Wednesday, December 15, 2010

Lux Æterna: Cassandra's Nightmare

I recently read an analogy about the stock markets by Jawad Mian of Q Invest which could equally apply to our Canadian Real Estate markets.

In Greek mythology, Cassandra was a princess of the legendary city of Troy, and the most beautiful of King Priam’s daughters.

Cassandra was seduced by Apollo, who gave her the ability to predict the future. But when she refused herself to him, he cursed her by making people disbelieve her predictions.

So Cassandra went around knowing and predicting the future, telling people what was going to happen, but no one ever believed her. She foresaw the fall of Troy, but couldn’t prevent it.

Cassandra is a figure both of sagacity and of tragedy, where her combination of deep understanding and powerlessness exemplify the tragic condition of humankind.

I find the mythic origins of the Greek prophetess and the metaphorical application intriguing in so far as it relates to the Canadian Real Estate markets.

What Cassandra sees is something dark and painful that may not be apparent on the surface of things or that objective facts do not corroborate.

She may envision a negative or unexpected outcome; or a truth which others, especially authority figures, would not accept.

In her frightened, ego-less state, she may blurt out what she sees, perhaps with the unconscious hope that others might be able to make some sense of it. But to them, her words sound meaningless, disconnected and blown out of all proportion.

At the turn of the century, there were some who fretted that higher interest rates might soon return.

Dismissed as scaremongering Chicken Little's who thought the sky was falling, they were further vilified as Central Bankers in the Western World cut interest rates to stimulate the economy out of the dot com collapse.

"The Central Bankers are telling us interest rates will stay low," the housing bulls cried. "Now is the time to buy!"

And they were right.

As the American housing market imploded, and the 2008 Financial Crisis took hold, Central Bankers swore to cut interest rates drastically to resuscitate the economy.

"The Central Bankers are telling us interest rates will stay low," the housing bulls cried. "Housing in Canada will continue to rise!"

And they were right.

But over the last 12 months that has changed.

First it was Alan Greenspan, former chairman of the US Federal Reserve, who started sounding the warning bells.

Then Canada's Central Banker, Mark Carney, started with his warnings.

For most of this year Carney has intoned his cautionary tale: Interest rates will be going up - sharply. Make sure you are ready.

For years the housing bears have been dismissed because the signs coming from the Central Bankers undercut the primary reason the bulls said housing would collapse: interest rates.

Changing viewpoints is a gradual process. Flipping from bullish to bearish, and vice versa is difficult. We remember what most recently rewarded us, and internalize that.

Cassandra has become the archetype for many prophetic characters who are either ignored or cannot be comprehended until after an event has occurred.

Our catastrophic failure to heed caution has much to do with our preference to look at the surface rather than what underlies appearances.

Both Greenspan and Carney are issuing warnings about higher interest rates, mainstream media are regularly publishing stories about the existence of a housing bubble, about our extreme debt situation and the American Experience reflects back at us.

And still the warnings sound meaningless, disconnected and blown out of all proportion.

Sometimes illusions are far more comfortable than reality. That may explain the unchecked optimism many continue to have in regards to the Vancouver Real Estate market.

The housing market will soon start a steady erosion that will scar the life of anyone invested on the wrong side. That erosion will be caused by significantly higher interest rates.

The Greek philosopher Solon said: ‘Observing the numerous misfortunes that attend all conditions forbids us to grow insolent upon our present enjoyments. For the uncertain future has yet to come.’

Greenspan and Carney have made it clear now that the uncertain future is almost upon us.

  • “The crisis is not over, but has merely entered a new phase... when interest rates begin to rise again, the repercussions may be swift, fierce and have the potential to catch many [Canadians] with debt loads they can no longer afford."

Soon the Central Banker safety net will be withdrawn, or the bond market will negate their interference.

Will it be a Requiem for the Canadian Housing Dream? More importantly... will you be forced to mourn your own personal circumstance out of insolence?



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  1. This is without a doubt the best post you have ever put up, Whisperer. Four times I have read it. Playing your youtube clip in the background just intensifies the message. Well done.


  2. Carney appeared on BNN warning Canadian about debt and seem to say in vain: "fret thy finance with balances and cares". The reality is how can Canadians escape the same fate as our Americans friend if our government takes the same road (low interest rate) to avoid it? There is no value in saving, at 1% rates, the bank gives you even less. There is no value in safe investment when the return is less than inflation. It leaves only to consumptions and speculative investments. What concern Carney is not our present, but our future ability to service the debt. What does Carney know that he is not saying on BNN? If one venture to guess, there few events that might affect Canadian directly or indirectly. The precursor to all this was QE2, when Bernanke appeared on CBS and guarantee 100% confident that Fed can control inflation. This amounts to an extraordinary singular event for central banker. Most central banker speaks in a cryptic language, but Ben spoke like the Oracle of Delphi with 100% confidence in an almost uncertain voice. This actually scares the bond holder and they show it by driving the yield higher. However, why fleeing a relatively safe asset like the U.S treasury when the Euro is about to face a real acid test of European unity, equality and fraternity? The simple answer is: QE3, QE4...QEn. To compound the problem, these possible events occurring in 2011 might influence Canada:

    U.S will reach 100% debt/GDP.
    U.S State and Municipal debt.
    U.S housing and unemployment problems.
    European PIIGS, notably Spain, Portugal and Italy.
    China inflation.
    China shadow banking.
    Commodity price.
    Japan deflation

    Any of these event will create instability and investor will demand higher rate. These are the reason why Carney went on BNN and warned of rising rates and economic uncertainty. However, the good news is Canadians still have some time left and problems will probably not occur until the 3rd-4th quarter of 2011.

    Happy holidays everyone.

  3. They still have time, but no one will listen.

    Excellent post.