Saturday, November 6, 2010

No Limits

So we are now into QE2. Anyone else make a lot of money this week?

Today's post will be about Real Estate in Vancouver AND about the economy.

First the economy.

Do you remember QE1? I do.

Back on March 10th, 2009 I commented that I fully expected a lot of the QE1 stimulus would be misdirected and end up in the stock market.

On March 12th, 2009 I said, "One thing is for certain, all this money printing is going to juice the economy in the short term like nothing any of us have seen in our lifetime. Look for commodities in the stock market to take off like a rocket."

And on March 13th, 2009 I said, "This (the rise of both stocks and gold/silver/oil) insiders say points to a bottoming out of the worst Bear market since the Great Depression and the start of the predicted hyper-inflationary period. If they're right, buckle up folks, it means things are gonna take off like a rocket if that is the case. It's not the end of the recession or hard times in Canada, but the market is usually six to eight months ahead of the economy. My recommendation? Now's the time to play the market. Silver stocks like First Majestic, commodities like Tech Resources and oil stocks. But beware! A rapid blowing up of the market could lead to another rapid collapse. Study the 1930s! The market recovered almost 60% after the crash of 1929. All the stimulus that has been announced will find it's way into the market - mark my words."

I'm kinda proud of that.

Note I refered to entering a hyperinflationary period. I still believe that if we do enter one, that people will look back on the week of March 9th, 2009 as the Genesis point that instigated Hyperinflation.

As you can see QE1, for me, meant that the stock market was about to embark on an incedible run.

18 months later I don't think anyone would dispute that.

And the stocks I referred to?

On March 13th, 2009 First Majestic Silver Corp. (TSE:FR) was trading at $1.76. Yesterday it closed at $9.96.

On March 13th, 2009 Tech Resources Limited (TSE:TCK.B) was trading at $5.04. Yesterday it closed at $49.71.

As for Oil. It had dropped to about $30 a barrell. Now it is over $85. A Canadian Oil Income Trust like Provident Energy Trust was trading for $3.99 on March 13th, 2009 and yesterday closed at $8.00. More importantly it has been paying out a dividend of $0.06 per share each and every month since then (with the occasional double dividend).

Anyone who properly recognized the impact of QE1 back in March 2009 will be laughing today.

That's why I sit back and chuckle at all the R/E aficionado's who chortle at the R/E bears.

"Poor Bear," they say. "Wrong again," they intone about Real Estate in the Village on the Edge of the Rainforest in 2009/2010.

Ummm... I don't think so.

Yes... it is true that the high interest rates I have warned will decimate the Vancouver Real Estate bubble have failed to materialize... yet.

But the advice in Spring 2009 was to bail out of Real Estate and invest in Silver, Equities and Oil. If you were looking to enter the Real Estate market as a first time buyer, the advice was to take your downpayment and put it into the same markets instead.

A first time buyer, with a $30,000 downpayment (5%) on a $600,000 home, would be looking at about at 23% return on his R/E investment. Minus, of course, $3,000 a month in mortgage payments (the majority of which would go to interest, not principle).

If he turned around and sold the house today (if it sold) he would be looking at a profit of around $80,000. And that's if you bought in an area that did, in fact, rise about 23%. Most areas beyond the westside of the City of Vancouver have remained stagnant and have not risen at all.

So, at best, a profit of $80,000, after applicable fees. Big deal.

$30,000 invested in a commodities stock like Tech Resources would have given you a return of $266,000.

$30,000 invested in a silver mining fund like First Majestic would have given you a return of about $140,000. And if the lawsuit against JP Morgan I spoke of earlier this week pans out, the return on silver will dwarf Tech Resources.

Real Estate has been an extremely poor investment over the past year.

Meanwhile, as someone who had sold their real estate and capitalized on the equity from the stunning housing bubble... well your profits would have made you a multi-millionaire.

Just look at what the first time buyer would have reaped.

But now the question is... what can we expect from QE2?

As already mentioned, the Federal Reserve will continue with quantitative easing for the foreseeable future. There will be many episodes of QE, often combined with other initiatives such as inflation targeting.

I believe you will see far more QE than the announced $600 Billion. Much will depend upon the amount of economic growth or shrinkage that the U.S. economy experiences…and the recurring fear of many professional economists at the Federal Reserve that the U.S. is slipping into a Japanese-style deflation/stagnation. As explained yesterday, a QE2 of almost a Trillion will do nothing to counteract the amount of debt delveraging that is about to occur.

Add to this the issue of whether or not the Bush tax-cuts are renewed.

Non-renewal or expiration of the tax cuts means the Fed is on its own in stimulating the economy, and that means even more QE.

The amount of budget-cutting done by Congress (especially if it is rapidly implemented) could have deflationary consequences, prompting more QE from the Fed.

The majority of the economists at the Federal Reserve believe that inflation targeting and QE is the only way to prevent millions more U.S. jobs from disappearing. The language in the Fed’s announcements repeatedly states that they believe inflation is too low.

Inflation will be a longer-term focus of the Fed.

They have already come out and said they want to stimulate investment in real estate, commodities, and stocks by institutions and the public.

Fed officials want the U.S. economy to grow and they want individuals to start new businesses to increase employment and salaries. A long-term policy of continuing QE will be part of that process.

Side effects of QE are: a lower dollar, stronger commodity prices, and increased demand for stocks that can grow in the U.S. and abroad.

It must also be stressed that QE is going on in many places.

Every country engaged in printing money to buy dollars and thus keep their currency from rising too much is engaging in QE.

Japan, Brazil, and many other Asian and Latin American countries are in this category.

QE is everywhere and the additional liquidity from it is flowing into the markets of Asian and Latin countries with good growth prospects. It is also flowing into some non-U.S. currencies, gold, silver, oil, copper, food, cotton, rubber, and many other commodities, in addition to U.S. and European stocks.

Currency intervention, trade wars, and volatility will become the norm.

Expect to see trade wars break out in a major way as this game progresses. We’ve already had a hint of this with China’s decision to cut rare earth elements exports. However, this is just the tip of the iceberg. Things are going to be getting very messy going forward. Expect to see capital controls, tariffs, and outright trade wars break out. As a result, prices of various goods will skyrocket.

Inflation is coming sooner rather than later. The cost of just about everything is going to be going up... a LOT.

One thing that is different this time around, however, is that QE1 will not be like QE2.

In the prior instance, the short-term fuel led to short-term complacency about the economic trajectory. QE1 was presented an an Emergency Effort.

Everyone sees what QE2 is about.

Compounding that reality is that the Fed has no ability to direct its fire.

What’s likely is that much of the investment capital freed up by Fed purchases of Treasury debt will overshoot its target — the U.S. economy — and flow to emerging markets and especially into commodities that serve as a hedge against a falling dollar.

Be aware of this difference.

Back in March 2009 I referenced a couple of specific stocks. I was deluged with emails for advice about what to do. People literally freaked out when the stocks I recommended dropped in value.

I won't make that mistake again.

That's what triggered the disclaimer you see at the bottom of this blog.

I won't recommend any specific stocks this time.

What I can guarantee you is that the immediate future is one of great volatility, especially in anything related to gold/silver/commodities.

I can also guarantee you that the Federal Reserve will be resolute in it's mindset on this issue. Bernanke, an intellectual, wrote a doctoral thesis on how to respond in times like these. He won't do anything to deviate from that thesis.

Predictability is you ally here, use it wisely.

All the information you need to know on what is going to happen over the next 6-12 months have been covered in the last 3 days of posting.

Do you own research.

If you click on the youtube video I have posted above, you will hear a catchy tune from 1993 which I think you will find could serve as the Federal Reserve Theme song for QE.

  • No no limits, we'll reach for the sky!
    No valley to deep, no mountain to high
    No no limits, won't give up the fight
    We do what we want and we do it with pride

Bernanke has made it clear what he intends to do.

Study the past, study what is happening, and position yourself to take advantage of it.

We are living in a once-in-a-lifetime moment in history.

Don't let it pass you by.

PS. Be warned now, I give whatever commentary I offer in my posts you are reading on this blog. Please read the disclaimer at the bottom of this blog and DON'T email me for investment advice.

I won't reply to your email if you are asking for investment advice.

Hell, I don't respond to 75% of the emails I receive as it is, (although I do read every single one of them).



Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.


  1. What W said.

    Teck (note k, not h) was a no-brainer. I loaded up in December 08 when it traded sub-$4. By complete fluke, I bought within a few cents of their 52-week trading bottom. (I won't take credit for timing the market.) People thought I was nuts, especially because of their debt issue at the time. High ratios of return on juniors are expected, but 1200% on a major in under 24 months is tantamount to impossible.

    As mentioned before, things requiring cash (or cash-like) in order to transact (food, energy, etc) will inflate. Things requiring debt will deflate.

    We aren't even near the intermission in this play.

    Everyone else's mileage may vary.

    --Another Albertan

  2. Albertan. You are correct, it is Teck, not Tech. I made the error in last year's post and I should have corrected it with this post.

  3. Your blog has really caught my attention.... so, thought I would post after a few months of reading. It certainly appears to be giving me my dose of pre-local (Vancouver) bust porn.

    So, from what you suggesting, do you think its reasonable that realestate prices may be kept bouyed and even fueled by growth of commodity based share values?

    Assuming enough people are invested, would there always be buyers with successful conversions of 1200% increases (( such as the lucky person above ))


  4. V,

    There will always been some major "contrarian wins" in every market. You will almost always find some subset of a local marketplace that is buoyed. Take Calgary and people who have worked for companies (predominantly in the energy sector) that have been taken over and whose efforts are crystallized in one fell swoop. It's easy to make major purchases when you find yourself flush with high-6 or low-7 figure payouts.

    This is the exception, though. It is not the norm.

    Teck was absolutely under-valued. It didn't take a genius to see that or to pull the trigger on the trade. It took discipline and understanding. These two factors are principally missing from the hoard of the masses.

    Major capital gains can be made investing in junior stocks. Major capital losses can be incurred investing in junior stocks. Many are uber-thinly-traded, making the entry and exit even harder.

    Your scenario is possible, but highly improbable.

    As for luck:

    "Luck is what happens when preparation meets opportunity." --Seneca

    Everyone else's mileage may vary.

    --Another Albertan

  5. Your posts are really appreciated Whisperer. We are living through the most unprecedented times and the end game appears to be the destruction, or major devaluation of the US dollar. This could easily translate to a drop in the average Americans standard of living from 30-50%, as the things needed to stay alive inflate in price. I am continually baffled by some commentators who suggest commodities are in a bubble, while ignoring the bubble in US Treasuries and the consequences of money printing.

  6. I would be curious to know how QE2 is going to affect those periphery countries in Europe. You know, Ireland, Greece, and the others that are on the verge of going broke. Any thoughts on if that would force them over the edge of solvency.