Oh Yeaaah!

Prime Minister Pierre Elliot Trudeau once said that 'People who live at the foot of great mountains are often the last to climb them.'

A succinct analogy about introspective navel gazing that aptly defines Vancouver.

The latest external observer who can see what so many here cannot is Paul Krugman of the New York Times.

Now... I am not a Krugman fan. One of the media's chief promoters of the Keynesian policies driving the Federal Reserve, I have disagreed with a great many of Krugman's columns. But even Krugman appears to be recognizing what got us into the current worldwide financial mess.

Yesterday, Krugman wrote:

• "My take on the US economic crisis has increasingly been that banks were less central than many people think, while the housing bubble and household debt are the key players."

As Krugman comes to grips with this reality he opines that this is why financial stabilization by itself wasn’t enough to produce a V-shaped recovery.

We won't go into the massive amount of debt deleveraging that must occur to rebalance the economy. What stands out is Krugman's next comment.

Looking northward, across the border, Krugman weighs the combination of Canada's ever growing housing bubble with it's ballooning household debt and opines:

• "If I take all that seriously, I should be very worried about Canada."

Those of us who aren't overdosing on the Maple Syrup Kool-Aid are too, Paul.

With each passing month, more and more Vancouverites are convinced we are immune from a real estate-led economic downturn.

Too many people refuse to recognize/acknowledge that emergency level interest rates is the only thing that stands between many families and financial disaster, especially here in Vancouver.

The outcome is not going to be pretty.

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Silver Manipulation story goes mainstream. New York Times headlines: 'A Conspiracy with a Silver Lining'

This is the 2nd post today. Make sure to check out the 1st one below this (So what's been happening on the COMEX?}.

The mainipulation of silver prices which we have been outlining this past week is starting to get attention in the mainstream press.

Here is the article from the New York Times:.

• A Conspiracy with a Silver Lining
  
  Accusations that JPMorganChase and HSBC allegedly manipulated precious metal markets are worth looking into.
  
  By William D. Cohan
  
  As Americans know all too well by this point, commodity prices — for corn, wheat, soybeans, crude oil, gold and even farmland — have been going through the roof for what seems like forever. There are many causes, primarily supply and demand pressures driven by fears about the unrest in the Middle East, the rise of consumerism in China and India, and the Fed’s $600 billion campaign to increase the money supply.
  
  Nonetheless, how to explain the price of silver? In the past six months, the value of the precious metal has increased nearly 80 percent, to more than $34 an ounce from around $19 an ounce. In the last month alone, its price has increased nearly 23 percent. This kind of price action in the silver market is reminiscent of the fortune-busting, roller-coaster ride enjoyed by the Hunt Brothers, Nelson Bunker and William Herbert, back in 1970s and early 1980s when they tried unsuccessfully to corner the market. When the Hunts started buying silver in 1973, the price of the metal was $1.95 an ounce. By early 1980, the brothers had driven the price up to $54 an ounce before the Federal Reserve intervened, changed the rules on speculative silver investments and the price plunged. The brothers later declared bankruptcy.
  
  The Hunts may be gone from the market, but there are still plenty of people suspicious about the trading in silver, and now they have the Web to explore and to expand their conspiracy narratives. This time around — according to bloggers and commenters on sites with names like Silverseek, 321Gold and Seeking Alpha — silver shot up in price after a whistleblower exposed an alleged conspiracy to keep the price artificially low despite the inflationary pressure of the Fed’s cheap money policy. (Some even suspect that the Fed itself was behind the effort to keep silver prices low, as a way to keep the dollar’s value artificially high.) Trying to unravel the mysterious rise in silver’s price is a conspiracy theorist’s dream, replete with powerful bankers, informants, suspicious car accidents and a now a squeeze on short sellers. Most intriguingly, however, much of the speculation seems highly plausible.
  
  The gist goes something like this: When JPMorgan Chase bought Bear Stearns in March 2008, it inherited Bear Stearns’ large bet that the price of silver would fall. Over time, it added to that bet, and then the international bank HSBC got into the market heavily on the bear side as well. These actions “artificially depressed the price of silver dramatically downward,” according to a class-action lawsuit initiated by a Florida futures trader and filed against both banks in November in federal court in the Southern District of New York.
  
  “The conspiracy and scheme was enormously successful, netting the defendants substantial illegal profits” in the billions of dollars between June 2008 and March 2010, according to the suit. The suit claims that JPMorgan and HSBC together “controlled over 85 percent the commercial net short positions” in silvers futures contracts at Comex, a Chicago-based exchange on which silver is traded, along with “25 percent of all open interest short positions” and a “a market share in excess of 9o percent of all precious metals derivative contracts, excluding gold.”
  
  In the United States, trading in precious metals and other commodities is regulated and closely monitored by a federal agency, the Commodity Futures Trading Commission. In September 2008, after receiving hundreds of complaints that silver future prices were being manipulated downward by JPMorgan and HSBC, the commission’s enforcement division started an investigation. In November 2009, an informant, described in the law suit only as a former employee of Goldman Sachs and a 40-year industry veteran, approached the commission with tales of how the silver traders at JPMorgan were bragging about all the money they were making “as a result of the manipulation,” which entailed “flooding the market” with “short positions” every time the price of silver started to creep upward. The idea was that by unloading its short positions like a time-released capsule, JPMorgan’s traders were keeping the price of silver artificially low.
  
  Soon enough, the informant was identified as Andrew Maguire, an independent precious metals trader in London. On Jan. 26, 2010, Maguire sent Bart Chilton, a member of the futures trading commission, an e-mail urging him to look into the silver trading that day. “It was a good example of how a single seller, when they hold such a concentrated position in the very small silver market can instigate a sell off at will,” Maguire wrote.
  
  On Feb. 3, 2010, Maguire gave the futures trading commission word about an impending “manipulation event” that he said would occur two days later, when the Labor Department’s non-farm payroll numbers would be released. He then spelled out two trading scenarios about which he had been told. “Both scenarios will spell an attempt by the two main short holders” — JPMorganChase and HSBC — “to illegally drive the market down and reap very large profits,” Maguire wrote in an e-mail to a trading-commission investigator.
  
  On Feb. 5, Maguire took a victory lap, writing in another e-mail to the trading commission that “silver manipulation was a great success and played out EXACTLY to plan as predicted.” He added, “I hope you took note of how and who added the short sales (I certainly have a copy) and I am certain you will find it is the same concentrated shorts who have been in full control since JPM took over the Bear Stearns position … I feel sorry for all those not in this loop. A serious amount of money was made and lost today and in my opinion as a result of the CFTC’s allowing by your own definition an illegal concentrated and manipulative position to continue.”
  
  In March 2010, Maguire released his e-mails publicly, in part because he felt the trading commission’s enforcement arm was not taking swift enough action. He was also unhappy over not being invited to a commission hearing on position limits scheduled for March 25. Then came the cloak and dagger element: the day after the hearing, Maguire was involved in a bizarre car accident in London. As he was at a gas station, a car came out of a side street and barreled into his car and two others; London police, using helicopters and chase cars, eventually nabbed the hit-and-run driver. Reports that the perpetrator was given a slap on the wrist inflamed the online crowds that had become captivated by Maguire’s odd story.
  
  In any case, the class-action lawsuit contends that between March 2010 and November 2010, JPMorgan Chase and HSBC reduced their short positions in the silver market by 30 percent, causing the metal’s price to rise dramatically, but leaving them still with a large short position. Now, with the value of silver rising nearly every day, the two banks are caught in a “massive short squeeze,” according to one market participant, that appears to be costing them the billions they made originally plus billions more. Whether these huge losses will show up on the books of JPMorgan Chase and HSBC remains to be seen. (Parsing through the publicly filed footnotes of derivative trades is no easy task.)
  
  Nonetheless, the conspiracy-minded have claimed that the Fed must have somehow agreed to make JPMorgan and HSBC whole for any losses the banks suffered if and when the price of silver rose above the artificially maintained low levels — as in right now, for instance. (About all this, a JPMorganChase spokesman declined to comment.)
  
  Some two-and-a-half years later, the Commodity Futures Trading Commission’s investigation is still unresolved, and at least one commissioner — Bart Chilton — thinks that after interviewing more than 32 people and reviewing more than 40,000 documents, there has been enough investigating and not enough prosecuting. “More than two years ago, the agency began an investigation into silver markets,” Chilton said at a commission hearing last October. “I have been urging the agency to say something on the matter for months … I believe violations to the Commodity Exchange Act have taken place in silver markets and that any such violation of the law in this regard should be prosecuted.”
  
  What’s more, Chilton said in an interview last week, that “one participant” in the silver market still controlled 35 percent of the silver market as recently as a few months ago, “enough to move prices,” he said, and well above the 10 percent “position limits” the commission has proposed to comply with Dodd-Frank financial reform law. Since that law’s passage last summer, the commodities exchanges have issued waivers permitting the ownership of silver positions above the limits the C.F.T.C. has proposed, and which were supposed to be in place by January of this year. Yet the waivers remain in place, and the big traders have not been penalized, much to Chilton’s frustration And the mystery deepens: last Thursday, the price of silver fell $1.50 per ounce in less than an hour before recovering. “This was robbery at its most obvious and most vindictive,” wrote Richard Guthrie, a London-based trader, in an e-mail to Chilton. “How many investors lost money and positions to the financial benefit of an elite few?”
  
  It’s getting harder and harder to continue to brush off Andrew Maguire’s claims as the rantings of a rogue trader with a nutty online following. The Commodities Futures Trading Commission should immediately release the files from its investigation into the supposed manipulation of the silver market so the public can determine whether JPMorganChase and HSBC did anything illegal, with or without the help of the Fed. In addition, the commission should start enforcing the 10 percent threshold on silver positions it has proposed to comply with Dodd-Frank law. Basically, the other commissioners must join with Bart Chilton to do the job they are required to do: Protecting the sanctity of the markets and preventing the sorts of manipulation we’ve seen all too often.

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Jumping the Shark

Do you recall the quote from yesterday's post that referenced the New York Times?

"Consumers are about to face a sustained period of rising interest rates."

Almost as if on que, the Royal Bank hiked their rates a quarter of a point. More significantly its the second rate hike in only two weeks!

And why are rates going up when the Bank of Canada hasn't altered their rate?

Because yields are rising in the bond market and it's the bond market, not the Bank of Canada, that funds mortgages.

And without the United States continuing with QE to infinity, the cost of money is rising.

Cameron Muir, our bud from the BC Real Estate Association, was on TV today saying that rates are beginning to 'normalize'. May I remind faithful readers that normal for the last 20 years would be a five year rate of 8.25%

And that's before you factor in inflation.

Which brings the conversation to an interesting post on Bill Fleckenstein’s website Ask Fleck:

• “I am a large volume importer of industrial hardware, mostly out of Asia. I just received my April ocean freight rate update. Container cost up 5% from March and up 21% from April 2009. For my products, the YOY increase represents a 3% increase to cost of goods. Cost of steel as we know is going up significantly and these price increases for us – contrary to what the popular spin may be – are effective immediately. Obviously, as we are replacing fast-turning inventory, we are passing on these increases immediately. About a year ago, I reported to you that our business was extremely slow and our inventories very high. Despite price increases going on offshore, I pointed out that in our world, these increases would take time to trickle through due to the high inventory levels that we and our competitors were sitting on. Our position was that if we had it in stock, we would sell at basically any price for cash flow reasons. Any new inventory would be sold based on actual current cost. Needless to say, the purchases we made through the year were very minimal as we (correctly) were not optimistic about business looking forward.”
  
  “Now, business is still terribly slow but inventories have been depleted to the point that shortages are occurring. These shortages are exasperated by the fact that no one is buying any significant volume of replacement inventory. Our statistics would show that our purchases in March (for delivery this summer) are up about 400% from any given month last year BUT are still only about 30% of our peak going back before all hell broke loose. Can you imagine how this data can be spun by focusing on the former and conveniently ignoring the latter? We feel that we have hit bottom and have reasonable expectations to survive this debacle simply because we have downsized to about 20-25% the company we once were. Our domestic competitors and vendors overseas basically report the same. ... (The) bottom line is this: no one is (all that) busy but prices are literally skyrocketing. Smells like stagflation to me. Anyone who tells me that there is no inflation on the horizon is delusional and in for one hell of a shock.”

In an investment post by Jeffery Sault his readers are reminded that annualized inflation in India is running at about 15% and China is not all that far behind. In the Philippines, March’s inflation figure was just reported at +4.4%, up from the previous month’s 4.2%, with the cost of Philippine fuel/electricity/water up 14.6% over the trailing 12 months.

In North America, since January 2009 the price of copper is up 185%, crude oil is better by 118%, and rubber is higher by 167%. Moreover, from August of 2009 until now hog prices have rallied 75%, while cattle prices have lifted 19%. Such actions caused the Reuters CRB Commodity Index to travel above its 200-day moving average in June 2009 and stay there ever since (read: bullish and inflationary).

Meanwhile, economists continue to insist there is no inflation because wage inflation is non-existent.

If inflation were calculated like it was prior to 2000, it's existence would be evident. But we changed the rules, and pretend it doesn't exist.

Unfortunately it's effects still do.

Jumping the shark is an idiom used to describe the moment of downturn for a previously successful enterprise. The phrase was originally used to denote the point in a television program's history where the plot spins off into absurd story lines or unlikely characterizations. These changes were often the result of efforts to revive interest in a show whose viewership has begun to decline.

The phrase came from a three-part episode opening the fifth season of the TV series Happy Days in September 1977. In hindsight the consensus was that the show went downhill from this point.

Inflation is here.

Rising interest rates are here.

And I'm betting that, in hindsight, this is the moment people will say Vancouver Real Estate 'jumped the shark'.

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Uphill Climb

Interest rates.

As has been noted time and time again on this blog, the story of Vancouver Real Estate has been the story of interest rates... and as they go, so with R/E in the Village on the Edge of the Rainforest.

The stunning rise in land values in our humble utopia have been shaped by a historic 30-year decline in the cost of borrowing.

But as the New York Times noted on Sunday, consumers are about to face a new financial burden: a sustained period of rising interest rates.

It's a paradigm shift that is the inevitable outcome of ballooning sovereign debt levels and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

“[North] Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

The comments of Bill Gross are significant. He is a hugely successful bond fund manager and the co-chief investment officer of Pimco. He personally manages the company's flagship, the Total Return fund, which has $158 billion in assets.

Gross is highly influential and US Treasury secretaries call him for advice. Warren Buffett, the Berkshire Hathaway chairman, and Alan Greenspan, the former Federal Reserve chairman, sing his praises.

And with the collapse of Wall Street, Mr. Gross has emerged as one of the nation's most influential financiers.

In 1999, Mr. Gross warned in his monthly investment column that the dot-com bubble would soon burst. The next year, it did. Despite the market downdraft, Mr. Gross's fund ended 2000 up 12%, and that same year he and his partners sold Pimco to Allianz for $3.3 billion.

In an October 2005 letter to investors, Mr. Gross made one of the most prescient calls of the last decade, warning of the looming subprime mortgage crisis.

And for Gross the next big financial story is going to be the tale of interest rates.

Gross sees the run-up in rates quickening as investors steer more of their money away from bonds and as Washington unplugs the economic life support programs that kept rates low through the financial crisis.

Mortgage rates and car loans are linked to the yield on long-term bonds.

Besides the inflation fears set off by the strengthening economy, Mr. Gross said he was also wary of Treasury bonds because he feared the burgeoning supply of new debt issued to finance the government’s huge budget deficits would overwhelm demand, driving interest rates higher.

Nine months ago, United States government debt accounted for half of the assets in Gross’s flagship fund, Pimco Total Return. That has shrunk to 30% now — the lowest ever in the fund’s 23-year history — as Gross has sold American bonds in favor of debt from Europe, particularly Germany, as well as from developing countries like Brazil.

And as other bond traders follow Gross's lead, the results are starting to impact rates.

Last week, the yield on the benchmark 10-year Treasury note briefly crossed the psychologically important threshold of 4%. Though still very low by historical standards, the rise of bond yields since then is reversing a decline that began in 1981, when 10-year note yields reached nearly 16%.

From that peak, steadily dropping interest rates have fed a three-decade lending boom, during which consumers borrowed more and more.

But those days are ending.

And for young home buyers today (who can consider 10-year mortgages with a stunningly low rate of just 5%), it is inconceivable that rates could migrate to those days of in the fall of 1981 when mortgage rates peaked at 21.5% in Canada.

And while few are willing to forecast rates to return to anything resembling 1981 levels, to those tuned in on Wall Street the question is not whether rates will go up, but rather by how much.

The consensus in the high level financial community is clear. As Terrence M. Belton, global head of fixed-income strategy for J. P. Morgan Securities, summarized, “everyone knows that rates will go higher.”

Just try telling that to anyone around this town.

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