Sat Post #2: New Year's Eve

On a night where we often reflect on the recently completed year- and on years gone by - I wish you all a safe and Happy New Year's Eve.

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Sat Post #1: Foreclosure Process in British Columbia

Yesterday's post prompted a discussion about the Foreclosure Process in British Columbia so as the second last post of the year let's make that the topic.

Ever popular downtown realtor Ian Watt has a site that specializes in Foreclosures and some info on the topic.  This info is from his site. 

Buying a foreclosure in BC is somewhat different from buying a regularly owned property and it is certainly different from buying a bank owned property in the United States. 

First of all, please understand that in BC the courts will ensure the homeowner is protected and their property is marketed and sold for an amount as close to "Fair Market Value" as possible. 

Whereas in the US, the laws protect the banks and properties can sell substantially well below market value, buying a foreclosure in BC could get you a deal and save you some money on the purchase price, but rarely does a property ever sell less than 20% off fair market value.

  

The Foreclosure Process in most cases works like this:

After a lender has been given the right to sell the property by the BC Supreme Court, the lawyer acting on behalf of the lender hires a realtor to market the property. The property can still be owner occupied and showing may be limited and sometimes difficult due to the nature of the circumstances. 

When the foreclosure property is listed on the MLS, the listing agent will showcase that property to as many purchasers as possible in hopes to get an offer that is suitable to the lender.

When a buyer submits a written offer, which includes a Schedule A (which amends the regular Contract of Purchase and Sale), to the listing agent, the listing agent will present that offer to the lender's lawyer and he or she will act of behalf of the lender during the negotiation. During this period the lender and the purchaser will negotiate a price they are both satisfied with. 

Upon accepting the offer, the purchaser will have 5 business days (in some cases) to do all their due diligence. After the buyer is satisfied with her due diligence and she has her financing in order, she then prepares a certified deposit cheque or bank draft and remove all subjects in regards to the lender. This is now a subject free offer as far as the buyer and the lender are concerned. However, there is one last subject which is "Subject to Court Approval". 

The lender's lawyer will now set a court date and this could take on average 2 to 4 weeks time. A few days before court, the listing realtor will disclose the price which the offer was accepted for. That will give any other perspective purchasers the ability to decide if they want to come to court and outbid the original offer or not.

Unlike a regular property for sale, the first offer that comes in and is accepted by the lender is not necessarily the person who ultimately ends up owning the property at the end.

At Court the listing agent will collect all, if any, competing offers which must be subject free, contained in a sealed envelope, include a schedule A addendum, and be accompanied with a certified deposit cheque or bank draft. 

When the judge has this property address file in front of her, the judge may give the owner one last time to redeem the owner's mortgage and any other outstanding debts. If there is no attempt to pay off all the debts she will proceed with the offers to purchase the property.

Should there be mulitple offers, whoever has the highest subject free bid in the sealed envelope will most likely be awarded the property. Depending if the property is vacant or owner occupied, the completion and possession could be after the court date will be somewhere between 2 to 8 weeks.

It is strongly recommended that the purchasers are in court to either up their bid or be present to initial any changes that the judge may request. There are no second chances for anyone after the judge has made her decision and there is no chance to back out of the contract.

The property is now sold and all documentation is forwarded to the parties involved for conveyance.

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What if?

All the talk of a housing correction of 12% (or more) in 2012 - and the impact such a correction might have on those already tightly squeezed by their current debt situation - raises an interesting question.

What will banks do at mortgage renewal time?

It is interesting to watch the reactions of the average Canadian when you raise the topic of US subprime mortgages.

They know very little about what a US subprime mortgage is.

In the United States, it is common for people with mortgages to have a 30 year term at the same interest rate for all 30 years.

Subprime mortgages were for those for didn't qualify for these type of mortgages.  Subprime mortgages were for shorter terms (1 - 7 years) with teaser rates that would expire. Basically subprime mortgages were mortgages that had an interest rate that would 'reset' after a few years and the mortgage holders had to go out and get a new mortgage.

Once this is explained to them the average Canadian's brow furrows, the head cocks, and you can almost smell the wood burning as the realization dawns.

Virtually every single Canadian has a 1, 3 or 5 year mortgage with an interest rate that 'resets' at current market rates at the end of the 1, 3 or 5 year mortgage term.  And by 'reset' we mean a brand new mortgage is issued to the mortgage holder.

Virtually every single Canadian mortgage is just like an American subprime mortgage.

In the United States, as the housing bubble burst and property values began to collapse, many subprime mortgage holders were forced to renew mortgages at substantially higher interest rates. Many faced significant interest rate hikes because of their risky status and the underwater state of their mortgage vs their property value.

In Canada the situation is somewhat different with the CMHC but what will happen in Greater Vancouver to a Lower Mainland homeowner who has a $500,000 mortgage with no equity (because of HELOC withdrawals) and has seen the 'value' of their property drop 12% - 15% (or as some are predicting - 30%).

A 15% drop in 'value' means you are asking for a new mortgage that is now $75,000 greater than the appraised value of the property. 

A 30% drop could leave people underwater by as much as $150,000. (We won't even begin to factor in the situation faced by the 0/40 crowd whose 5 year terms are coming due just as the Conservatives ponder reducing mortgage terms to 25 years next March).

Will the bank renew these mortgages?

Most people assume they will.

But some people to question is this is, in fact, the case. Over on the blog, Vancouver Condo Info, one contributor noted the following this morning:

"Recently I had an informal talk with a friend who works at one of the big Canadian banks. I asked him if he noticed any changes in the mortgage business. He said it’s still going strong. Interestingly though he also mentioned that he noticed an interesting phenomenon... if the mortgage was $600k or higher (most of the time this resulted from clients rolling in other kind of debt into their mortgage payments) the principal appears to have remained at the same level for the last 2-3 years. He noted that these $600k+ clients appear to be paying the principal over the years but after a while they ask that some line of credit with $30k-60k on it be rolled in the mortgage which bumps the principal back to previous years’ values. I asked what would happen if the clients can’t pay… does the bank take the property into foreclosure? The way he answered caught me a little off guard. It felt like he never quiet thought the process through. He said that the bank will work quite hard to 'help' the client continue paying. He seemed to think that the foreclosure procedure was the solution of last resort."

What I find striking is that I have also raised this point with colleagues who work at some of the big banks and I get a similar, perplexing response.

No one really seems to know for sure because no one has really addressed this question. 

Everyone assumes that banks won't be foreclosing because it is assumed the banks won't gain by foreclosing. That to do so (foreclose) wouldn't be in the bank's interests because it would cause a glut of inventory that will crash the housing market.

But will this stop the banks?

One thing we know for sure is that there are foreclosures happening in BC and elsewhere in the country. Did the banks avoid foreclosing on these people?

Nope.

So why do you think they will avoid foreclosing on you when the time comes?

Remember... the vast majority of these mortgages carry CMHC insurance (which is why the banks were willing to make these stupid loans in the first place).  If the banks foreclose, they don't lose a penny on the loan.  They could flood the market with properties, drive market prices dramatically downward, and they won't care.

They could sell the $500,000 house to anyone who will give them anything - say $200,000 - and all the bank does is turn around and hold out their hand to CMHC for the $300,000 they lost on the transaction.

If we were to have a rash of people caught in large underwater positions on their mortgages, what is the incentive for the banks to avoid the foreclosure process (and as you rationalize why they will do this - ask yourself why they didn't do it to the people who are currently being foreclosed on)?

As it is, the foreclosure process in BC is already long and arduous (taking over a year plus to complete). Banks have a responsibility first and foremost to their shareholders. It you are in a financial bind, why will banks make it worse by renewing bad loans?

Yet the vast majority of people you talk to are convinced the banks will "work very hard to make sure you keep your property" and will utilize foreclosure as a last resort. They are also convinced that the government will step in if these conditions evolve and pressure the banks not to foreclose to protect the economy. Many are convinced CMHC will be instructed to guarantee underwater mortgage renewals so long as they are renewals.

I suspect a great many homeowners in Greater Vancouver are going to be supremely shocked at the difference between the bank's definition of 'last resort' and their own.

I further suspect they will be stunned at the indifference of government to the financial hardships caused by a collapsing real estate market when CMHC offers no such support for massive underwater mortgage renewals.

Whocouldaknown?

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Thur Post #2: Housing mania leaves Canadians over-indebted, economy vulnerable to pullback

Earlier today we talked about how precarious the debt situation is for a friend's landlord (see Thur Post #1 below).

Now the Vancouver Sun expands on how tedious the debt situation is for Canadians in general.

According to a report released today by the Canadian Mortgage and Housing Corporation, the record level of household debt in this country is a "serious issue."

And what prompted this exclamation?

As of March 2011, Canadians owed more than a trillion dollars on their mortgages.

That's Trillion with a "T".

The CMHC reported that housing-related spending of about $330 billion a year in 2010 has risen by 67% since 2001 and now comprises 20.3% of Canada's gross domestic product in 2010.

These statistics underline the importance of that debt load, and what might happen to the economy if for any reason Canadians crack under its burden.

CMHC figures show that mortgages made up about 68% of total household debt in 2010. Consumer credit, which makes up the other 32%, has been growing faster than mortgage debt over the past two decades.

"Concerns expressed about household indebtedness have been largely driven by the total household debt-to-disposable income ratio," the report says.

"The major risk in the mortgage market is impairment in a household's ability to pay, often due to job loss. Recession or other adverse economic scenarios, such as rising interest rates, could certainly pose a challenge for some Canadian households."

Subprime was the trigger in the United States. Our's may well be debt piggies who can no longer keep their heads above water.

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Thur Post #1: A 12% correction is no big deal, right?

Last week TD Bank came out and forecast a "larger-than-average price and sales correction" for the housing market in Vancouver next year projecting a sales drop of 15% and a home-price decrease of 12%.

The mere fact that they are making such a forecast is significant on it's own. Warnings of an overblown market have moved from the fringe of the blogosphere to the mainstream with only the staunchest of the bulls denying the inevitable.

The question now is... by how much will it correct?

When the US market collapsed in 2006, it was a small segment of the market - the subprime sector - that started the domino's falling. 

But no one saw it coming because the subprime sector was considered such a small segment of the mortgage market that even if it did collapse, no one believed the repercussions would be felt let alone have a significant impact (see the portion of video below at the 5:12 mark where economist Ben Stein chastises Peter Schiff about the significance of the subprime market).

As it turned out, subprime was but the first of a number of domino's that fell... triggering a full scale collapse.

Fast forward to today. TD is predicting a 12% correction in the Greater Vancouver market. But what will be the repercussions of that first domino falling?

As we have documented over and over, the biggest concern in Canada is the huge debt load being carried by Canadians. Many local blogs have long speculated on just how significant a factor the overextended homeowner will be when the market starts it's unwind.

A close acquaintance of mine lives in the Vancouver suburb of Surrey (an area that respected blogger Garth Turner recently predicted would see a 30% correction if the national market tanks 15%).

A staunch housing bear himself, my close acquaintance rents the house he is currently living in. The home was recently assessed at a value of $450,000 and the landlord is the quintessential poster child of the over-extended, amateur Vancouver landlord.  

Owning her own home in Coquitlam (another Vancouver suburb) plus two rental homes in Surrey, she constantly struggles to make ends meet.

Recently a spat of repairs were required on the house my acquaintance lives in. 

First, the garage door sustained damage. When arrangements were made for an assessment from a repairman, the landlord asked my friend to pay the $80 charge (which would be deducted from the next month's rent) because she no longer had a credit card.

Next, the dishwasher failed.  A plumber was called and he replaced the garburator (a repair that had been put off since summer) as well as the dishwasher.  And while the landlord arranged a cash payment for these (delivering the money to my friend to give to the plumber on the day the work was to be done), the plumber later confided the landlord had been in tears on the phone as they discussed the best place to secure the 'lowest' price on a new dishwasher.

I'm sure you won't be surprised to learn that all repairs seemed to be "under the table" with no apparent HST tax paid.

There are other repairs that are required at the house but are "on hold" because the landlord admits to cash flow problems.

The landlord has told my friend that the house was a gift she received from her parents over 13 years ago. 

So does that mean the property is mortgage free?

In the 3 years my friend has been at this house, he has accommodated 3 requests to have the property assessed for HELOC applications. In the most recent visit (always by the same assessor), the assessor let slip that he had also been doing the same on her two other properties. She has maxed out the available equity on this house (about six years ago this money was used to purchase the second rental home), the second rental home and her own house.

Now, with TD Bank expecting a market correction of 12%, where will this landlord wind up?

This landlord (not unlike many others in the Lower Mainland) have been using their homes as personal ATM machines.  And the money they have taken out against their properties is spent.

This particular landlord struggles to maintain basic repairs on the homes and is in a personal financial situation where she no longer has access to credit cards.

What will a 12% drop in property values mean to this landlord?

On the one Surrey home (assessed value $450,000), a 12% correction is a loss in $54,000 in mortgaged asset value. A 15% drop translates to a loss of $67,500. If we were to realize Garth Turner's prediction of a 30% drop - the loss on this house would be $135,000. 

Without continued price appreciation, not only is the HELOC ATM most assuredly closed to her for future withdrawals but any major repair or incident will be devastating to family finances.

If the other two homes are of equal value, she is facing a total drop of $162,000/$202,500/$405,000 in asset value (based on drops of 12%/15%/30%), none of which is equity. Are the banks going to blindly renew mortgages on these three properties when she could be underwater by almost half a million dollars on all three combined?

At what point does the straw break the proverbial camel's back?

How many more are in similar circumstances?

Without a dramatic turnaround in the economy, how can these people avoid any other fate besides default, bankruptcy and foreclosure?

Anecdotal evidence suggests there is a strong likelihood that a higher percentage of Greater Vancouver homeowners are in this situation vis-a-vis the greater mortgage market than there were subprime mortgage holders in the US mortgage market.

A 12% or 15% correction does not sound like much, but given the dynamics of the Vancouver market it could be devastating.

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The bailouts continue... you're just not hearing about them

A while back, US Republican candidate Ron Paul commented on the ongoing bailouts of Europe by the US Federal Reserve:

The Fed's latest actions in cooperating with foreign central banks to undertake liquidity swaps of dollars for foreign currencies is another reason why Congress needs enhanced power to oversee and audit the Fed.  Under current law Congress cannot examine these types of agreements.  Those who would argue that auditing the Fed or these agreements with central banks harms the Fed's independence should reevaluate the Fed's supposed independence when the Fed bails out Europe so soon after President Obama promised US assistance in resolving the Euro crisis.

And today the Wall Street Journal reported that former Dallas Fed Vice President, Gerald Driscoll has come right out and accused the Fed of bailing out Europe courtesy of "incomprehensible" currency swaps, and implicitly accusing Bernanke of lying that he would not bail out Europe even as he has done precisely that.

The Federal Reserve's Covert Bailout of Europe 

When is a loan between central banks not a loan? When it is a dollars-for-euros currency swap.

America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.

The Fed is using what is termed a "temporary U.S. dollar liquidity swap arrangement" with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or "swaps" dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman's collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.

The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.

The ECB is entangled in an even bigger legal and political mess. What the heads of many European governments want is for the ECB to bail them out. The central bank and some European governments say that it cannot constitutionally do that. The ECB would also prefer not to create boatloads of new euros, since it wants to keep its reputation as an inflation-fighter intact. To mitigate its euro lending, it borrows dollars to lend them to its banks. That keeps the supply of new euros down. This lending replaces dollar funding from U.S. banks and money-market institutions that are curtailing their lending to European banks—which need the dollars to finance trade, among other activities. Meanwhile, European governments pressure the banks to purchase still more sovereign debt.

This Byzantine financial arrangement could hardly be better designed to confuse observers, and it has largely succeeded on this side of the Atlantic, where press coverage has been light. Reporting in Europe is on the mark. On Dec. 21 the Frankfurter Allgemeine Zeitung noted on its website that European banks took three-month credits worth $33 billion, which was financed by a swap between the ECB and the Fed. When it first came out in 2009 that the Greek government was much more heavily indebted than previously known, currency swaps reportedly arranged by Goldman Sachs were one subterfuge employed to hide its debts.

The Fed had more than $600 billion of currency swaps on its books in the fall of 2008. Those draws were largely paid down by January 2010. As recently as a few weeks ago, the amount under the swap renewal agreement announced last summer was $2.4 billion. For the week ending Dec. 14, however, the amount jumped to $54 billion. For the week ending Dec. 21, the total went up by a little more than $8 billion. The aforementioned $33 billion three-month loan was not picked up because it was only booked by the ECB on Dec. 22, falling outside the Fed's reporting week. Notably, the Bank of Japan drew almost $5 billion in the most recent week. Could a bailout of Japanese banks be afoot? (All data come from the Federal Reserve Board H.4.1. release, the New York Fed's Swap Operations report, and the ECB website.)

More and more balls are being thrown in the air.

The question remains... how long can the ponzi juggling act be maintained?

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Chinese Central Banker Declares That 'Gold Is The Only Safe Haven Left'

Apparently People's Bank of China official Zhang Jianhua declared yesterday that: "No asset is safe now. The only choice to hedge risks is to hold hard currency - Gold."

Zhang, the bank's research director, recommended buying the dips and said: "The Chinese government should not only be cautious of the imported risk caused by rising global inflation, but also further optimize its foreign-exchange portfolio and purchase Gold assets when the Gold price shows a favorable fluctuation."

China's $3.2 trillion in foreign reserves are currently invested one-third in U.S. treasuries 20% in euro-denominated assets and only 1.8% in Gold, according to China Daily.

Presumably China's Gold holdings are about to change significantly. 

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Merry Christmas to All

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Twas the night before Christmas...

To all who come to this blog today I wish for you the happiest of holidays. Thank you for dropping by to indulge my thoughts, my viewpoints, my ramblings.

Holiday cheer to all the realtors, bloggers, R/E watchers and interested parties in precious metals and economic policy.

I enjoy this blog and I enjoy the emails/comments you send and post. If you pop by today, take a moment to leave a comment. I would love to hear from you.

To those who so diligently send me links, thoughts and comments, it is greatly appreciated despite the fact I may not necessary respond personally to each one.

Happy Christmas to all...

The best of the season to you and your families...

And to all a good night.

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Naysayers

Seems like everyone is jumping on the 'housing correction' bandwagon.

The latest is TD Bank who, in a report released this week, say that "the Canadian housing market in 2012 will be a 'tug-of-war,' with low interest rates hauling hard on one end of the rope, and economic uncertainty joining forces with slow income and employment growth to pull back on the other. Ultimately, we expect the economic side of the equation to win out over the near-term."

TD sees a double blow coming. The economy suffering in 2012 and then higher interest rates in 2013, both of which will knock the stuffing out of the bloated housing market.

And how will it affect our little hamlet on the wet coast?

"Among the 12 major markets profiled in this report, Calgary and Edmonton ought to lead the pack. Solid economic fundamentals and the absence of a recent run-up in prices support our call. Toronto and Vancouver do not appear to be as lucky — we have them experiencing a greater-than-average correction in both sales and prices over the next two years."

Yesterday we noted that Garth Turner sees up to a 15% correction nationally with Surrey, a suburb of Vancouver, taking as much as a 30% hit.

Meanwhile the Globe and Mail is urging people "not to drink the housing market kool-aid."

In an article the doesn't pull any punches you are told straight out that "the affordability gauges used by the banks – i.e., people who make money selling mortgages – are too slack. They let people buy more house than they can comfortably afford while meeting their savings obligations. If your mortgage and all your monthly debt payments would exceed 30% of your monthly pretax income, then back off and keep saving. Worried that the price of houses will keep rising and you’ll never be able to afford to buy in? Won’t happen. When people like you are priced out of the market, the market must fall.”

When you combine all of this with Bank of Canada Governor Mark Carney's warnings this week, I don't think it can be spelled out any plainer than that for you.

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To plunge or not to plunge?

Will Canadian Real Estate plunge dramatically over the next few years or not?

Recently Garth Turner opined:

"Most commentors decry my estimate of a coming 15% reduction in the national average, followed by a lengthy period of real estate decline. They want bloody intestines. They want it now. Phoenix is their idea of a good market (prices off up to 80% in some hoods). They relish the thought of screaming Boomers in white golf shoes clinging to a shard of granite c-top while a front-end loader turns their McMansion into landfill. As appealing as that may be, it won’t happen here... What took years to swell will take as long to contract. Remember, the US housing market peaked in the last few months of 2005, and is still correcting more than six years later

It seems many of our delusional visitors have no idea what 15% means. First, this average number would translate into a 0% change in, say, La Broquerie or Chicoutimi (or Fredericton and Thunder Bay), but something closer to 20% in Brampton and 30% in Surrey. Given local conditions, there’d even be individual neighbourhoods exceeding that. As for a comparison with US prices, it’s simply a myth they have plunged 50% across the country."

Turner's excellent post on the issue can be read here.

On the other end of the spectrum is this article by Seeking Alpha titled: Phoenix Phenomenon: Why Real Estate Everywhere Will Eventually Drop Over 50%.

"In cities like Atlanta, Detroit, Las Vegas, Minneapolis, Orlando, Phoenix, and Tampa-St. Petersburg, housing prices have fallen sharply and had lost more than half of their value in many neighborhoods... The question is whether (these) cities are the exception to the rule, or simply experienced their pullbacks earlier than most other places. In other words, is Orlando the anomaly, or will most of the remainder of the United States, Canada, Australia, China, Brazil, and the rest of the world eventually behave like Orlando?"

Personally I'm willing to bet Vancouver will write it's own story and that the story - ultimately - will be just as horrific as Pheonix or Orlando.

However, because of our bankruptcy laws and process, the unwind will be maddenly slow.

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Tues Post#2: Federal Reserve bailout by the numbers

In the first week of December we talked about how Bloomberg had uncovered that the US Federal Reserve bailouts of the banks was much higher than previously known. According to documents released through the Freedom of Information Act, the bailout given to America's big banks was far bigger than the Federal Reserve let the public, and even members of Congress, know.

The US Federal Reserve basically provided free loans of $7.7 Trillion to wall street banks so that they could turn around and buy US Treasuries and made a profit on the interest difference - about $13 Billion (a profit which comes off the backs of the US taxpayers, of course). This is how the Federal Reserve is helping banks make money in this massive liquidity squeeze.

The youtube clip is set up to prevent embedding but you can view it by clicking here.

Another excellent clip involving Alan Grayson, former US Representative, who points out that when combined with the earlier revelations ($16 Trillion reported earlier), the Fed has bailed out the banks to the tune of $26 Trillion while all over America people are being kicked out to their homes via foreclosures.

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Tues Post #1: Part of the Plan

Yesterday we posted that when the housing bubble began to burst in the United States in 2005/2006, the ruling federal Conservative government in Canada moved heaven and earth to shield our economy by protecting the real estate industry.

Cheap credit, artificially suppressed interest rates and government policy were used to fuel and protect the real estate boom in the hopes that the Great Global Recession would pass before the impact him home in the Land of the Maple Leaf.

How important has Real Estate been to the Canadian economy?

In 2010 the Canada Mortgage and Housing Corporation widely discussed the importance of the housing market for the Canadian economy in the CHMC publication 'Canadian Housing Observer'.

The CMHC’s numbers show that real-estate-related economic activity in 2009 contributed more than $300 billion to the Canadian economy.

That accounts for more than 20% per cent of Canada’s total gross domestic product.

Not only did new residential constructions and sales of current houses positively stimulate the economy by creating jobs, creating higher wages, creating investment, and creating government revenues but far more important to the government was the wealth effect motivated by increasing housing prices.

The housing bubble strengthened consumer confidence and, as a result, consumers spent more.

This was crucial for the Canadian economy. While the world was going through the Great Global Recession, this 'wealth effect' allowed Canada to get by without experiencing any real pain.

In an average recession, the economy starts to rebound after 3-5 years.

So the hope has been to get us through the worst of the recession and then allow growth in our resource based economy to mitigate the debt overhand.

The problem is that this was no ordinary recession.

As many in the blogosphere have noted, this economic crisis began with its financial system and as Bank of Canada Governor Mark Carney noted last week, “recessions involving financial crises tend to be deeper and have recoveries that take twice as long.”

And that's the problem... the recovery is not going to come in time.

Our nation's plan of "channelling cheap and easy capital into unsustainable increases in consumption" is just that... unsustainable.

It's forced Carney to publically address what, until now, has been a topic confined to the realm of the blogosphere. To wit that the “debt super cycle” in which debt fuels consumer spending as a driver of the economy is an era which“is now decisively over.”

This public admission is stunning for those who have spent any amout of time watching the statements of public officials.

It's your best evidence that the time of reckoning is rapidly approaching.

Which begs the question... how will it all play out? 

As we posted back in 2009 in 'The Anatomy of a Bubble', no model can predict the timing, highs or lows of any bubble.

But all bubbles - be they real estate, stock market or whatever - tend to follow a pattern traced in human psychology.

And when any given bubble 'unwinds', it usually takes as long to wind down as it took to wind up.

Vancouver's real estate market has taken over 15 years to blow up into it's current state.  As a result one could logically expect that the decline will take years, not months, to play out.

Ideally officials like Carney want to see a gradual unwind. That's the plan.

But can you engineer an orderly unwind?

Things don't always go 'according to plan.' The variable is the unknown... events that upset the plan.

I mean let's face it. If things went according to plan, the Recession would be over by now, wouldn't it?

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Do you hear what I hear?

It's Christmas time in the city and the scarcity of posts from your dutiful scribe is a direct consequence of imbibing in the holiday spirit prevalent at this time of the year.

There's a lot going on and time simply doesn't permit delving into all the topics I would like to cover.

But I would be remiss if I didn't take a moment to reference an incredible speech given recently by Mark Carney, Governor of the Bank of Canada.

As the Globe and Mail noted, "Mr. Carney delivered a discourse so intelligent in its analysis and perceptive in its recommendations that it stands as the best speech delivered by any public figure in Ottawa in a very, very long time."

Carney says that he believes that the Western world stands at a point of “rupture.” For decades, countries borrowed beyond their means – leveraged themselves with accumulations of debt. “That era,” Mr. Carney proclaims, “is now decisively over.”

For many faithful readers, this is not news. However hearing such candor from the likes of Carney is... and it gives you a glimpse of the seriousness and gravity of the situation we are in.

As this blog says ad nauseum, the 2008 Financial Crisis was a severe financial earthquake whose depth and breadth we still do not fully appreciate.

Now... three years later, it is only becoming apparent.

Debt, particularly Sovereign Debt, is the issue of the coming decade.

Carney talks about the “debt super cycle” which occurred all around the world. It's that debt which fuelled consumer spending, not productive investments.

Excessive private debt wound up on the public ledger. The more households and governments borrowed for consumption, the less productive the economy became, which, in turn, means the overall debt burden was less sustainable.

Everywhere in the Western world, a long period of deleveraging – that is, reducing debts – has begun, or must begin.

The global economy, Mr. Carney predicts, risks entering a “prolonged period of deficient demand.” In Europe, there’ll be fiscal austerity, high unemployment and tight credit; in the U.S., personal and government debt will hang over the economy for years. The U.S. economic crisis began with its financial system, and Mr. Carney (agreeing with many others) notes that “recessions involving financial crises tend to be deeper and have recoveries that take twice as long.”

When countries do what Western ones have done and borrow abroad to fund internal consumption, their situations become unsustainable.

Canada, Mr. Carney warns, is falling into that very trap, because “channelling cheap and easy capital into unsustainable increases in consumption is at best unwise.”

Canadians have been running a net financial deficit for more that a decade, borrowing more than they’ve earned. Canadians’ household debt ratio is now worse than the Americans or the British, Mr. Carney says.

“Our demographics have turned, our productivity has slowed, and the world is undergoing a competitive deleveraging. We might appear to prosper for a while by consuming beyond our means. Markets may let us do so for longer than we should. But if we yield to this temptation, eventually we, too, will face painful adjustments.”

I would suggest that Carney has identified exactly what has been happening for the past five years.

When the housing bubble began to burst in the United States in 2005/2006, the ruling federal Conservative government in Canada moved heaven and earth to shield our economy by protecting the real estate industry.

We've had the zero down, forty year mortgage. The ability to raid the RRSP fund for down payments. The Home Reno Tax Credit. Emergency interest rates. First-time buyer’s closing cost credit. Regulations that permit liar loans. Regulations that permit zero-down payments with cash back from mortgage lenders. And CMHC increasing loan value on their books from just over $100 million to well over $700 million while assuming all lender risk.

Cheap credit, artificially suppressed interest rates and government policy have attempted to fuel and protect the real estate boom in the hopes the Great Global Recession would pass before the impacts him home in the Land of the Maple Leaf. In short our government gambled... much like the Trudeau government gambled on oil in the 1970s.

This isn't to excuse Carney's role in all of this, as the blogosphere constantly points out.

But the fact the at the Governor of the Bank of Canada is now completely dispensing with the malarkey about how splendidly Canada has done during the recession - on a regular basis - is a significant development.

Regrettably the average Canadian isn't hearing him.

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Ron Paul predicting the economic mess created by the bursting of the housing bubble back in 2001

More on the situation in precious metals when I can.

In the meantime, I invite you to check out this speech by Ron Paul, current candidate for the US Republican Presidential nomination, which he gave on September 6, 2001. 

Paul foresees many of today's problems (including the bursting of the housing bubble and the debt problems triggered by derivatives) as early as 2001.

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The Gold/Silver Rehypothecation scandal: HSBC Sues MF Global Over Disputed Ownership Of Physical Gold/Silver

If you follow Gold and Silver, a great deal of interest is being focused on an interesting development in the MF Global issue which will have a significant impact on the precious metals.

For years you have heard how the 'gold bugs' have advocated that you hold actual phyiscal Gold and Silver bars as opposed to certificates which 'represent' Gold and Silver.

It has been said that as much as 99 times as much “paper” or digital gold is bought on commodities exchanges such as COMEX, as there is traded in actual delivery of physical Gold and Silver.

What does this mean?

Simply put... there is not enough actual Gold and Silver in the world to match up to all the 'paper' claims for the metal.  Iif all parties “stood for delivery” it would be impossible for the warehouses and the short players to actually meet their obligations, and “someone” would be left standing without a chair.

The amount of physical Gold and Silver that the COMEX delivers on a daily basis is negligible compared to the massive historical short positions that have existed for decades.

For example, during a two-week span across last January and February, COMEX arranged for the physical delivery of 543,500 troy ounces of gold with their contracted warehouse depositories, a figure that represents an average of just 38,786 troy ounces of gold per day. At this rate of daily delivery, it would take the COMEX more than two years to deliver all the gold represented by the current net commercial short position should the holders of long contracts ask for settlement in physical delivery.

Through the use of futures markets, the Commodities Futures Trading Commission (CFTC) has granted bankers a mechanism to perform alchemy and turn paper into Gold on the COMEX by allowing them to establish obscene short positions that represent 25% to nearly 40% of annual Gold production at times while simultaneously allowing them to renege on their fiduciary responsibility to actually physically possess the Gold represented by their short positions. In other words, the CFTC has allowed Gold to operate under the principles of the fractional reserve banking system on the COMEX futures markets.

In Silver the situation is even more obscene.

Since the Great 2008 Financial Crisis, the demand for physical Gold/Silver has ramped up exponentially prompting many observers (including this blog) to focus attention on how the demand for phyiscal has stressed the COMEX system.

For those dubbed 'Gold bugs' or 'Silver bugs' the real issue has always been, “If I asked for physical delivery of an amount of Gold or Silver that I should be able to receive, would I receive it?”

If you were India, China or the United Arab Emirates and you wanted to buy 200 tonnes of gold at the price established in futures markets, but you knew that there was no possible situation whereby 200 tonnes of gold would ever be delivered to you via the futures markets, what would you do?

Would you buy 200 tonnes of gold in the futures markets only to know that you would suffer a default of this delivery and likely be forced to pay a much higher price in the future or would you try to arrange to buy 200 tonnes of gold NOW from the IMF or another Central Bank?

Of course, you would choose the latter tactic.

The fact that Gold/Silver cannot be printed out of thin air is the essential quality that makes it a form of money much more sound than the Euro, the dollar, the Yen or any other form of fiat currency.

This concern of the 'Gold/Silver bugs' has been derided and dismissed for years.

However, tens of billions of dollars of Gold/Silver exist only in digital form on the COMEX and the CFTC has allowed bullion banks to indeed achieve alchemy with gold (and silver) in the futures markets. By allowing these mechanisms ,that have absolutely zero to do with physical supply and demand of gold and silver, to persist bullion banks can suppress the price of paper gold and paper silver in futures markets.

But in the end, they will never be able to perpetually suppress the price of real physical gold and real physical silver. There will come a time when the prices for real physical gold and real physical silver completely sever the already tenuous umbilical cord they maintain to the suppressed prices of gold and silver established by the agent bullion banks of the US Federal Reserve and the Bank of England in futures markets.

Which brings us to MF Global.

Last week we made a post about MF Global, Rehypothecation and Canadian Banks. It turns out that in investment banking, assets deposited with a broker can be hypothecated such that a broker may sell securities if an investor fails to keep up credit payments or if the securities drop in value and the investor fails to respond to a margin call (a request for more capital).

Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings.

This practice of re-hypothecation runs into the trillions of dollars and is perfectly legal.

It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds. In the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated.

When MF Global went bankrupt news immediately spread that investors like Gerald Celente, who was heavily invested in paper futures contracts, got screwed.

His so-called 'gold' held at MF Global was instantly rendered a "General Unsecured Claim" and Celente may or may not receive a pennies on the dollar equitable treatment post liquidation.

What was less known was the fate of physical gold in the hands of the very same insolvent MF Global financial syndicate.

Last week Bloomberg broke a stunning story whereby HSBC was suing the MF Global brokerage trustee to establish who was the rightful owner of gold bars worth about $850,000 and silver bars underlying contracts between the brokerage and a client.

In it's court filing HSBC wrote, "Five gold bars and 15 silver bars underlie eight Comex contracts between the brokerage and client Jason Fane of Ithaca, New York, London-based HSBC."

Both parties (Jason Fane and MF Global) have asserted claims to the bars, creating difficulties for HSBC, which is storing them. Jason Fane claims he deposited the bars with MF Global for storage. And MF Global has used the bars for collatteral in it's own dealings (rehypothecation).

HSBC has asked a judge to decide who the rightful owner is.

“HSBC has received conflicting instructions regarding ownership and disposition of the property. Accordingly, HSBC is exposed to multiple liabilities with respect to the disposition of the properties.”

Fane wrote HSBC after the bankruptcy, asking the bank to transfer the bars to his account at Brink’s, according to a copy of his letter filed in court. The trustee wrote HSBC saying the gold and silver was “customer property,” (property of MF Global, a customer of HSBC) and the bank shouldn’t turn it over to Fane.

MF Global's liquidation trustee James Giddens was basically saying Fane could not have his Gold and Silver back.  The trustee claims MF Global rehypothecated Fane's Gold and Silver as collateral when it purchased CDS contracts. Thus the trustee will be taking the delivery of the said Gold and Silver due to it's SENIOR creditor status.

The crux of this suit is whether or not MF Global was rehypothecating, or lending, or repoing, that one physical asset that it should not have been transferring ownership rights to under any circumstances.

This is at the heart of the whole commingling situation: was MF Global using rehypothecated client gold to satisfy liabilities?

The thought alone should send shivers up the spine of all those who have been deriding Gold/Silver bugs, who have been warning about precisely this for years.

The implications could be staggering.

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