Sunday, July 31, 2011

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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  1. video

    Richard Koo AT THE 2011 Argentine Central Bank Conference. Very interesting take on Japans housing downturn and then the crash of the housing market in the US.

  2. “I barely do anything in my expensive house other than sleep and go back to work each day.”

    When I bought this million dollar crack shack, I thought it would come with actual hookers and blow.

  3. The comment above hits the tail on the head in saying the spare tire can not get any traction.
    We have reached the point of debt saturation. The creation of new debt will not create enough growth to reduce the existing debt. John Williams of Shadow Government Statistics estimates the actual rate of inflation in the US at 11.2%, while growth as measured by the government is estimated at about 1.5%. Therefore, real economic growth is negative and cash is losing value, which indicates stagflation is upon us.

  4. There is such a desire to own a nice home and then a nicer home... that generally, people no longer think about what makes them truly happy. I have vowed (yes) to never owe anyone anything ever again. That meant that I couldnt afford to buy a home outright in Van, but, instead, made me think in terms of decades instead of months. THAT, has created a method of living... which makes me very happy compared to how I lived life 10 years ago.... when I owned realestate. Mind you, I have a dog now... that might have something to do with it.

  5. Therefore, real economic growth is negative and cash is losing value, which indicates stagflation is upon us

    bingo, this is a very bad decision.

    Add to the fact that they just started cutting spending when the economy has not recovered. People who are on the fence will panic save when they see health care cuts.
    the public does not spend when things are tough, they save and pay down debt.Companies are going to put off hiring because people are saving and will downsize forcing more and more people out of work. This is going to self feed upon itself. Capital will take flight and seek a safer haven. Gold is going to go up and commodities will collapse.

    cutting spending in a recession

    this is bad