Sunday, July 31, 2011

Sunday Post #2: The US debt ceiling talks

So the theatre that is the debt ceiling debate in the United States may be coming to a close as both sides seem poised to reach an agreement.

But as your faithful scribe has noted before, the debt ceiling issue isn't the problem.

And once again it is David Stockman, former federal budget director under President Reagan, making news with a succinct analysis of the issue:
  • "The problem is not the ceiling, but the debt. It's the $6 billion a day that we're borrowing day in day out."
Yes... you read that right.  The deficit with the United States budget is so great that after all taxes and income are counted, the United States must borrow $6 BILLION per day to function.

Speaking to CNBC last week, Stockman said:
  • "The U.S. is not a triple-A credit and is running a fiscal doomsday machine."
Stockman believes that Washington will come to some type of an agreement at the last moment to raise the debt ceiling, but it will only be a short-term fix.
  • "We are going to be facing a day of reckoning here, and I don't know whether it's six months from now or a year from now."
And that is the most important point to remember as the political theatre in Washington winds down.

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Some Sunday musings

A few random thoughts first thing this Sunday morning.

Yesterday we noted how the chief economist for RBC Global Asset Management, Eric Lascelles, argued that by the time many current mortgage holders renew their mortgage that the impact of higher interest rates will be mitigated by three years of rising household incomes.

It is fitting that on the day his comments were covered that shocking GDP figures were released showing that Canada's gross domestic product unexpectedly fell by 0.3 percent in May and that the U.S. economy grew at a meager 1.3 percent in the second quarter.

More importantly growth for the first quarter was revised sharply lower.

And just as data from the first quarter in the US was 'revised' lower, analysts are already looking at the second quarter data and figure that it's not accurate either and will be downgraded as well.
  • "Just as Q1 2008 was eventually shown as the start of the great recession so will Q2 2011 in subsequent revisions."
So much for three years of rising household incomes.

Speaking of conditions stagnating, former Chinese central bank adviser Yu Yongding repeated his call for China to reduce its Treasury holdings as the American debate about the debt limit drags on. Speaking to reporters at a briefing in Mumbai on Friday Yu said:
  • “U.S. bonds are not safe, but people think they are safe. That is a mirage.”
In March, Yu said that China, the biggest foreign holder of Treasuries with $1.16 trillion of the securities, should halt purchases because of the risk of an eventual default. In June, he predicted that credit agencies would limit the severity of any downgrade of the U.S. rating to avoid investor panic.

As China, Russia, Japan et al slow their purchases of US Treasuries, the US Federal Reserve will have no choice but to launch some form of QE3 to monetize the US debt. Increasingly the US economy (and by extension: Canada's economy) look to be entering the same decade plus malaise that Japan is dealing with.

There was an excellent analogy offered in the comments section over at Vancouver Condo Info yesterday about the actions our governement took during the first phase of the financial crisis (2008-2011):
  • "The low emergency rates were supposed to be used as a spare tire, while the regular tire was to get fixed. But they couldn’t afford the repair, and could not buy a new tire as the credit card was maxed, so they ran the spare tire so long the tread is worn and can’t get any traction."
The economy has stalled and conditions are not improving. As the real estate market turns, the impact on Lower Mainland homeowners with high mortgages is going to be severe.

Our friends over on VREAA documented a poignant comment yesterday which represents the situation shared by many who have bought in the last five years in the Lower Mainland.  Calling into the Bill Good radio show, a caller said:
  • “I work long hours to be able to pay for a house. I drive long distances to get to and from work. I barely do anything in my expensive house other than sleep and go back to work each day. And on top of that [speaking about the upcoming additional gas tax] every time I turn around I’m being taxed for something else.”
Bill Good replied that he thought the caller was "speaking for thousands of people right now.”

Indeed he is.

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Saturday, July 30, 2011

"They wouldn't dare"

After the financial crisis of 2008, as the greatest recession since the Great Depression of the 1930s set in, Canada's economy fared remarkably well.

So well, in fact, that many Canadians are oblivious to all this talk of a 'Great Recession' around the world.

Everyone is aware of the 2008 Financial Crisis... but few appreciate how severe the underlying credit crunch was.

And that's because Canadians never really felt that crunch.  The banking sector in Canada insulated our citizens from the worst of that crunch.  Because of the emergency level interest rates brought in by the Federal Government... because the Canadian Mortgage and Housing Corporation (CMHC) dramatically lowered the requirements to qualify for a fully backstopped mortgage... and because CMHC insurance fully guaranteed mortgages given out by Canadian banks, those Canadian banks  kept on lending money to Canadians.

As a result Canadians kept on buying. 

But the availability of cheap credit has driven Canadian household debt levels to record highs. Household debt as measured against disposable income currently sits at a record high of 147%.

As Canadians have piled into massive consumer spending, and buying as much house as they could afford under emergency level historic low interest rates, there is this perception that the Bank of Canada will never raise interest rates because they wouldn't dare upset the economy.

This, of course, if pure nonsense.

Echoing this sentiment is the chief economist for  RBC Global Asset Management, Eric Lascelles.
  • “There is a popular misconception that the Bank of Canada cannot afford to raise interest rates because this would prove too damaging for mortgage holders. The opposite is in fact true. The reality is that the Bank of Canada cannot afford to delay raising interest rates, for precisely the same reason. The longer the bank delays, the more marginal borrowers will enter the market and be walloped when rates rise, and the further home prices will go above their equilibrium levels, only to tumble later.”
You can clearly see how the domino's will inevitably fall here.

Once the Bank of Canada raises its key lending rate from the current “astonishingly cheap” one per cent, costs of servicing mortgage and other debts will rise. 

These increased costs will sap consumer spending, housing prices will fall as lower-tier buyers are forced out of the market by diminished affordability, and the endless annual increases in real estate values will cease.

Just as so many Australian's (as we saw in yesterday's Aussie TV clip) were dependant on rising real estate, so are many Canadians. And as lower-tier buyers are forced out of the market by diminished affordability, the vicious catch-22 cycle will begin.  The lack of buyers will increase inventory.  Increased inventory will create competition for what buyers remain.  And a 'high supply, limited buyers' condition will start collapsing the market.

The Reserve Bank of Australia first started raising their interest rates back in October 2009.

By January 2010 it was evident the Australian collapse has started.  As Mish Shedlock observed:
  • "The day of reckoning has finally arrived for Australia. A day of reckoning awaits Canada, China, and the UK as well. It's too late now to do much of anything except: exit the Australian stock market, get out of the Australian dollar, pick up some popcorn and stay on the sidelines and watch the collapse unfold."
Since January 2010 the Australian collapse has picked up speed. Yesterday's Australian TV clip quoted a stunned Aussie who said "I don't think anyone saw it coming."

That will be our future.  So many do not see what is coming. And right now we're still telling ourselves, "they wouldn't dare raise interest rates."

But as the chief economist for RBC Global Asset Management noted... they most certainly will.

The risk is clearly greatest of all for those who have just purchased a home since the 2008 financial crisis.

All the people who were lured by emergency level interest rates over the last 3 years are, on average, earlier in their career, and their income has not yet fully blossomed. They often begin with little equity in their dwelling, having neither contributed much equity up front, nor made many mortgage payments, nor have they enjoyed the fruit of rising home prices.

Their debt load is likely at its lifetime peak.

As Lascelles’ notes, the outcome of rising rates will be quite painful these buyers.

The only remaining question is... do these buyers represent a systemic risk similar to the devastation on the U.S. economy of its housing collapse?

Interestingly Lascelles discounts this outcome.  Despite that fact that many will face higher rates when they renew, Lascelles argues that by the time many do renew the impact will be mitigated by three years of rising household incomes.

A downturn saved by a rebounding economy? Didn't American economists predict that same outcome in the United States?

In 2007 many well known economists in America (like the infamous Ben Stein in the clip below) were adamant that the few who would be affected by resetting mortgages at higher interest rates would not adversely affect the overall real estate market. 

And in the summer of 2011, a similar sentiment seems to exist in Canada.

Not only will interest rates will rise, but the mantra of "they wouldn't dare" will give way to "I don't think anyone saw it coming"... just like it now has in Australia.

And just like we see in Australia today, the impact here will be more severe than expected.

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Friday, July 29, 2011

"I don't think anyone saw it coming"

The financial collapse in 2008 was the tipping point of a worldwide housing collapse that started in 2006.

Two housing bubbles escaped the worldwide carnage: Australia and Canada.

But the tide has started to turn in Australia, which is home to the most unaffordable city in the world - Sydney.

Above is a newstory which aired on last Friday on Channel 7 in Australia.  It gives you a glimpse of what is coming for Canada, home to the 2nd most unaffordable city in the world: Vancouver.

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Thursday, July 28, 2011

What does America's debt look like?

The United States is currently engaged in political theatre about raising the debt limit.  We say 'theatre' because that's what it is... a postering performance.  The arbitrary limit will be raised and America will do nothing to address it's structural debt problem, at least not yet.

The problem, of course, is that the debt is so large right now it can't be repaid.  $14 Trillion is such a large amount most people cannot grasp just how much money that is.

And the 'real' debt is so much larger that the mind simply can't comprehend how much money is involved.

First, let's put a few things in perspective. Recently the blogoshpere have been reposting an excellent link to a visualization of the US debt. Above is a US $100 bill (click on all images to enlarge).

Using that as our basis, let's look at different amounts of money.

Here is what $10,000 looks like:

Here is $1 million:

Here is $100 million:

This is $1 Billion:

This is $1 Trillion:

This is what $15 Trillion looks like. This is the current debt limit:

But that's not the real problem. 

These numbers are incomplete.  The actual figure of the US' national debt is much higher than the official sum of $14.3 trillion.

The $14.3 trillion figure does not count off-budget obligations such as required spending for Social Security and Medicare, whose programs represent a balloon payment for the Government as more Americans retire and collect benefits.

In the case of Social Security, beginning in 2016, the US Government will be paying out more than it is collecting in taxes. Social Security Commissioner Michael Astrue says that "by 2037 the Social Security Trust Fund will be exhausted. There will be enough money only to pay about $US0.76 for each dollar of benefits."

How large are those off-budget obligations?

David Walker, the US Comptroller General from 1998 to 2008, estimates the total debt at about $60 trillion.

But Laurence Kotlikoff, an economist at Boston University and co-author of 'The Coming Generational Storm: What You Need to Know about America's Economic Future.' says that the full range of off-budget obligations totals $202 Trillion.

Regardless of who is right, keep these off-budget obligations in mind as the debt limit charade drags out over a piddling several $Billion in spending cuts. America hasn't even begun to tackle the problem.

This looming systemic debt tsunami can only be solved one way: default and destroying that debt.

It is inevitable.

Just for reference, this picture below shows you $114 Trillion.  That's not a building next to the twin towers of the World Trade Centre; that's a stack of $100 dollar bills as wide and long as a football field and significantly taller than the WTC:
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Wednesday, July 27, 2011

Things a pyramid needs

One of the themes we often talked about is how the housing bubble in our little hamlet on the Edge of the Rainforest has been enable (and inflated) by the easing of monetary policy over the past 30 years.

Back in the early 1980s interest rates were much higher and mortgage rules required you to put down 25% with a maximum amortization of 25 years.

Today interest rates have been slashed to historic lows and  we've been through a period where you could purchase with 0% down and amortize your mortgage over 40 years. 

This has created a stunning rise in real estate values as cheap money inflated values.

And while mortgage rules have been recently tightened to 5% down and amortization reduced to 35 and then 30 years, Vancouver remains the most bubble inflated market in North America.

Which brings us to an interesting question.  With interest rates at the lowest levels in history and amortization periods far longer than 30 years ago... is it easier to own a home now than it was back then?

In a recent press release, the Ontario Real Estate Association (OREA) suggests it isn't.

In a recent Ipsos Reid poll, 81% of Ontarians say it’s more difficult to own a home now than it was for their parents.

That’s despite the fact those 'parents' had to put down 25% to purchase a home and now you only need 5% down with many banks offering you money-back deals that mean you can put 0% down.

The mortgage broker, Canadian Mortgage Trends correctly notes that monthly payments are tougher to meet today, even with longer amortizations.

In 1984, the average minimum mortgage payment would have been roughly $628, or 18% of a married couple’s gross income, based on a:
  • $77,342 average house
  • $41,348 median couple’s income
  • 25% down payment
  • 12.74% five-year fixed rate
  • 25-year amortization
In 2011, the average minimum mortgage payment is about $1,622 or 25% of a married couple’s gross income, based on a:
  • $372,700 average house
  • $77,198 median couple’s income
  • 5% down payment
  • 3.69% five-year fixed rate
  • 30-year amortization
And that's nationally.  Just try and find a decent house in Vancouver (or it's immediate suburbs) for anything under $600,000.

As Canadian Mortgage Trends notes:
  • "Regardless of how you slice and dice it, it is harder for many young people to afford a home today, as OREA’s survey suggests. That’s true despite drastically lower interest rates, smaller down payments, and longer amortizations."
In theory increasing amortizations and lowering minimum downpayments was promoted in the past as helping new homeowners get into the market by making real estate 'affordable'.

In reality all it has done is enabled the pyramid real estate system to find more entrants to the lower end of the pyramid.

To make the scheme work, real estate values have to keep going up.  And that's the rub.  We are coming to the end of the line for ways to keep the pyramid going. 

The OREA's press release and survey is a desperate attempt to find more ways of extending the game. 

Noting that 54% of Ontario renters cited affordability as a key reason for not owning a home and 70% surveyed indicated they would be more willing to consider owning if the government offered more tax breaks and incentives to offset costs for first time buyers, the OREA plays the desperation card:
  • "We have an obligation to protect the affordability of home ownership for future generations. From its impact on job creation to the healthy and stable environment it provides for raising a family, home ownership matters to people, communities and Ontario."
You can sense that the market is beginning to contract.

Look for all kinds of pressure to be exerted on Government to intervene 'in the name of the economy' as the pyramid breaks down.

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Sunday, July 24, 2011

The Looming Implosion

One of the big debates that swirls in the Bull vs Bear debate on real estate in the Village on the Edge of the Rainforest is whether or not the excessive debt loads of Canadians nationwide is even more extreme in Vancouver.

We all know how CMHC has enabled our housing bubble by standing behind our Canadian banks, taking away their risk in the case of default. Because banks have no reason not to give money to people they’d otherwise laugh out of the branch, the debt levels of Canadians have risen to record heights.

An interesting thread was started over on the Vancouver Condo Info forum last week by poster vanpro that took a look at what level income is required to buy a house in Greater Vancouver with a stable 20% down, 5 yr. rate with a 25 yr. amortization.

That analysis alone is startling.

Using CMHC's latest (Q2, 2011) report on Vancouver average SFH housing prices (for April, 2011) here is the qualifying income required to purchase a home based on that stable 20% down, 5 yr. rate, 25 yr. amortization (click on image to enlarge):


In Vancouver (Westside) the qualifying income to purchase based on the average house price is $496,000 per year.

In the suburb of West Vancouver the qualifying income to purchase based on the average house price is $472,000.

In Burnaby it's $208,000.

And in New Westminster it's $138,000.

Wow.  Let me ask you, what is your combined family income right now?  Could you qualify to buy in these cities?

I guess Vancouver must be the Beverly Hills of Canada and our little hamlet an enclave home to the high income earners of the nation.

Surely Vancouver must have the strongest economy in Canada, then?

Curiously the Vancouver Sun ran an article last week. A CIBC study of the relative economic performance of Canadian cities showed that not only wasn't Vancouver #1.... it wasn't even in the top 5. 

Vancouver ranked as the 7th best economy in Canada.


So if Vancouver hasn't got the best economy in the country to support the necessary wages for qualifying buyers for stable mortgages, maybe Vancouver has families whose income combines high employment income with income from outside the local economy. 

Perhaps high investment income allows us to reach the necessary lofty annual income levels?

The VCI thread links us to a chart showing the average incomes from various regions in the Greater Vancouver area.  The chart comes from BC Stats and the 2008 Canada Revenue Agency actual tax filer database.  The table on page 16 indicates "Total Income" in each neighbourhood, where "Total Income" includes ALL employment AND investment income.

(note: this 2008 data has most likely stagnated or fallen due to the subsequent recession, but we will use them anyways)

The VCI thread looked at the Vancouver suburb of West Vancouver.

The West Vancouver median Male total income is $50,720. The median female total income is $34,078. Thus the hypothetical median husband/wife household total income is $84,798 per year. 

But the average annual qualifying income to purchase a West Vancouver home is $472,000.

That means that the median family income of those living in West Vancouver ($84,798 per annum) is ONLY 18% of the qualifying income to purchase the average priced home in West Vancouver.

Similar disparities exist in all the other Lower Mainland neighbourhoods as well. 

So how do people qualify for loans to buy homes at the current bubble prices?

It's true that many homeowners bought before the housing bubble kicked in, many who have leveraged bubble inflated values for secondary purchases, many who capitalized on equity from the bubble values to downsize and buy properties at these prices and finally there are Asian immigrants who have been able to purchase at bubble levels (although as recent real estate statistics show only 7.5% of purchases fall into this category).

But that doesn't account for everyone by half. 

The real answer is that the majority of Vancouver residents are completely unable to qualify to purchase in Vancouver when putting 20% down on a 5 yr. rate with a 25 yr. amortization.

And while statistics aren't available on how many such mortgages are being issued, clearly there are high numbers who are obtaining mortgages with high risk leverage... using 5% or no money down options and the maximum amortization.

As one contributor to the VCI thread notes:
  • "The market has run out of buyers and continually sweeps the edges for increasingly less qualified borderline customers. Possible signs are: Ignoring total debt load and qualifying entirely on monthly carrying costs, or cash back/ third party secondary loans to get around down payment requirements.. From the bank's side, it's a mortgage where the lien is issued solely on the value of the property (or the guarantee from the mortgage insurance scheme) and/or its expected gains, not on the ability for the borrower to comfortably live with the loan for 30 years."
Is the Greater Vancouver mortgage market heavily laden with high leveraged homeowners who had normal underwriting criteria 'softened' or who used additional / non-traditional, "stated" income (liar loans) or other accounting gimmicks like we saw in the United States at the height of their bubble?

You bet it is.

In 2005 and 2006 US banks, regulators and the real estate industry constantly underestimated the full extent and impact that this segment of the market would have on the overall US real estate market when conditions turned.

US subprime mortgages were estimated to be less than 20% of the market, but their collapse wreaked havoc on the market.

Looking at the Greater Vancouver market, that 'first domino' appears to be much larger than it was in the US. 

High leverage loans are a fact of life here.

Combine that with the fact that so many under the age of 40 seem completely perplexed when they hear the term 'correction in real estate'.  Last week I had two young adults (one mid 30's and one mid 20's) ask me what 'correction' meant in respect to real estate. These people have no fear of high leverage because they have no conception of what a correction in the market can do to those leveraged to the max. As a result, the vast majority have made their way into the market in this fashion.

Time will tell, but the stage is set for a much more devastating collapse here.

It's only a question of when.

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Saturday, July 23, 2011

Default now or suffer a more expensive crisis later

In an oped piece posted in Bloomberg, Congressman Ron Paul once again outlines the common sense argument over US debt that is so poignant.

In strict terms, the US will default if America fails to meet its debt obligations, through failure to pay either interest or principal due a bondholder.

To avoid this, there is a giant push to raise the debt ceiling.  The other way of avoiding it is to make massive spending cuts.  America is bringing in roughly $1 Trillion in tax revenue and needs to borrow an additional $1.9 Trillion to cover all expenses.  To avoid raising the debt ceiling, America would have to institute massive spending cuts.

In his OpEd piece, Ron Paul notes that there are numerous claims that a default on Aug. 2 is unprecedented and will result in calamity (never mind that this is simply an arbitrary date, easily changed, marking a congressional recess). 

Paul notes that the U.S. government defaulted at least three times on its obligations during the 20th century;
  • In 1934, the government banned ownership of gold and eliminated the right to exchange gold certificates for gold coins. It then immediately revalued gold from $20.67 per troy ounce to $35, thus devaluing the dollar holdings of all Americans by 40%
  • From 1934 to 1968, the federal government continued to issue and redeem silver certificates, notes that circulated as legal tender that could be redeemed for silver coins or silver bars. In 1968, Congress unilaterally reneged on this obligation, too.
  • From 1934 to 1971, foreign governments were permitted by the U.S. government to exchange their dollars for gold through the gold window. In 1971, President Richard Nixon severed this final link between the dollar and gold by closing the gold window, thus in effect defaulting once again on a debt obligation of the U.S. government.
Paul goes on to describe how these moves freed the US government to now spend unlimited amounts of money because they were no longer constrained by any sort of commodity backing; the only check on its spending being the market’s appetite for Treasury debt.
  • "Despite the defaults in 1934, 1968 and 1971, world markets have been only too willing to purchase Treasury debt and thereby fund the government’s deficit spending. If these major defaults didn’t result in decreased investor appetite for U.S. obligations, I see no reason why defaulting on a small amount of debt this August would cause any major changes.  The national debt now stands at just over $14 trillion, while net total liabilities are estimated at over $200 trillion. The government is insolvent, as there is no way that this massive sum of liabilities can ever be paid off. Successive Congresses and administrations have shown absolutely no restraint when it comes to the budget process, and the idea that either of the two parties is serious about getting our fiscal house in order is laughable."
Paul quotes the Austrian School’s theory of the business cycle that describes how loose central bank monetary policy causes booms and busts:

Loose monetary policy drives down interest rates below the market rate, lowering the cost of borrowing; encourages malinvestment; and causes economic miscalculation as resources are diverted from the highest value use as reflected in true consumer preferences.

Loose monetary policy caused the dot-com bubble and the housing bubble, and now is causing the government debt bubble.

Paul zero's in on how, for far too long, the Federal Reserve’s monetary policy and quantitative easing have kept interest rates artificially low, enabling the government to drastically increase its spending by funding its profligacy through new debt whose service costs were lower than they otherwise would have been.
  • "Neither Republicans nor Democrats sought to end this gravy train, with one party prioritizing war spending and the other prioritizing welfare spending, and with both supporting both types of spending. But now, with the end of the second round of quantitative easing, the federal funds rate at the zero bound, and the debt limit maxed out, Congress finds itself in a real quandary."
And it's that quandary which has America at it's most important crossroads since the Civil War.
  • "Unless major changes are made today, the U.S. will default on its debt sooner or later, and it is certainly preferable that it be sooner rather than later. If the government defaults on its debt now, the consequences undoubtedly will be painful in the short term. The loss of its AAA rating will raise the cost of issuing new debt, but this is not altogether a bad thing. Higher borrowing costs will ensure that the government cannot continue the same old spending policies. Budgets will have to be brought into balance (as the cost of servicing debt will be so expensive as to preclude future debt financing of government operations), so hopefully, in the long term, the government will return to sound financial footing."
By raising the debt ceiling all America does is postpone the inevitable. Increasing the debt ceiling allows the US to keep spending.  Since there is no way the money can be paid back, it means default is simply kicked down the road.

More spending will mean more money printing. A future default won’t take the form of a missed payment, but rather will come through hyperinflation.
  • "The already incestuous relationship between the Federal Reserve and the Treasury will grow even closer as the Fed begins to purchase debt directly from the Treasury and monetizes debt on a scale that makes QE2 look like a drop in the bucket. Imagine the societal breakdown of Weimar Germany, but in a country five times as large. That is what we face if we do not come to terms with our debt problem immediately."
Paul notes that default will be painful, but it is all but inevitable for a country as heavily indebted as the U.S.

The past 40 years have clearly shown that pumping money into the system to combat a recession only ensures an unsustainable economic boom and a future recession worse than the first.
  • "And continuously raising the debt ceiling only forestall the day of reckoning and ensure that, when it comes, it will be cataclysmic. We have a choice: default now and take our medicine, or put it off as long as possible, when the effects will be much worse."
Wise words.

But the path of action has already been chosen. And without titanic resolve, there won't be a deviation from that path.

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Friday, July 22, 2011

Any Questions as we wait for the Debt Limit to be raised? (updated)

(click on image to enlarge)
Above is the reason for the bullish view on Gold. Meanwhile Citigroup Global Markets Inc. have said that if silver follows similar patterns as seen in silver’s last bull market from 1971 to 1980 than silver could double to over $100 per ounce.

From the Citigroup report:
  • “If the final rally in the last bull market repeated then we can expect $100 over the long term. While the high so far this year was at the same level as the peak in January 1980, we are not convinced that the long-term trend is over yet.”
Most institutional players and Wall Street banks have been bearish on silver and have called the silver market wrong for years. Many analysts believe this is because these insitutional players and banks have very large concentrated short positions and were likely 'talking their book.'

Because of that it is very unusual to see such a bullish call from a major bank. It suggests that at least some of the major banks see the writing on the wall regarding much higher silver prices. They are likely positioning themselves accordingly.

This means that the banks with concentrated short positions, such as JP Morgan, may soon see their silver positions incur even greater losses and we may see the much heralded short squeeze propel silver to much higher prices.

It's important to note that the real inflation adjusted high from 1980 is $140/oz and many believe we will see this very shortly.

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Thursday, July 21, 2011

Too Funny


Check out this exchange on the debt debate in the United States between MSNBC's Contessa Brewer and Mo Brooks, the U.S. Representative for Alabama's 5th congressional district.

Brook's disagree's with the assertion from the likes of  US Federal Reserve Chairman Ben Bernanke that the Western World is on the brink of another depression, thus justifying the Trillions of dollars in liquidity the Federal Reserve has used to bail out the banking system.

MSNBC's Brewer attempts to marginalize the Congressman's opinion by putting him in his place and asking him if he has an economics degree.


Brooks' retort is classic deadpan: "Yes Ma'am I do, highest honours."


The only thing better would have been a conversation that went like this:

Brewer: "Do you have a degree in economics?"
Brooks: "Yes I do, highest honors. What degree do you have?"
Brewer: "Broadcast Journalism"
Brooks: "That explains the stupid question. Carry on."

Knowing the she can't hide in today's media exposed world from such a brutal gaffe, Brewer made the following post on her facebook page (click image to enlarge):
  • "Just learned why lawyers are told never to ask a question they don't know the answer to. Me to Rep. Mo Brooks, talking about why he disagrees with well-known economists that we were on the brink of another depression: 'Do you have a degree in economics?' Him: 'Yes I do. Graduated with honors.'"

Too funny.

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Wednesday, July 20, 2011

An example of how Silver is manipulated on the COMEX (amended)

Faithful readers who have followed this blog know we have covered Silver and Gold manipulation on the COMEX.

JP Morgan's shorting of the Silver market has lead to the largest short position on a commodity in the HISTORY of commodities trading and has set up a situation where the paper price of Silver has been artificially suppressed in huge distortion to the massive worldwide demand for the metal.

On Saturday, the Commitment of Traders report showed a huge increase in commercial shorts in both Silver and Gold.  Gold was hitting a new record over $1,600 per ounce and Silver had climbed back over $40 per ounce... all of which forced the banking cartel to raid both metals on Monday and that raid was intense.

Above is an examination of just how immense and blatant that Silver raid was.

At exactly 14:03 (2:03pm) on Monday, in what is known as the access (after-hours) market, someone dumped over 50,000 Silver contracts onto the Silver market in one minute!

The video clip shows you (in a very visual graphic) just how 'out of whack' the dumping of this much Silver on the market at one time was.  There was no event that justified this kind of selling, no wave of panic that would lead to a sudden liquidation of this magnitude.

There was just ONE massive dump in an attempt to trigger a collapse in the price of Silver.

As you watch the video, consider just how much Silver 50,000 contracts represents.

In the span of one minute someone attempted to dump 250 million ounces (50,000 contracts x 5,000 ounces per contract) on the market.  That's over $10 Billion of Silver being sold into the the market in one minute.

Think about that for a moment.  Someone tried to sell over $10 Billion worth of Silver in one minute.

250 million ounces is roughly one-third of all the Silver mined in the world for an entire year.  The United States only extracts about 50 million ounces in one year.

As the clip explains, this is an extraordinary amount of Silver and couldn't possibly be a mining company hedging production or the act of a single investor liquidating assets.

Someone, in the midst of a world wide buying frenzy of precious metals over sovereign debt, tried to dump five times the amount of Silver mined in the United States in one year onto the market all at once.

It has to be someone with an access to an unlimited supply of paper Silver contracts - no one else has that kind of access to that much Silver.

But the attempt to flood the market failed.

So voracious is the current demand for Silver that this massive dump was not only absorbed - but Silver surged back up over $40 an ounce today.

The battle to keep a lid on Silver and Gold is intensifying. And the desperation of those shorting the market is palatable.

And why is the demand so strong? 

Congressman Ron Paul explains it best in the video clip below. If you can understand what Congressman Paul is saying you will understand why Gold will hit $5,000 an ounce and Silver will surge over $250 an ounce...

Jim Sinclair also summarized the situation on his blog today and expanded on Congressman Paul's points by explaining why the debt issue will only intensify even after the Congress lifts the debt ceiling.
  • The idea that an increase in the debt ceiling is a solution to anything is nonsense. The event would be simply a can kick forward for a very short period of time. Increasing debt is not a solution to a debt problem. It actually makes the problem worse.
  • It is an act of extending your Federal credit card borrowing line so you can use it to pay your mortgage.
  • [To call the act of ] increasing the debt ceiling a solution to a debt problem is too stupid to be stupid. The unwind is deeply entrenched since the failure of Over the Counter (OTC) derivatives in 2008. There has been no meaningful intervention in this economic downward spiral at the level of the cause. The downward spiral therefore continues unabated.
  • OTC derivatives are what turned a four year correction into the greatest economic accident in human history. OTC derivatives only go one way in size and that is up.
  • Changing the way nominal value is determined does not solve the problem. All that does is add camouflage to the problem. It does not solve it.
  • The damage is done. The debt of the entire Western world is beyond out of hand. The so called solution, just like raising the debt ceiling, will be acts of kicking the can down the road.
  • We have come to the end of the road. The result of no financial discipline anywhere in the Western world is unfolding.

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Tuesday, July 19, 2011

Snapshot of Real Estate in BC

The Bank of Canada (BOC) decided to stand pat on interest rates today keeping the trend setting BOC rate at 1%.  This despite the fact inflation under the truncated post-2000 Consumer Price Index (CPI) is sitting at 3%.

The key here is that with interest rates below inflation Canadians discouraged from saving.  Any type of bond purchase under 5 years would give you a return below the rate of inflation.  Why save?

Money is encouraged, instead, to move from prudent behaviour into risky speculative behaviour to get a return that stays ahead of the rate of inflation. 

So with our 'below inflation' interest rates, here's a snapshot of real estate in BC for you.

June's Months of Inventory (MOI) calculations for each of the British Columbia Real Estate Association's (BCREA’s) sales regions is listed below. The inventory and sales data from is from and was posted recently in the comments section over at Vancouver Condo Info.

= = = = = = = = = = = =

BC Northern
Inventory: 3215
Sales: 418
MOI: 7.7

Inventory: 1828
Sales: 230
MOI: 7.9

Fraser Valley
Inventory: 8169
Sales: 1508
MOI: 5.4

Greater Vancouver
Inventory: 16194
Sales: 3317
MOI: 4.9

Inventory: 2301
Sales: 206
MOI: 11.2

Inventory: 3441
Sales: 232
MOI: 14.8

Okanagan Mainline
Inventory: 6928
Sales: 499
MOI: 13.9

Powell River
Inventory: 265
Sales: 38
MOI: 7.0

South Okanagan
Inventory: 2275
Sales: 145
MOI: 15.7

Northern Lights
Inventory: 356
Sales: 43
MOI: 8.3

Vancouver Island
Inventory: 6676
Sales: 672
MOI: 9.9

Inventory: 4108
Sales: 596
MOI: 6.9

Provincial Totals
Inventory: 55816
Sales: 7904
MOI: 7.1

Vancouver continues to have relatively low MOI numbers while outside the Lower Mainland the Months of Inventory numbers are high, especially in the Okanagan.

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Monday, July 18, 2011

Two local housing videos for you...

Another excellent video courtesy of our friends over at Vancouver Condo Info regarding the impact of interest rates on housing prices.

If you haven't seen it, also check out their previous vid below on the roller coaster that is the Vancouver Housing Bubble.


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Sunday, July 17, 2011

How low will it go?

Fascinating, isn't it, how we have suddenly gone from "there is nothing wrong with the housing market" to a situation where different factions are now competing to predict how low it will go.

The transition has been so swift that many average people have no idea that sentiment has shifted so dramatically.

The latest Housing Limbo article comes courtesy of the Toronto Star which notes that Real Estate analysts all seem to  agree the cycle of exceptional appreciation will be broken in 2012, but disagree about the severity of the downturn – some believe house prices will flatline, others forecast a drop of up to 25% by 2013.

National Bank economist Paul-Andre Pinsonnault is quoted with this little gem:
  • “You do have a situation where you have a generation who has not seen a fall in prices in Canada, but as we all know, nothing ever goes up in a straight line. We are not immune to gravity.”
Well... the blogosphere knows this, but until recently it has been nothing short of heresy to make such a suggestion.

But this month two major banks have now released reports calling for a correction in the housing market: TD and CIBC.  Suddenly the chorus of negative forecasts is everywhere.

Some say values will flatline, others say prices will drop by anywhere from 10% to 25% over the next two years.

What's important is that a drop of 10%, while not severe, could still wipe out the equity for some buyers who have saved to put the minimum down on their home.

[More importantly... if you were about to buy, would you now with everyone predicting as much as a 25% correction in prices looming on the horizon?]

Obviously this blog agrees with the likes of Capital Economics who predict a significant correction because Canadians have become complacent with low interest rates and have been loading up on debt to the point where we now have a higher debt load than the U.S.
  • “Prices have risen substantially relative to income and we don’t think that’s sustainable.”
It is unsustainable. And the housing market will correct. The only question is what will be the mechanism that triggers the correction and how severe will it be.

For the record here are the prognostications offered so far:

2012-2013 Bank Forecasts
  • Toronto Dominion Bank: A 10.2% correction over the next two years.
  • National Bank: Flat, with a possible correction in the 5 to 10% range.
  • CIBC: Flat, with a possible correction in the 5 to 10% range.
  • RBC: Flat. Prices could dip slightly, but depends on economic environment.
  • Bank of Montreal: Prices will flatline at best.
  • Scotiabank: A flattening and moderation in the market. But depending on global economy, prices may still rise slightly in 2012.
Non-bank forecasts:
  • Capital Economics: Prices could burst by as much as 25%.
  • The Economist Magazine: House prices overvalued by 21%.
  • Village Whisperer: Vancouver market will start correcting with prices ultimately dropping by 50 - 70%.
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Saturday, July 16, 2011

Real Estate Prices are continuing to fall in Victoria

Back in April we posted that the noose is tightening on the larger periphery around the Village on the Edge of the Rainforest.

The Victoria Times-Colonist reported that, "The first quarter of 2011 has proven to be a tale of two real estate markets in B.C. - the Lower Mainland and everyone else."

In April real estate sales in Victoria were down 18.1% and the average price fell 2.8%.

Last week the Times-Colonist reported June data. According to Royal Lepage, the average selling price of a detached bungalow in Greater Victoria has now dropped nearly 5% in the last year.

As expected, the local Royal Lepage representative tried to put a positive spin on the data. Carol Geurts of Royal LePage Coast Capital Realty said:
  • "We're not seeing a lot of movement in the Victoria real-estate market, so inventory is up. However, the average price decrease for most homes was less than two per cent."
Prices are down nearly 5%, but the average price decrease for 'most' homes was less than 2%?

What is she suggesting?

Is it that only the crappy homes and/or the homes being sold by desperate sellers that are dropping in price?  Is she saying most homes (meaning yours) aren't really dropping in price so you don't need to worry about these negative statistics?


As our friends over at World Housing Bubble blog have noted, this sort of rationalization was seen in California at the start of the American housing bubble burst. Realtors would argue in the press that while the value of houses for sale was dropping, the value of houses that weren't for sale was holding firm.

Look for this sort of spin to ramp up over the coming months.

The Times-Colonist also noted that the price of a new home in Victoria dropped 1.7% and in Vancouver it dropped 0.8%.

We will watch these trends with great interest.

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Friday, July 15, 2011

Silver supply continues to dwindle on the COMEX (updated)

The ongoing saga of dwindling available Silver for delivery on the COMEX continues unabated as the demand heats up.

After yet another day of withdrawls, the total amount of registered Silver drops to a new all-time low of 26,814,648 ounces!

The pace of silver depletion in the registered category is nothing short of astonishing.  If it were to continue at the pace it has been on since March, the COMEX would literally be depleted of registered Silver to make deliveries within 250 days.

It is interesting to note, however, that the eligible catagory of Silver on the COMEX has increased.  While not available as Silver that can be delivered to settle contracts, the total now stands at 101,719,841 ounces.

Not surprisingly, JP Morgan and the Commercial shorts have been adding to their net short position as Silver's price has been going up. Presumably that pace will really pick up next week as they desperately try and keep the price under $40.

As a percentage of total COMEX inventory, the short position is up to 185% from 164% last week.

As a percentage of Registered Inventory, JP Morgan and the Commercial shorts are now short 699% of the registered Silver category - a level which is almost the highest ever.

Below is a graph of the Registered Silver Inventory for 2011.  Since January inventory has dropped from over 45,800,000 ounces to  26,814,648 ounces today (click on image to enlarge).

It's important to note, the significance of this inventory decline on the COMEX is not that the world is running out of silver, far from it.

It is that the amount of silver available for sale, in large quantities and the appropriate forms, is in increasingly short supply, down to record levels AT CURRENT PRICES.

This is significant for two reasons.

Such supply/demand imbalance, in the absence of supply or demand shocks, is often the result of long term artificial price manipulation and external forces in the market that prevent a market clearing price.

Eventually the market imbalance will be resolved, one way or the other.  The banking cabal has tried to create available Silver by crushing the price downward in a hope Silver holders would dump their physical Silver.

That has not only failed to materialize, but Silver supply has actually tightened.

The shortage of Silver at the COMEX can be resolved with a significantly higher price. And I believe we are going to see that in the not too distant future.

It appears things are heating up again for another possible big breakout in Silver price.

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