extended buyers are triggering. Yesterday's news brings reports of a return to condo line-ups and buying frenzy's again.

And what of the potential impact on everyone else who bought in the last five years... is the looming crisis registering in their collective psyche yet?

Mortgage rates are going to shoot upwards. And it will be the buying class of 2009 who will be be the first domino that takes down the rest.

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Pet Emergency

Hi Gang.

Been helping close friend with a pet emergency this week so have been unable to post. Will be back tomorrow, hopefully.

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Sunday Funnies - November 22nd, 2009

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A 40% interest rate? Ho, Ho, Doh!

Nothing will put a lump of coal in the stockings of retailers this year quite like seeing Christmas sales completely evaporate.

And the chill is now on.

Word came out yesterday that some US credit card firms are pushing up interest rates by as much as 7% ahead of Christmas - and that's in addition to some heavy increases already implemented.

For the likes of Capital One, it means some customers will be paying almost 40% interest on their Christmas gifts and January sale purchases unless they clear the balance on their cards.

Angry Capital One customers have been complaining in a forum on the consumer website moneysavingexpert.com.

One said: "My World Mastercard's old rate is 15.9% and its new rate is 23.9%. I told Capital One it's no better than legalised extortion. I've never missed a payment or paid late - what a way to treat customers."

Another said: "My Capital One Classic Visa's old rate was 30.04%, new rate 39.9%. I'll be closing my card."

Capital One's reponse: "Due to current market conditions, we have had to increase rates for some customers."

Yes Virginia, there is a Santa Claus. There just won't be any presents this year.

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American Graffiti

“The stability we've started to see in U.S. housing was likely a false calm before a bigger storm. There are millions of homeowners under threat of losing their homes in the next two years.”

This is the observation of Derek Holt, vice-president of economics for Scotia Capital.

It seems a record one in seven U.S. mortgages, or four million homeowners, were in foreclosure or at least one payment late in the third quarter.

Even more astonishing is that Americans with solid credit ratings comprised 33% of the quarter's foreclosures.

This is what happens when a huge surge of people default on their mortgages, and the wave of foreclosures causes a big drop in the value of real estate. It puts other homeowners in an 'underwater' position. Throw in the highest jobless rate in 26 years and suddenly its impossible for many homeowners to make their payments in the quarter.

Another Canadian watching the developments closely is Jennifer Lee, an economist at Bank of Montreal. Increased foreclosures among those with good credit is a problem in any recession, said Lee, but this time the increase comes after the subprime crisis forced millions from their homes and pushed prices down as much as 50% in some cities.

Not only are they losing their jobs and falling behind on loan payments, sharply lower prices mean they aren't able to simply sell their homes to pay off their banks.

“We can't say what is typical any more in the housing sector because we've never experienced anything like this,” she said. “People need to start working again, because when they do find work the first thing they do is get back on track with their mortgages. But, that isn't likely to happen soon.”

Most of these have five-year reset rates, and were issued at the height of the market's bubble. They start coming due in January.

Once again Scotiabank's Derek Holt makes a succinct observation. “You didn't have to prove a thing to get [a mortgage],” Mr. Holt said. “They haven't been a problem because they have such long fuses. But those fuses are just about done, and we're heading into entirely uncharted territory.”

It takes a long time for the housing story to play out. For the United States it started in 2006. The full effects won't really start to be seen until next year.

For Canada the writing is on the wall.

It will start with rising interest rates. The first to get caught up will be all those resetting 0/40 mortgages and the huge number of people who "bit off more than they could chew" in the Great Reflation Drive of 2009.

The problem is, too many dismiss the writing on the wall as nothing more than graffiti.

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Gold Observations

Last Thursday we talked about Gold and when I made a return to work this week after a multi-week absence, several colleagues were keen for my thoughts on the yellow metal.

With Gold leaping to yet another all-time high in early London trade on Wednesday (coming within 50¢ of $1150 an ounce), the 64 thousand dollar question becomes: is it a bubble that is about to burst or will Gold go higher?

So let's consider what's happening.

As was stressed last week, the real motivation for the movement to Gold is not as a hedge for inflation. The reality is that it performs that role very poorly.

The current move to gold around the world is a hedge against the mismanagement of the state - which at this time and place is the United States with it's world's reserve currency status.

We are currently witnessing perhaps the most profound paradigm shift in gold from the patterns seen over the last 20 years. During that time European monetary authorities sold the precious metal and Asian central banks accumulated official reserves in the form of US Treasuries.

But now that pattern is being turned on its head.

Currently, sales in Europe have slowed to a crawl and Asian banks have started swapping their dollars for gold.

GFMS, the London-based consultancy, estimates that over the past 20 years net sales from the official sector have run at an annual rate of about 400 tonnes - about 11% of the total supply. But the combination of slower sales in Europe and fresh gold purchases in Asia are set to cut the official sector's bullion net sales to about 50 tonnes this year, the lowest level since 1988.

The shift is important for the gold market on two fronts: the interest provides psychological support and, more important, caps a source of supply.

Things began to really pick up steam when the IMF approved the sale of 403.3 tonnes of gold back in September 2009. In a completely unexpected move, India was the official purchaser of 200 on those tonnes in October.

It is largely understood that India sold holdings of US Treasuries to make the purchase.

Next up came the central bank of Sri Lanka who purchased gold in the open market at market prices, another surprise move.

Now the IMF has announced that Mauritius' central bank bought gold at market prevailing prices on November 11 for about $71.1 million (US Dollars) in total. According to data from the London Bullion Market Association, gold was quoted on the afternoon "fixing" that day at USD 1,115.25 a troy ounce, a record high at that time.

Before the transaction, Mauritius - a tiny nation made up of islands in the Indian Ocean more than 1,000 kilometres off the East coast of Africa - held 1.9 tonnes of bullion - 3.2% of its total official foreign reserves - according to data from the mining industry-backed World Gold Council. The purchase more than doubles the reserves to 3.9 tonnes.

It's another brutal kick in the teeth to the concept of nation states storing their wealth in the in the security of US Treasuries.

Even Zimbabwe, which a year ago had hyperinflation running at 231 million percent annually, is now considering reintroducing its Zimbabwe dollar, but this time fully backed by assets, including gold.

With India, Sri Lanka and now Mauritius adding to their gold reserves – and with Zimbabwe looking to purchase gold, it is putting extreme pressure on the gold supply. "It is the sentiment that matters" and not the size, says VM analyst Gary Mead in the latest BNP Paribas Fortis Metals Monthly. "The bottom line is that the Gold Price rally has got everything going for it right now: Few official sector sellers, some official sector buyers, a low-interest rate environment, and a weak US currency. It's a perfect storm."

Included in that perfect storm are the following elements:

• Decreasing Gold Mine Production - Annual worldwide mine production of gold has decreased by 9.3% since 2001. Gold prices have nearly quadrupled since then, but more gold is not being produced because resources are being depleted and the quality of those resources is diminishing. When a discovery is made, it takes about 7-10 years to get a mine permitted and into production, making it difficult to quickly ramp up gold production.

• Investment Demand for Gold - Large institutional investors, such as hedge and pension funds, are making large allocations to gold and gold shares. Individual investors are also getting in on the action, with gold exchange-traded funds (ETFs) gaining influence. SPDR Gold Trust (NYSE: GLD), the largest physically backed ETF on the planet, is now the 6th biggest holder of gold bullion with more than 1000 tons. That is helping to facilitate and spread the ownership of gold by individuals. In fact, in the first half of 2009 investment demand for gold is up 150% over the first half of 2008, according to the World Gold Council.

• Asian Demand for Gold is Exploding - Asia, with its more than two and a half billion people, has a major impact on investment demand. Asians have a long-standing cultural affinity for gold as a store of wealth. India is the world’s largest gold consumer. For the last 50 years, until 2009, the Chinese government has forbidden its citizens from owning gold. But now China is encouraging its citizens to buy both gold and silver. Today, Chinese investors even have access to gold-linked checking accounts. As a result, demand for gold in mainland China is expected to triple in the next few years.

Gold’s price has increased every single year since 2001. In 2001 gold sat at $300 an ounce. It has risen now for eight consecutive years. Are we currently in the middle of a secular bull market for gold?

Bull markets typically last about 17 years and end with a mania stage where investors throw the concept of supply and demand out the window and frantically invest in gold. Analysts note that this pattern has repeated itself over the last hundred years of investment history.

More importantly, when adjusted for inflation, gold is nowhere near that highs it attained in the 1980s. Adjusted for inflation, gold should be at $2,000 an ounce.

And if these factors are going to place even more upward pressure on the metal than the 1980s did, it would suggest that we are about to see a major run up in gold prices.

The gold market is very small in relation to the currency, bond or stock markets, so when investors start to pile in, it could just send prices through the roof.

As a side note Jim Rogers, the renowned global commodities investor and author, said he doesn’t ever like to buy something making all time highs but he is not selling his gold. He believes Gold is going to go much higher in the course of the bull market. He also warned that it doesn’t mean it can’t go down 20% next year but during the course of the bull market it is going to go much higher and whatever you are seeing is not a bubble yet.

Jim also said that being a contrarian, he should be selling gold when others are buying. But he hastens to add that he also sells at the top and that he doesn’t think this is the top.

“In my view, in this bull market in commodities gold will make all new highs adjust for inflation,” he said.

A possible coming drop of 20% in the price of Gold?

So my response to my colleagues was to read today's blog.

Like so much of everything we discuss here, the issue is all about confidence in the economy of the United States. You need to investigate that issue thoroughly and make decisions accordingly.

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Rationalization

Despite the fact that mainstream media, leading economists, bank presidents and the Governor of the Bank of Canada are now taking notice of the irrational way the Canadian housing market is 'reinflating', there are still those who vehemently seek to justify what is going on.

It doesn't matter that prices are hitting an all time high in the middle of the greatest recession since the 1930s. Nor that the current rate of double-digit price increases are coming amidst rising unemployment and within an economy that is otherwise contracting.

No... this isn't out of whack at all.

Certainly not to the likes of Bank of Montreal's Michael Gregory.

Gregory is adamant that there is no evidence that low interest rates are pumping a domestic housing bubble.

“The record surge in resale volumes reflects unleashing pent-up demand,” Mr. Gregory said in a research note. “From mid-2007 record highs (just before the global credit crisis began) to January lows, existing home sales plummeted 42%, with the majority of the decline occurring during the four months after Lehman Brothers' bankruptcy,” he wrote.

“Discretionary and big-ticket purchases of all types were postponed in the post-Lehman panic, creating an abnormal amount of pent-up demand... Once the panic subsided, pent-up demand started to unwind, pulled by record low mortgage rates, cheaper home prices (around 9% on average), and an emerging sense among consumers that the worst of the recession was over.”

Alrighty then. So it's a booming rebound and not a bubble then?

Douglas Porter, also with Bank of Montreal, concurs (surprise!).

“The rapid-fire rebound in Canadian housing is showing no signs of letting up,” Mr. Porter said in a note to clients. “While that may be causing some sweaty palms among bubble-phobes, the quick turn is a vivid illustration that monetary policy still works in this country.”

So here we are in the midst of a year when the average price of home resales rises by more than 20% despite the fact that overall inflation is sitting at less than 1%.

And these guys insist that it isn't a sign that something is dangerously wrong - but that it's just a reflection of 'effective monetary policy'?.

In psychology and logic, rationalization is the process of constructing a logical justification for a belief that was originally arrived at through a different mental process. It is a defense mechanism, in which perceived controversial activities are explained in a rational or logical manner to avoid the true explanation of the behavior in question.

And that's all this malarkey is... deceptive rationalization employed as a defense mechanism.

Have I said this is going to end badly?

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The Great Reflation

Scanning the worldwide news clippings today, the main topics of interest are Gold, the US Dollar and Interest Rates.

Early last night Gold spiked to $1,140 US per ounce and the Dollar index dropped well below 75.

In the wee hours of this morning, the Dollar index is back up and Gold hovers at $1,130.

We do live in interesting times.

The stock market was up again yesterday as US Federal Reserve Chairman Ben Bernanke gave no indication that he would take actions to back up his stated preference to promote the Dollar.

It seems almost unanimous that the market's recent upswing has all been about a weak dollar and ample liquidity.

But there seems to be a fine line being walked here.

"A steep slide in the dollar would be the death knell for the great reflation engineered by the Fed. But the Fed chairman's concerns about the currency's current level are not yet serious enough for him to abandon his interest-rate policy," said Jean-Baptiste Pethe of Exane BNP Paribas.

Ahh, yes... that's what they are calling it now. The Great Reflation.

It brings to mind this interesting quote from Benjamin Anderson, Chief Economist of Chase National Bank published in the New York Times on April 1930:

“Cheap money is a stimulant, also an intoxicant. If the dose is large enough, a substantial temporary effect can be brought about, but headaches follow. If the matter really were that simple, everybody could be an economist, and only the perversity of central banks would keep us from endless prosperity. Merchants and manufacturers will not be induced to increase borrowings, since interest on money borrowed is only one small factor in total costs. But if merchants and manufacturers will not use cheap money, speculators will.”

And that's what's driving the Great Reflation... speculators who are using the cheap interest rates to their advantage.

The money that got pumped into the US economy by the Fed over the past year didn’t get anywhere near “merchants and manufacturers” or small businesses that are now the backbone of the US economy.

Speculators are borrowing at 0% plus or minus short term, and are “playing/gaming” the stock market with much of that money.

One of the bubbles forming again is in oil prices. So perverse is the emerging scenario that you have the US taxpayer advancing money to speculators so they can game the oil market so that US taxpayers must pay more for oil (!).

San Francisco Fed President Janet Yellen made an interesting comment on Tuesday in Hong Kong. She opined about whether monetary policy should be used to lean against "potentially dangerous swings in asset prices. The answer is far from clear, because the use of monetary policy for these ends necessarily compromises the attainment of other macroeconomic goals."

It would appear those 'other macroeconomic goals' involve around creating new bubbles to get themselves and of our current hole - a hole dug by the creation of the 2001 - 2006 bubble.

But how long until it becomes necessary to move to defend the Dollar by dramatically raising interest rates?

We shall see.

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Major mortgage lender risks unpopularity with peers to express his concerns

Last Thursday Peter Aceto, President of ING Direct, told the Toronto Star that he’s worried about Canada’s real estate market.

Aceto made several candid statements and - perhaps even more astonishing - acknowledged that his comments will likely not be popular with money lenders since he is also in the business of selling mortgages.

Do tell?

Aceto said the current low interest rates have caused some Canadians to act "irrationally" in the housing market, potentially taking on too much debt that could lead to economic difficulties down the road.

More significantly Aceto indicated that mortgage lenders share partial responsibility for this situation.

You may recall back in September, Scotiabank economists Derek Holt and Karen Cordes said, in a research note, that "lenders have been scrambling to get enough product to put into the federal government’s Insured Mortgage Purchase Program over the months, and that may have translated into excessively generous financing terms"

Aceto followed up on this theme and said, "we shouldn't be interested in just selling mortgages to get our numbers up for the next quarter."

The concern, as Aceto noted, is that more than 50% of all mortgages in Canada this year were amortizations longer than the standard 25 years.

Buyers take on those long amortizations for only one reason: it allows them to borrow far more than they probably should and leaves them highly vulnerable to catastrophe when interest rates inevitably rise.

Aceto acknowledges this and says he is worried that some consumers are biting off more than they can chew.

As this blog has said all year long, the stage is being set in Canada for a US-style real estate implosion because a great many Canadians have taken on massive mortgages and will be forced to default when the catalyst of rising interest rates kicks in.

Aceto drew on his own California experience to concur with this sentiment.

Aceto's former job at ING was chief risk officer and he spent two years in California during the height of the real estate bubble there. At the time he felt that Canadians would not be as extravagant or recklessly wasteful as their American counterparts.

But when he arrived back in Canada he was surprised to see that some consumers were acting in a similar way.

"Canadians have been proud internally that we're very different than the Americans in the way we behave in terms of our spending habits and the way we deal with credit. But over time we have become a lot closer than we think," said Aceto.

"It's almost as if [consumers] feel very concerned they are missing something with such low rates," said Aceto. "The problem is: can they afford to pay for their mortgage five years from now, when interest rates go back up?"

Bingo!

Aceto joins a growing list of financial community heavyweights who are starting to publically take notice of this issue.

Last week CIBC World Markets senior economist Benjamin Tal told the Toronto Star that consumers are "blinded" by low interest rates. Before that Bank of Canada Governor Mark Carney expressed concern that he may have to 'intervene' in the mortgage market because lenders and borrowers were not being 'prudent'.

Peter Aceto, however, is the first bank president to express concern over the housing market.

Seems the fretting about the future of real estate in Canada with the prospect of rising interest rates is no longer simply a fixation of 'negative bloggers'.

The truly unfortunate thing, though, is that the ultra-low interest rates of 2009 - interest rates slashed as part of a desperate attempt to protect and re-inflate real estate asset prices - will ultimately just intensify the collapse, wreaking far greater havoc on asset prices than if the market had been allowed to correct on its own.

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Sunday Funnies - November 15th, 2009

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Eeny Meeny Miney Moe

A couple of days ago we talked about the next gold rush, a result of a loss of confidence in America, it's deficit and the dollar.

But don't get us wrong... the dollar could rally. If it does it will spell disaster for the stock market. And make no mistake, a dollar rally could seriously damage stocks and commodities.

Believe it or not tho... a dollar rally would be a minor development compared to what might happen in the Bond and Currency markets.

As of 2008, the world stock market was roughly $36 trillion in size.

In contrast, bonds were $67 trillion and forex (currency) turns over $3.2 trillion per day -- ten times the daily volume of every stock market in the world.

Them's big numbers.

We bring this up because there are some analysts who are looking at three different gloom and doom scenarios that lie on the horizon. The respected website Seeking Alpha profiled them this week. Let's check them out...

(1) Stock Market Collapse Part 2

Some analysts believe there will be a rise in the US dollar as the economic recovery fails to take hold. Worldwide capital would begain 'a flight to the safety of US Treasuries' which would boost the US dollar. Such a development would force all those people shorting the US dollar to sell stocks to pay off their shorts and stocks would collapse (again). US Treasuries would rise, solvency issues would again take hold as China et al would still be willing to buy US debt for safety's sake, even at low interest rates.

(2) Currency Crisis

The second possible scenario is that stocks continue to rally. The Dollar breaks it support barriers and the flight from the dollar intensifies and hyper-inflation hits the US. In this case China et al would dump Treasuries en masse, in effect kicking the dollar to the curb.

(3) Sovereign Nation Crisis

Under this scenario stocks AND bonds collapse. Interest rates soar destroying the US economy and all big banks implode as deriviaties ignite a chain reaction. Under this scenario capital would begin a full fledged flight from the US and the United States would default on its debt.

Suffice it to say, a crisis in stocks would be the lesser of three crises.

It's interesting to note that in the second quarter the Federal Reserve accounted for nearly half (49%) of all Treasury purchases (that's called either quantitative easing, the cranking up of the printing press, or monetizing the debt).

During the same time period, foreign investors (China, Japan etc.) decreased their purchases of US debt by 40%.

In simple terms, foreign investors are not interested in buying US Treasuries at current yields (with the 30-year yielding 4.4% and the Dollar losing 15% in value this year alone).

Now, to get higher yields you need bond prices to fall. The Fed’s Quantitative Easing program (in which the Fed bought Treasuries to artificially create demand) just ended... so Seeking Alpha correctly suggests we’re about to find out what the bond market really thinks of US debt without life support.

If demand is so low that Treasuries break their 20-plus year trend-line, then S.A. suggests we may be heading for Crisis #2 or Crisis #3.

The interesting thing is almost all analysts believe that sooner - rather than later - another crisis is coming.

It's just a question of which one and when.

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Good News... We've been 'saved'!

Did you hear the news?

We've been SAVED!

According to the annual Emerging Trends in Real Estate 2010 report released by PricewaterhouseCoopers and the Urban Land Institute, "Canadian real estate investors were saved from overleveraging" by conservative banking practices and stricter regulation that kept lending in check.

This, we are told, has enabled Canada to largely elude the real estate collapse suffered by Americans.

Riiight.

Of course there is no mention that massive numbers of Americans had to deal with something that Canadians have yet to face: mortgage resets at dramatically higher interest rates.

Many Americans had mortgages with low, low 'teaser' rates. When property values dipped and they attempted to renegotiate a new mortgage with a new 'teaser' rate, they were denied because the drop in home values left them 'underwater'. Failing to renegotiate trigger resets with a 10-12% interest rate. Defaults created a domino effect that cascaded out of control.

In Canada our 'salvation' (we call it a 'delay' in the day of reckoning) is wholely attributable to ultra low interest rates and a government insured credit market.

The Bank of Canada has already admitted to a real estate bubble in Canada and Mark Carney, head of the BOC, has threatened to manipulate the mortgage market if borrowers don’t come to their senses.

According to BNN, Canadian mortgage credit was 74% of disposable income in 2004. Now it is 96%. More significantly Canada's debt to income ratio is now 140%, up from 131% last year.

The greatest concern is that Canada's home buyers are partying now and risking a catasrphic hangover in 5 years when morgages have to be renewed at higher rates... at time when all these ultra low rates will be seen as nothing more than 'teaser' rates that sucked so many people in to huge mortgages which they will not be able to support when rates return to historic norms.

Apparently, however, none of this should concern you.

You have been 'saved'.

Just remember that this rosy picture of 'salvation' portrayed by the Emerging Trends report is derived from interviews with and surveys of more than 900 of the real estate industry's leading real estate experts (including investors, developers, lenders, brokers and consultants)

Translation: all those people who, earlier this year, were frantic to restore 'consumer confidence' in real estate have now come out with a glowing report telling you that we have been 'saved' from overleveraging yourselves... ergo you can feel confident about continuing to buy real estate.

Saved? As the subtitle in the image above says... heaven help us.

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A new gold rush?

Back on October 30th we profiled Jim Sinclair, perhaps the most successful commodities trader of all time and a frequent CNN and CNBC commentator.

Sinclair is one of those with grave concerns about the US dollar and is an uber gold-bug. He had suggested that the most recent G20 meeting on November 7th was going to be significant.

Specifically BRIC nations wanted to see assurances that quantitative easing would be ending and that the United States would moving to bring it's massive deficit under control. If that didn't happen,

If this didn't happen Sinclair predicted you would start to see moves undertaken by China, Brazil, India and Russia that would start a greater slide in the value of the US dollar.

So... what happened?

The G20 came out with a full bore commitment to "maintain support for the recovery until it is assured." That means more deficit spending and easy monetary policy around the world. Terrance Corcoran of the Financial Post calls this the "G20's greatest ever roll of the economic dice".

The immediate impact saw the US dollar drop some more. To the right you will notice that we have added a US Dollar index graph from kitco. It has long been held that the 75.0 mark on the index was a dangerously low point for the dollar. Yesterday the index dropped to 74.8 and is now hovering back around 75 again.

Meanwhile it caused a jump in the price of gold to record setting highs of over $1,120 an ounce.

Today, analysts on CNN and BNN were predicting gold to reach $1200 before the end of next month.

(For the record, Sinclair believes gold will bump up to $1224, plateau briefly, bump up to $1278, plateau briefly, bump up to $1650 and after that shoot up to the $5000+ predicted by Martin Armstrong. It's interesting to note that Armstrong argues that gold is NOT a hedge for inflation [it performs that role very poorly] but that gold is a hedge against the mismanagement of the state - which at this time and place is the United States with it's world's reserve currency status).

Ever since the United States went off the gold standard in 1971, gold bugs have long speculated that the United States has attempted to manipulate and hold down the price of gold. Whenever gold has been rising, the US or the IMF would flood the market with sales of tons of gold and water down the price.

The reason? The bugs believe the United States wants gold dismissed as an instrument of monetary value. In it's place the US would prefer to see nations (and individuals/companies) plunk their money into US Treasuries.

Earlier this year the IMF pre-announced sales of 400 tons of gold. The belief was that this would hit the market and cause the gold price to plummet. The speculation was that the only nation interested would be China and that they would simply snatch up the first offering of 200 tons.

But in a surprise turn of events, India bought those 200 tons one month after it went on the market (a record quick sale) and it is appears they sold US Treasuries in order to do it.

This has had a stunning impact on the market.

It is no secret that many emerging countries want to buy the IMF gold in order to raise their status in the community of nations and diversify their holdings out of the declining US dollar.

Sri Lanka joined the cast of nations seeking a safe haven and bought gold for their reserves in the open market. Both the India and Sri Lanka purchases were at prices above $1,000 per ounce.

The purchase raises India’s gold holdings to 6% of their reserves from 4%. China’s gold percentage to total reserves is lower than India’s.

It seems that a trend has started where many other nations will buy up any gold offered by the IMF or other central banks at market prices, and shy away from the purchase of US Treasuries.

If they do, analysts expect the price of gold to rise much higher to accommodate a rise to 10% in India and China’s gold reserves. China mines a great deal of gold internally. If they decide to hold their domestic production to add to their reserves as Chinese financial figures have suggested they do, we could see gold move to much higher prices.

And as more money moves toward gold, there are less funds available for US Treasuries.

Yet another sign that significantly higher yields are going to have to appear at some point.

And higher yields on US Treasuries mean higher mortgage rates for the average homeowner.

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In the 11th month, On the 11th day, At the 11th hour...

European hostilities officially paused at 11 am on the 11th of November 1918 after the German government accepted the terms of armistice given them by the allied forces. The following year the cease fire was made permanent with the signing of the Treaty of Versailles, but it is the 11th of the 11th that has become the symbolic time of peace.

The 11th of November was originally called Armistice Day, but was changed to Remembrance Day after World War II as a gesture to commemorate all who have given their lives serving our great country.

They shall grow not old as we that are left grow old.
Age shall not weary them, nor the years condemn
At the going down of the sun and in the morning
We will remember them.

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