Seasons don't fear the reaper, nor do the wind and the sun and the rain... soon we will be like they are.

So, according to our buddy Cameron Muir in yesterday's post, Asian hot money is keeping our market 'firm'.

Now you know I dismiss this as more R/E spin-doctoring that attempts to contain seller panic on the current state of the Vancouver real estate market.

And who can blame them, it is a palatable fear.

Listings are exploding, sales are down almost 10% nationally, there has been a minor uptick in interest rates, factors which are combining with tighter mortgage rules & the looming HST to cast a huge pall over the market.

But Asian saviours? Who is our buddy Cameron kidding?

We saw yesterday how there was no Asian savior for the biggest sale in Vancouver last month.

This tony Shaughnessy mansion at 3639 Osler Street, a 15,000 square foot home on 31,000 sq ft of gated manicured grounds (complete with it's own indoor pool) languished on the open market for almost half a year - it's initial asking price of $16.8 million unrealized.

Isn't this the type of property Asian investors are supposed to be climbing over each other in a desperate attempt to secure in frenzied bidding wars?

Apparently not because after six months of no takers (and several price reductions) the seller finally had to accept a 34% haircut (a cool $5 mil) off the original asking price to complete the sale.

Make no mistake. The seller had the same fears about the market that our buddy Muir is now trying to quell. He saw the writing on the wall and slashed his asking price knowing that Asian hot money wasn't there to protect value levels for him.

And what of our sound Canadian banks who, we are told, have not engaged in risky lending practices?

As we discussed on Wednesday, a civil forfeiture case currently before the courts is calling into question those sound lending practices. Examples are being entered into evidence showing that million dollar mortgages have been granted to lenders who simply do not have the capacity follow through on with their requisite monthly payments.

And this at a time when interest rates - and monthly payments - remain at low emergency levels.

Perhaps even more disturbing is that we are privy to this information only because it comes to us as a by-product of a grow-op forfeiture court proceeding.

How many similar million dollar mortgages languish after having been approved to similar risky borrowers?

On one of the real estate chatboards a thread has been started on foreclosed properties currently available.

With interest rates producing the lowest monthly payments we will ever see on this level of debt in our lifetimes, defaults abound.

Take this 2800 sq ft, 5 bedroom, 3.5 bath home on a 50 x 112 lot on the fashionable west side of the city of Vancouver.

Our 'diligent Canadian banks' facilitated this loan to a borrow who turned out not to be the secure risk they like to boast about.

(click on photos to enlarge)

Purchased in 2000 for $544,000, the property now languishes in foreclosure for $1,388,000.

(A figure that has anyone outside of Vancouver staring in utter disbelief at these photos... which is why I give you one of the listing links here)

We don't know the tale of misfortune that resulted in the financial distress of the former owner - nor do we seek to rub our hands in glee at his plight - but it is not a stretch to see that this situation screams out as an example of banks granting HELOCs without re qualifying lenders to ensure they can afford the payments.

But daily we are fed the malarky from our banks and political leaders that this situation does not exist in Canada.

As the case before the courts proves, our Canadian banks - just like their American counterparts - have been irresponsible in their lending practices. Decoupled from risk by the policies of the CMHC, why wouldn't they be?

Taxpayer's are on the hook for mortgage similar to this one through CMHC. And given that over 95% of Canadian mortgages have been CMHC secured in this crisis, the Canadian taxpayer is at a tremendous potential risk.

More importantly Asian hot money has not intervened here to save the lender's (and the taxpayer's) ass in this case and it will no doubt take a 35% haircut on the selling price here to move this property under the current market condition.

And that will come out of our taxpayer pockets.

As the foreclosure thread on Real Estate Talks demonstrates, there are numerous other properties in the $600,000 range that also languish in foreclosure - their owners not quite the secure lending risks our (supposedly) diligent Canadian banks claimed.

You can see examples here, and here, and here.

Where is the Asian hot money?

This is all happening despite the fact interest rates haven't started going up in earnest yet.

What is going to happen when rates start going up? Think about that for a moment.

The financial crisis is on the verge of entering stage 2 of it's devastating story. People are beginning to understand that the 'recovery' is more smoke and mirrors from the manipulation of stimulus money than actual economic recovery.

The great Canadian commodities trader Jim Sinclair has branded this misleading recovery P/R as the 'Management of Perspective Economics' (MOPE). As the stimulus runs it's course and the necessary deleverging begins, we will see that the recovery isn't taking hold and the examples cited above will increase dramatically.

We are no different from the United States.

We have only delayed the tipping of the first domino's that will trigger havoc on our real estate market.

In the process we have deluded ourselves into believing those domino's aren't poised and ready to fall.

They are, and they will... regardless of the MOPE spewed by Muir and company.

Before too long now the public at large will come to understand this.

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Don't fear the reaper...

So the main story in real estate right now is the explosion in listings and the dramatic drop off in sales as interest rates inch up and credit rules tighten.

In California the real estate collapse first started to show at the top end of the market with high end properties suffering dramatic drop offs.

Are we starting to see that here?

It's possible. How else to explain the British Columbia Real Estate Association's chief mouthpiece, Cameron Muir. coming out this week to pump the high end of the market with this puff piece on Global TV:



Muir tries to calm the market with the rational that investor class Asians are keeping the market up and protecting real estate values here. This follows several other news stories this week promoting the same viewpoint.

That, btw, is you first clue that the 'story' is being engineered as an R/E PR operation. We saw this last year when the market dropped... real estate associations begin their PR campaign to re-assure sellers to prevent them from panicking and setting off a cascade of price reductions.

Personally I love this phase and find the whole gamut of media manipulation fascinating.

There are reports, on various real estate blogs, of high end R/E sales completing at anywhere from 5% - 14% below asking prices... a far cry from the tales of bidding wars of the last few months with houses selling far above asking.

But perhaps the most telling sale is this one documented on Larry Yatkowsky's site. A 15,000 square foot home on almost an acre of land at 3639 Osler Street sold last month.

In January the asking price was $16,800,000.00.

It sold in May for $11,080,000.00 - $5,720,000 less than asking or 34% less than what the seller originally wanted.

Did he grab an offer for 34% less than what he was asking because the market is clearly starting to tank?

It's still early in the process yet, but with Cameron Muir doing his Blue Oyster Cult impression already, events are clearly starting to show a shift in fortunes.

Asian money didn't prevent a collapse in California and it won't here either. Let's face it. Why buy a property at full value if you sense in a year you might get it at half off?

The 'wealthy Asian investors' are wealthy... not stupid. Which explains the R/E PR machine's need to begin trying to calm the panic amongst sellers.

Go ahead... take Cameron's hand. "You'll be able to fly."


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Harbinger

This item has been covered on a number of local blogs, but the item is significant and will prove to be a harbinger of things to come.

The newspaper story in question (which you can read in the Province newspaper here) tells us about a real estate property which is now before the B.C. Supreme Court. The case is a potentially precedent-setting civil forfeiture that calls into question the role banks play, knowingly or unwittingly, in the province's multibillion-dollar drug trade.

But while the newspaper story focuses on the role played by banks in financing the grow-op, our focus zeros in on a revealing section within the story... one that confirms what many bloggers have suggested is going on with mortgage approvals in this country.

Every week we are reminded that the reason Canada has not suffered a housing collapse like our American cousins is that our banking system has been much more diligent with mortgage approvals and our banks have properly managed risk.

Thus, supposedly, there are no subprimer's in Canada.

Numerous posts have been made on this blog discounting this. We have subprimers. The conditions just haven't sufficiently presented themselves for their carnage to be unleashed on our market - yet.

Which takes us to the recent Vancouver Province newspaper story.

As details of the forfeiture case come out, it appears that the courts have come across several circumstances where banks have refinance mortgages on million dollar homes for lenders who, allegedly, were unable to provide proof they had the means to make the hefty monthly payments (about $4,000 a month).

That's right... million dollar mortgages approved without adequate proof of income to pay said loan.

In one case a prospective lender asked the Bank of Montreal to mortgage the property in question for its full value ($976.000) on Oct. 22, 2008. In August 2009 Vancouver police raided the home and uncovered a massive grow-op. Two days later, despite the raid, the lender sought and received an additional $70,000 mortgage on the property from the Royal Bank of Canada.

Make no mistake... this is not a 'one-off' story.

In the United States a minor drop in real estate values combined with mortgage resets at higher interest rates triggered the massive housing collapse we have witnessed over the past four years.

Those two conditions haven't come to pass in Canada, yet.

But they will.

And when they do, real estate in bubble areas of our country will suffer the same results as real estate in the bubble areas of the United States. And as the market here collapses inward upon itself, story after story will start to surface about other highly questionable loans that have been made.

This article is simply a portent of things to come.

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Unsustainable

"Unsustainable."

That's the single word that summarizes everything you need to know about the next 20 years. The only question is how long can the charade be carried on before the piper has to be paid.

And the single word is provided courtesy of none other than Fed Chairman Ben Bernanke who told the House Budget Committee this week that the US Debt level was "unsustainable."

"Our nation's fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession."

Bernanke went on to say that the budget deficit was necessary to help get the nation out of recession but will have to be addressed in the long term, particularly in light of the European debt crisis.

Sovereign Debt... the story of the next 20 years.

I note, with interest, that CNBC will be airing the BBC production of 'The Last Days of Lehman Brothers' today. For your enjoyment, this dramatized quote from Hank Paulson...


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Rationalization

"It's different this time."

That's the powerful phrase that, for many real estate bloggers, is the embodiment of rationalization in the housing bubble.

We all know it is just that... rationalization. But it's fascinating how easy it is to lose sight of that understanding. More on that momentarily.

In 1987 Paul Kennedy first published The Rise and Fall of the Great Powers: Economic Change and Military Conflict From 1500 to 2000. The book explores the politics and economics of the Great Powers from 1500 to 1980 and the reason for their decline.

Kennedy argues that the strength of a Great Power can be properly measured only relative to other powers, and he provides a straightforward and persuasively argued thesis: Great Power ascendency (over the long term or in specific conflicts) correlates strongly to available resources and economic durability; military "over-stretch" and a concomitant relative decline are the consistent threat facing powers whose ambitions and security requirements are greater than their resource base can provide for.

We would all like to think the U.S. will not suffer the same problems as those who came before it... the Soviet Union, Great Britian, France, Prussia, Austria-Hungary, etc.

The fact of the matter is that the U.S. is already dealing with too much debt and not enough money. The cracks in the economy are getting bigger, not smaller, as the “recovery” camp would have you believe. 40 million U.S. citizens on now food stamps — a new record. It was reported just last Friday that “Up to 300,000 Public School Teachers May Lose Their Jobs This Year Due to Local Budget Cuts.”

And since the individual U.S. states cannot print money, the U.S. federal government is going to try to save teaching jobs with an emergency federal spending bill. It will mean an additional $23 billion to the deficit. Illinois has reportedly stopped paying its bills. Contractors are owed $4.4 billion, and nonpayment may cause a wave of bankruptcies in that state. There are nearly 3 dozen other U.S. states facing similar severe budget problems.

In the latest report from Shadowstats.com, economist John Williams says look out for another nasty downturn in the economy because the money supply (M3) is shrinking. Williams writes, “... near-term economic activity will turn down, with major negative implications for the federal budget deficit, U.S. Treasury fundings, systemic solvency and the U.S. dollar. Such developments should place significant upside pressure on domestic inflation. U.S. difficulties eventually should dwarf the European sovereign solvency concerns”

So, what will perform well in this environment?

That, my friends, is the question I get peppered with half a dozen times each day.

Williams believes you better start looking for an exit if you are holding dollars, stocks or bonds. According to Williams, “the long-term outlook for the U.S. dollar and U.S. equity and credit markets remains bleak, while the long-term outlook for gold and silver remains extremely strong.”

Yesterday we talked about the BMO report "Go To Cash" which was advising it's clients to dump equities.

Reflections from the Doomer side of the net?

Hard to say.

No one can deny debt is out of control.

Some would suggest that this is no time for emotion to overtake reason. Reason being smart investments in tried and true economic vehicles which, under normal circumstances, are sure to be wise choices as the economy recovers.

Normalcy, we are cautioned, will return.

But evidence is mounting that - in the broader terms of history - we are at that turning point encounted by of the former powers. That same turning point which was undeniable for Prussia, Austria-Hungary, France and Great Britain.

In the face of all the mounting issues for the United States, in the face of all the mounting evidence... can we really deny what is happening around us.

Isn't it tantamount to saying it will be different this time... different this time for the United States?

Maybe it isn't fear and emotion.

Maybe it's just understanding that it probably isn't different this time?

Just a thought.

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BMO: Go To Cash... Now!

How bad is the evolving debt crisis in Europe?

Well... Bank of Montreal has some simple investment advice for it's clients.

Get out of equities and go to cash!

Ummm... can't get much more straightforward than that.

In fact that's the title of the report from BMO's Quant/Tech desk.

From the Report:

"We advocate switching out of equity positions and going to cash. The European sovereign debt crisis appears to be nowhere near over. The global credit environment is worsening. Cost of capital is going up and availability is going down. There are large gaps between where the credit market prices risk and where the equity market is priced. Equity is lagging the deterioration in credit conditions. Moves in currency, equity and commodity markets are mirroring the moves in the credit market. Global growth, in a credit-constrained environment, will slow. Profits will be squeezed by the higher cost of capital... We advocate a zero weight toward equity, and that investors convert their equity positions to cash."

The global credit environment is worsening and the cost of credit is going up. That's been my message for months now and we welcome BMO to the doomsayer bandwagon.

And when it starts to go up, it's going to go waaaay up.

It's not rocket science folks. That's why a major real estate purchaase you plan to hold, purchased over the last three years, has been the absolute worst move of your financial life.

For those who so desire, the BMO report is below.

Go To Cash

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You know what's coming...

Sigh.

I find it amazing that what seems so obvious escapes the consciousness of so many.

The latest to wake up and smell the coffee are the brilliant economists at the National Bank who have come out with the insightful conclusion that the impact of rising interest rates on the residential housing sector "could be dire" in Canada.


Really? Whodathunkit?

“Though the Bank of Canada has done well to set its rate normalization process in motion, the fact remains that the stakes at play are high, with home prices and household debt at record levels relative to income,” economists Matthieu Arseneau and Yanick Desnoyers said in a report. “The residential real estate sector, which is extremely sensitive to interest rate fluctuations, could have the wind knocked out of its sails if interest rates do nothing more than normalize.”

No kidding.

And what will happen if they do more than 'normalize'?

The impact on our Country, economy and government finances is going to be severe.

Once again, I shake my head.

Arseneau and Desnoyers are right, but where was this insightful analysis when the blogosphere was initially sounding the alarm last year?

Meanwhile the Toronto Star has taken these observations to their logical conclusion and noted that the CMHC is Canada's very own ticking time bomb.

The Star article concludes exactly what has been said here for the last 18 months... that the CMHC is "a potential financial disaster lurking just over the horizon, waiting to put us into the real world of true financial crisis."

Sigh... we are so screwed.

I am reminded of events in mid 2008. The United States was spiraling into recession and our politicians steadfastly maintained we would not be effected.

As world events continue to spin wildly, we continue to believe that we will not be impacted.

We are watching a 5.9% annual decline in the M3 money supply, the deepest decline since the early 1930s banking crisis. This is a post World War II record drop in the inflation-adjusted M3 and it signals an intensifying business contraction. Many observers believe we are heading for a renewed recession and it will set the stage for a U.S. solvency crisis and severe inflation threat.

Meanwhile British Prime Minister Cameron has come out and that the UK deficit is worse than 'previously thought'. That's British for "oh sh*t".

Tempering the UK announcement is word that that the U.S. government’s total debt will risee past $13 trillion for the first time in history later this month. The amount owed will surpass GDP in 2012, based on forecasts by the International Monetary Fund.

“Over the long term, interest rates on government debt will likely have to rise to attract investors,” said Hiroki Shimazu, a market economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “That will be a big burden on the government and the people.”

THAT, my friends, is the understatement of the year.

Just as Canada could not escape the effects of the recession which swept over the US in 2008, nor will we escape the impact of the sovereign debt crisis that is bearing down on the UK and US.

As all this plays out, you don't want to be carrying debt... especially hundreds of thousands of dollars in mortgage debt.

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The Story In Your Eyes

About a year and a bit ago it was time to pull up the ottoman, grab a bag of popcorn and watch the saga play itself out.

Of course a great many were gleefully anticipating a Canadian-style housing collapse that would mimic the great American catastrophe playing out on our cousins to the south.

But it was frustrated despair that many felt as the Canadian story took an unexpected path - government intervention, emergency interest rates, CHMC directives to approve sub-primers.

A watched pot never boils. And with that thought, I am now reminded of the classic Moody Blues song, The Story in your Eyes.

"Listen to the tide slowly turning
Wash all our heartaches away
We're part of the fire that is burning
And from the ashes we can build another day"

For the past month and a half we have watched the media slowly begin to grasp the true condition of what has been driving our real estate market, watched the bond market start to drive interest rates up and listened to the Governor of the Bank of Canada 'tsk-tsk' Canadians for overdosing on the crack cocaine of the emergency level interest rates he has set out on the table.

The result?

As CREA’s economist Gregory Klump says, “with interest rates soon expected to rise, Canada is widely believed to be entering a typical demand-driven downturn due to recent prices increases and rising interest rates."

Typical? It will only be classified as 'typical' if the bleeding is minimized. Last month's statistics are out and the 'demand-driven downturn' has begun.

Detached houses prices are down 4.6% from April, listings are exploding and buyers are exiting en masse.

And yesterday... the Bank of Canada doubled their emergency interest rate from 0.25% to 0.50%.

This comes on the heels of StatsCan reporting that the personal savings rate of Canadians has plunged. We now spend, on average, 97.2% of what we earn.

Debt has postively exploded among Canadians.

Mortgage debt is at an all-time high and we’ve never owed so much on credit cards, lines of credit, car loans and/or home equity loans.

And this debt orgy has all been built up when interest rates are at the lowest point in history.

The email inbox reveals numerous comments that I am gleefully crowing over the hardships I expect to befall my fellow countrymen.

Nothing could be further from the truth.

"But I'm frightened for the children
That the live that we are living is in vain
And the sunshine we've been waiting for
Will turn to rain"

I focus intently on the obvious conditions which are brewing because to ignore what is coming is pure folly.

As I said Monday, understand what is going on around you. We live in extraordinary times, most of us just don't realize it yet.



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When the truth is found to be lies, and all the joy within you dies...

Over the course of the last year the Vancouver Real Estate Market has rebounded in stunning style. As lotusland R/E values achieve breathtaking new highs, some have taken to doubting what we all know: that Vancouver R/E is in a massive bubble that will burst in spectacular fashion.

Deep down we all know what's happening.

Emergency interest rates have acted like crack cocaine to house-lusting buyers who have irrationally reinflated the housing bubble. All fueled by a federal government that has plowed $70 billion tax dollars into a ravaged Canadian financial system so that they could buy up mortgages from the big five banks through the Canadian Mortgage and Housing Corporation and hide the bad debt by taking it off the books of the banks.

Another $200 billion was then used to establish a fund to backstop the banks – money the banks could borrow if they needed it.

The Harper government called it the 'Emergency Financing Framework'.

Yet so many on the Wet Coast have ignored the obvious and rationalize that our Canadian banking system is among the soundest in the world. This fairy tale has convinced us that the R/E market resuscitation is legitimate and actually the work of the free market directing overseas investment into the prosperous and undervalued Olympic City of Vancouver.

Uh-huh... Balderdash!

Last week, in the Burnaby Newsleader paper, we got a taste of what has really been driving the market.

According to Angela Calla, a mortgage broker with Dominion Lending Systems and the host of CKNW’s Mortgage Show, 70% of the province’s real estate purchases last year were first-time buyers.

“The average income we were seeing last year was $45,000, either combined or from one person,” said Calla. “And a 5% down payment was the average from that same demographic.”

Given that we are the 'land-of-the-million-dollar-single-family-homes', those are chilling statistics.

Our housing market is being driven by over leveraged buyers who exist solely because the federal government now insures virtually all mortgages through CMHC.

This bit of fiscal magic is what has greased the wheels of the credit machinery in Canada and put the North America real estate collapse in abeyance here in Canada.

As Murray Dobbin noted on his blog, the Harper-lead federal government did all of this as deliberate political policy.

In an effort to prop up the real estate market in 2008, the Harper government directed the CMHC to approve as many high-risk borrowers as possible to keep credit flowing. CMHC described these risky loans as “high ratio homeowner units approved to address less-served markets and/or to serve specific government priorities.”

The approval rate for these risky loans went from 33% in 2007 to 42% in 2008. By mid-2007, average equity as a share of home value was down to 6% — from 48% in 2003.

According to CMHC numbers Canadian banks increased their total mortgage credit outstanding by only 0.01 per cent from the beginning of 2007 to January 2009.

It means the Canadian government has been almost 100% responsible for all the mortgages issued over the last three years.

And in 2009, as we have just learned from Ms. Calla, 70% of the province’s real estate purchases were from first-time buyers whose average income was only $45,000, either combined or from one person.

Classic sub-primers.

Canadians have been borrowing money at unprecedented levels and now owe a record $1.41 trillion, putting Canada in the No. 1 spot among OECD nations in terms of consumer debt to financial assets.

Every week I get emails from people asking me for investment advice.

It's simple.

Understand what is going on around you and position yourself to take advantage of it.

Real Estate is about to implode massively, hundreds of thousands of Canadians are going to be financially ruined and the Canadian government will be on the hook so badly we will make the Greeks look like fiscal conservatives.

Read the writing on the wall... a once-in-a-multi-generational opportunity is about to present itself.

Get out of debt, get liquid and invest in that which will explode in in value in this environment.

You can't prevent what's coming nor can you help those who are going to be wiped out. But since you can see what lies ahead, get ready to take advantage of it.

What more do you need to know?

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Panic?

So much going on.

BBC Newsnight held another great financial round table discussion which brought together Hugh Hdenry, Gillian Tett and Jeffrey Sachs.

Hugh Hendry is a Scottish fund manager who has become prominent in the UK for his commentary on the financial crisis and is known as the most high-profile Scot in the controversial Hedge Fund sector.

His take on what is going on in Europe? "I would recommend you panic. The European banking system is in a crisis... Let's purge this system of its rottenness. Let's take on a recession. It's going to be tough, people are gonna lose their jobs. They are going to lose their jobs anyway. We can spread this over 20 years, or we can get rid of it over 3 years."

You can see the full segment here.

Speaking of banks, Murray Dobbin has another excellent post on his blog about the Canadian banking system which you can see in it's entirety here (hattip to the faithful reader who posted the link in the comments section).

Dobbin succinctly summarizes how Canada has subsidized it's banking system making Canada the third worst of the G7 countries (behind the US and Britain) in terms of financial stabilization costs.

I highly encourage you to read Dobbin's article.

It outlines exactly why Canada has a housing bubble and shows how we are simply a pinprick away from it all blowing up.

As Hugh Hendry says, I would recommend you panic.

Time is running out to prepare for what is coming.

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Sunshine, lollipops and rainbows everywhere

Ahh... ya gotta love it.

Almost as if on Que, enter the Canadian Real Estate Association trying to slap down yesterday's bank economist's attempts to piss on the R/E parade.

"Don't expect big drop in B.C. home prices," trumpets the CREA. "If you are waiting for housing prices to drop substantially in B.C., it's probably not going to happen."

Of course not, real estate only ever goes up.

CREA Chief Economist Gregory Klump predicts a small decline in the average price in B.C. in 2011. "After that it will likely stabilize so what's going to happen is over time incomes will continue to rise as well. So that's going to return the ratio to its long term average. It's going to take longer than elsewhere in Canada because you're farther away from a long term average than other provinces are."

But if Klump's prognosis is still no pessimistic for you he quickly adds that "the price-to-income ratio may be affected by investors - again skewing the market upward."

Leslie Gore would be so proud.

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The Trigger

Just getting back from my own long weekend and it's gonna be too late for a proper post. Perhaps the most interesting developments on the real estate front this weekend is the release of two seperate reports that conclude that most homes in Canada are overvalued.

Doesn't exactly rate as a 'newsflash' to this blogs faithful readers, but I was drawn to this tidbit from CIBC bank economist Benny Tal:

“The fact that prices are overvalued today does not necessarily mean that they will crash tomorrow. A violent market correction needs a trigger such as the sub-prime crisis which ignited the U.S. real estate meltdown, or abnormally high interest rates as was the case during the 1991 property crash in Canada. Fortunately, that is not on the horizon this time around.”

I'm not sure which is more stunning. Seeing the big banks finally admit that real estate prices are overvalued... or the sheer audacity of denying that there are triggers present that could ignite the real estate powderkeg.

More on this during the week.

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It's Different Here

Last September I wrote a post about Mike "Mish" Shedlock, a top indie blogger from the United States. His blog (MISH'S Global Economic Trend Analysis) is consistently rated one of the top blogs on the internet.

On Saturday he posted an email he received from Canada defending the Canadian Housing Market and gave his reply. You can see it on his site here. I am going to reprint it here. Needless to say, I agree wholeheartedly with Mish.

• In response to (a post I made titled) Canada's Household Debt Reaches Record $42,000 a Person, I received an email from Paul Kilby of Canada (city unknown), who thinks it's different in Canada. After correcting at least 20 typos and spelling errors,
  Paul writes...
  
  As a Canadian I take great umbrage at yet another irresponsible bearish article from you.
  
  Reasons:
  
  1)Your type of advice has lost investors a double over the past 15 months,
  2)You have no understanding of how high ratio mortgages are funded in Canada(hint: Its not the cowboy Fannie, Freddie, package them and sell them as AAA debts etc),
  3)Canada's vast natural resources and tiny population largely insulate us from all but the direst long lasting downturn which we are obviously not having worldwide nor are we likely to,
  4)Our banks are very solidly capitalized and would require a 25% downturn in real estate values to even begin to dent this solid position as well as vast defaults on other debts. That's nationwide. We are not, I repeat not, oversupplied in housing in the vast majority of the country,
  5) Barring a worldwide collapse that would make 08-early09 look like child's play what calamity do you have in mind that would knock Canadian RE values for such a loop,
  
  Even you must admit the most likely scenario now is a world muddling through the next 3 to 5 years, hardly the stuff real estate collapses are made of.
  
  Do I think we will have a correction in overheated markets (Van to Calgary. Yes, but nationally this will likely translate into a 10 to 15 % overall decline and likely take 18 months to 2 years to complete.
  
  In case you haven't noticed, Bernanke, Geithner et al will not permit asset prices to collapse worldwide, the US dollar be damned. As an American this must be very upsetting to you but please don't pretend to know anything of Canada s economic position as you clearly don't.
  
  Paul Kilby
  
  
  Dear Paul...
  
  It is not different in Canada no matter what you think.
  
  However, let's start at the beginning of your rant. For starters, I did not cost anyone in Canada a dime. Most of my readers believe as I do and were not about to plunge into an overheated market no matter what I said.
  
  The rest are fools like yourself who think laws of economics do not apply to Canada because "It's different here". Those people bought regardless of what I said.
  
  Secondly, I am very aware of how the Canadian mortgage system works. Your system is arguably much worse than the US system of passing the trash to Fannie and Freddie.
  
  Canadian banks can and do directly pass every garbage loan to the Canadian Central Bank. In the US, Fannie and Freddie (in spite of their numerous faults), were actually among the more sane players in avoiding subprime slime.
  
  The worst of the trash in the US went to hedge funds, pension plans, foreign investors, etc.
  
  Canada's policy avoided the bank failures we saw in the US, but at the expense of bloating the central bank balance sheet with garbage. That policy will work until it doesn't.
  
  Paul, I have heard it all. I received taunts in 2005 about my housing crash call, in 2006 about my deflation call, in 2007 about my commercial real estate crash call, also in 2007 about my Europe is as bad as the US currency call.
  
  I even received taunts from deflationists telling me that it was irrational to believe in deflation and gold at the same time.
  
  My second favorite taunt came in October of 2007, the very day the market peaked. That day, I received an email from someone telling me "Mish, we are having Turkey for Thanksgiving and you are the turkey"
  
  My favorite set of taunts came during summer of 2008 when crude hit $140. That week I received numerous emails calling me an idiot for saying all time record lows across the entire curve were coming in US treasuries.
  
  Now, I have you telling me it's different in Canada. You sound just like the clowns who thought it was different in Florida, it was different in Las Vegas, it was different in San Diego, and it was different in Portland.
  
  Well I have news for you. It was not different in any of those places and it is not different in Canada either.
  
  That said, I certainly am not always right, especially on timing.
  
  I freely admit I was surprised that Canada was able to keep its housing bubble going. The same applies to Australia where I greatly sympathize with Australian economist Steve Keen who recently lost a high profile bet on home prices down under.
  
  As for "In case you haven't noticed, Bernanke, Geithner et al will not permit asset prices to collapse worldwide", that is one of the most ridiculous statements I have ever heard, because it it ignores hindsight, which should be 20-20.
  
  The S&P crashed. The Nikkei crashed. China crashed and in spite of world record stimulus from numerous central banks, home prices in the US are still falling.
  
  Thus, regardless of what Bernanke wanted, asset prices did crash, and they never fully recovered, especially housing.
  
  Finally, you tell me it's different in Canada because of natural resources. Pray tell, what percentage of the Canadian population works in mining or natural resources sectors?
  
  A Canadian housing crash is a given. Timing it is the only issue. Furthermore, the bigger the bubble the bigger the crash. Only fools believe "It's different in Canada".
  
  The pool of greater fools always exhausts itself. Timing it is the only problem. One timing indicator that frequently marks the top is taunts from the true believers who think "It's different this time."
  
  It never is.
  

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It will be complete chaos

You've seen me say it before. And I will say it again... the financial crisis of 2008 was a profound earthquake, the reprecussions of which we still do not fully appreciate.

The aftershocks continue.

Yesterday the German government announced they were banning short-selling of the banks or betting against bonds.

They are doing this because they think the financial crisis is going to get worse.

And, as this article from the Telegraph notes, the response of the markets is expected to be extreme. Traders greeted the move with a mixture of anger and astonishment.One bond trader said he expected Wednesday's trading session to be one of the most volatile in living memory:

"It will be complete chaos, I really don't know what the Germans think they are doing... Without the two-way flow the German market is likely to become utterly dysfunctional... and it raises the long-term question of who is now going to want to buy their debt.""

Will German bonds (called Bunds) collapse today?

The story of the decade will be sovereign debt, a tale which will ultimately drive interest rates sky high.

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Meltup - the youtube video

Spent last night watching this 55 minute video from Inflation.us that is now making the viral rounds.

It has some parts I don't agree with and but it outlines, in simple language, economic facts which are undeniable.

Inflationist or deflationist, I think it's worth checking out.



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Pardon?

I simply shake my head.

What else is there to do?

Listening to one of my colleagues this week tell me about Mary (not her real name), a single mom who is employed in our company who had bought a home in New Westminster recently.

A $725,000 home.

And Mary, after raiding her RRSP of $7,000, scraped together the 5% downpayment and was now the proud owner of a $695,000 mortgage.

This on an annual salary (including overtime) of just over $64,000.

How is this possible? Emergency level interest rates combined with CMHC insurance, of course.

With this as a backdrop, I almost choked on my morning coffee yesterday when I read that Finance Minister Jim Flaherty had proclaimed that "there does not appear to be a bubble in the country's housing market and that the level of consumer defaults has not increased in any significant way."

Heaven help us!

As many of you are probably already aware, a report by the Certified General Accountants Association of Canada released on Tuesday showed that Canada ranks first in terms of debt-to-financial assets ratio among 20 OECD countries.

The report, titled "Where Is the Money Now: The State of Canadian Household Debt as Conditions for Economic Recovery Emerge", showed Canada ranks first in terms of debt-to-financial assets ratio among 20 OECD countries. We are ahead of the Slovak Republic and - remarkably - Greece.

The U.S. came in a close fourth.

"When household indebtedness is measured as a ratio of consumer debt to financial assets, it becomes clear that Canadian households rely much more heavily on consumer credit than their counterparts in other countries," the report explained. Canadians' debt-to-income ratio reached 144% by the end of 2009.

Household debt in Canada reached a new high of $1.41 trillion in December 2009. If household debt was spread among all Canadians, each person would hold more than $41,740 in outstanding debt - an amount 2.5 times greater than 1989, according to the study.

Experts in the report point out if mortgage rates go up by just two percentage points, mid-income to mid-to-high income families could face having to cut 9% to 11% from "other expenses," in order to maintain their current standards of living.

And we all know full well that this isn't a hypothetical situation that the report is posing.

(everyone, that is, except Minister Flaherty)

Mortgage rate increases have already begun as lending institutions, anticipating that the Bank of Canada will increase its key lending rate in July or sooner, have already increased their fixed mortgage rates.

Watch what is happening in Greece, Portugal, Spain... and soon the UK.

Because when interest rates spike upward, and the Government of Canada (through the guarentees of the CMHC) is called upon to reimbuse the $650 Billion in secured mortgages... you will see the bond vigilantes turn against our country in a dramatic and violent fashion.

It will not be pretty.

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Inflation in Argentia is at 25%

I'm always amazed at the number of people who scoff at the suggestion that inflation is a concern right here, right now.

It is taking hold around the world as we speak.

The latest example comes from Argentia.

Annual price increases in South America’s second-biggest economy are more than 25%, which would make Argentina’s inflation rate the second highest in the world behind Venezuela. Argentina’s statistics agency said prices rose 9.7% in March from a year earlier.

Quickening inflation in South America’s second-biggest economy isn’t a concern only for those trying to buy groceries. Doubts about the government’s data mean investors demand higher yields on Argentine bonds, said Edwin Gutierrez, who manages $5 billion in emerging-market debt at Aberdeen Management Plc in London. The current yields on Argentine debt of about 12% percent are unsustainable, he said.

The extra yield investors demand to buy Argentine bonds over U.S. Treasuries is 696 basis points, or 6.96%, according to JPMorgan Chase & Co.

Compare that to Iraq where the so-called spread for Iraqi bonds is 3.88%. Even the Dominican Republic, whose $46 billion economy is barely one-tenth of Argentina’s, sold $750 million of bonds last month yielding 7.5%. Argentina’s dollar bonds due in 2015, by comparison, yield more than 12.5%.

Surging government spending is behind the price increases, said Daniel Kerner, an analyst at the Eurasia Group in New York. Government outlays before interest payments rose 40.1% in March from a year earlier as revenue increased 39.9% the government said.

Surging government debt, eh?

Good thing we aren't looking at a problem like that here in North America.

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The Story of the Decade: Sovereign Debt

As I said a few months ago, the story of the coming decade will be sovereign debt.

The Swiss-based Bank of International Settlements (BIS), the oldest international financial institution in the world, has issued a working paper written by three senior staff economists (“The future of public debt: prospects and implications”). In that paper the BIS warns that Greece isn’t the only Western economy that is setting off alarm bells.

The BIS names 11 more economies of concern: Austria, France, Germany, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, Britain – and the United States.

Without “drastic measures,” BIS says, all of these countries will hit a wall of debt.

When the senior economists at BIS warn 12 of the richest countries on Earth that they must take drastic action to reduce debt, you know the situation is bad.

The BIS paper notes that the public debt of 30 OECD countries will (on average) exceed 100% of GDP within the next year, “something that has never happened before in peacetime.”

But that isn't half of the concern. The BIS goes on to warn that conventional debt-to-GDP ratios are misleading – missing “enormous future costs” that are already authorized by past fiscal commitments, that will inexorably inflate public debt further still.

By the end of 2011, the BIS economists calculate, U.S. government debt will have risen from 62% of GDP in 2007, not quite three years ago, to 100%. Britain’s debt will have risen from 47% of GDP to 94%. Italy’s debt will have risen from 112% of GDP to 130%. All together, the public debt of the 12 countries will have risen from 73% of combined GDP to 105%.

At this debt level, the risk of sovereign default rises rapidly. And the BIS analysis says this unprecedented debt level will itself increase “precipitously” in coming years.

Each of the individual countries insist that those levels will fall.

The BIS says - not a chance and that these increases in debt are untenable.

What you should take note of is what the BIS report says comes next. The BIS says the financial markets won’t permit these debt increases to exist as such.

The only mystery, the BIS report says, is exactly when the markets will intervene.

History shows, the report says, that when the markets do rebel, they often do so instantaneously and decisively – often without much warning.

“When, in the absence of fiscal actions, will investors start demanding a much higher compensation for the risk of holding the increasingly large amounts of public debt that [these countries] are going to issue to finance their extravagant ways?” the BIS economists ask. “The question is when will markets start putting pressure on governments, not if.”

Translation: high interest rates, like what we saw in the late 1970s, are coming.

Meanwhile, in other news...

Yesterday the United States posted their 19th straight monthly budget deficit, $82.69 billion (just for the month of April) - an amount that was nearly four times the $20.91 billion shortfall registered in April 2009 and the largest on record for that month. It was more than twice the $40-billion deficit that Wall Street economists surveyed by Reuters had forecast.

On another front, the 10 Year US Tresury note auction results were also released yesterday. It seems that one quarter of the accepted bids came from direct (anonymous) bidders. This was a huge jump from April and represents the highest participation rate from this group since the crisis began. The drop in primary dealer participation rate to 33% was shocking. Remember these numbers and trends the next time someone suggests the sovereign debt crisis is limited to Europe or within the euro zone. As Zero Hedge noted, "there is no way that the Federal Reserve is not directly or indirectly interfering with auction take downs."

What you will start to see in the coming months is that people around the world will begin waking up to the dire circumstance our western economies are in.

This is already creating a mini-panic and rush on precious metals, a trend which will only intensify.

Reports surfaced yesterday suggesting the panic buying of phyiscal gold in Europe is threatening the depletion of the Austrian Mint. Yesterday the Mint said that it had sold 243,500 ounces of gold in coins and bars in the last 2 weeks. That's more than it sold in the entire first quarter. The Mint reports that the gold orders are coming entirely from Europe and are a sign of "panic buys".

And it's not just gold that is falling to panicked buying from Europeans who openly fear the demise of their currency.

Now, courtesy of Slim Beleggen, it appears the situation in the silver market is just as bad and has spilled over from Austria to Germany. Beleggen suggests the contagion is no longer one of sovereign debt, but of precious metal physical inventory. The primarily silver focused (but holding gold as well) Kronwitter precious metal online retailer is not only not accepting any orders, but has entirely taken down its website.

I have talked about gold on this blog in the past.

In North America there are those who eschew gold/silver as an investment and claim that "gold's only use today is as an inflation hedge as record debt depresses currency values, until fiscal order is restored."

They are right.

The problem though is that people are starting to realize that it is going to be a long, difficult time until 'fiscal order' is restorded.

That's why back on January 11th I said the next big spike would take gold to over $1,650 US an ounce.

I believe we're on our way to that level in the next couple of months.

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If Greece Is Bear Stearns, Will the UK Be Lehman?

Great little piece on CNBC yesterday which posed the above titled European debt contagion question.

Sunday’s news of a 750 billion euros ($951 billion) stabilization fund and European Central Bank assistance for the European bond market averted a full fledged liquidity crisis, but many remain sceptical that the crisis has past.

Can the governments in Greece and Portugal live up to their end of the bargain and significantly cut government spending in the face of bitter opposition from voters?

“The big question I am asking myself is whether Greece is Bear Stearns,” Anthony Fry, senior managing director at Evercore Partners, said. “What I really fear is that if Greece is Bear Stearns then the UK is Lehman Brothers.”

Fry, it should be noted, worked for Lehman before its collapse.

There is an insistance that the UK will be alright because it has the ability to sell government bonds internally.

Steven Barrow, the head of G10 Research at Standard Bank, holds that opinion. “I am confident about the prospects for the pound,” Barrow said.

The difference between the UK and Greece, according to Barrow, is that Britain has more room for maneuver. “The UK can devalue and print money, the UK will not default, the UK will not need the IMF,” he said.

Sounds like a recipe for currency collapse to me.

And Anthony Fry is adamant that such analysis is nonsense.

“I can’t believe (the UK) can avoid trouble," he said. "The current coalition talks are like arguing over a birthday cake. Once they decide how much of the cake they get they realize no one bothered to bake the cake.”

Fry makes the exact same point I have been making the past few months; with a lot of money needing to be raised over the coming months and years, UK borrowing costs are going to move sharply higher.

“My big fear is that after (Chancellor of the Exchequer) Alistair Darling refused to support the EU/IMF/ECB bailout of the euro zone bond market, the euro zone may stand by and do nothing when the UK gets into trouble,” Fry said.

Fry remains worried about the problems facing Greece will spread to Spain and Portugal despite Sunday night’s unprecedented support.

“Tuesday was a correction post Monday’s huge short squeeze," Gallagher said. "The big question now is whether institutional investors will return to the European bond market.”

Meanwhile Pimco, the world’s largest mutual fund, made the decision to stay clear of a proposed Greek dollar-denominated bond auction last month and that decision was one of the key moments leading up to Sunday’s rescue package. The coming weeks and months, July in particular, will be crucial. That's when €227 billion redemptions come up in the euro zone and with Spain needing to refinance significantly that month.

“What we are likely to see is a two-tier Europe," Michael Gallagher, director of research at IDEAglobal, tpld CNBC. “A double-dip recession in Southern Europe is increasingly likely. Core Europe will slow, but do OK. The outlook to the South is far worse.”

All these agreements are predicated on the EU governments meeting strict budget targets and stepping up debt consolidation efforts. Which means the Achilles Heel in Sunday's agreement is governments resisting expansionary, deficit financing once its economic fortunes begin to falter.

The United States has been unable to break that cycle, what makes anyone think the PIIGS will be able to?

So, if if Greece is Bear Stearns and the UK is Lehman, who will be AIG?

“No comment," Fry said.

I'm willing to be it will be California.

As I said last week: first the PIIGS, then the UK and then... the United States.

Are you prepared?

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Meanwhile... on the local real estate front

If you read my little blog you know that I (and my colleagues) believe that the Village on the Edge of the Rainforest is in for the mother of all real estate collapses.

How big of a collapse?

We stand by our prediction of a minimum drop of 40%-50% in the value of single family houses from the highs, and likely much more.

Strengthening that conviction are reports like this one from the Canadian Association of Accredited Mortgage Professionals (CAAMP).

CAAMP simulated the impact of mortgages hitting 5.25% – a rate which isn't even 2% higher than the current average of fixed-rate loans outstanding - and the impact will result in about 500,000 mortgage holders who will be in trouble.

When you add in the 375,000 who are already having difficulties, you have a total of about a million mortgage holders who very shortly be falling on difficult times with their payments.

How significant is that?

About 9.3 million families own houses in this country and 5.5 million have mortgages. So if rates rise less than 2%, 2 out of every 10 mortgage holders will be under significant 'financial stress'.

That's 20%.

The US housing market dominoes started falling on far less than this.

Ramping up the heat on this percolating mess is the fact that approximately 2 million mortgage holders carry variable rate mortgages. Economists are predicting that those prime variable mortgages will be going (in very short order) from the current 2.25% to 5%.

That's a jump of almost 3%, higher that the forecast increase of less that 2% which could cause so many 'problems'.

'Financial Stress' are going to be the buzz words of the coming next two years. Followed very quickly by the companion catch phrases of 'default', 'bankruptcy' and 'foreclosure'.

In the United States these conditions were a recipe for real estate implosion.

Thank God it's different here.

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Marching headlong down the road to Q.E. to infinity

Some interesting comments to the last post about the stock market's wild ride. Thank you to those who emailed and posted.

Agree or disagree with my comments, here's a thought for you from Jim Sinclair.

When the DOW is down 500 points in the blink of an eye, this is considered extremely bad and needs to be investigated. And in this flash crash all Market orders placed are considered bad and are cancelled!

But on a day when the Dow is up 500 points in the blink of an eye, this is considered good and congratulations are in order. Yet in this flash boom, all Market orders placed are considered good?

Uh-huh.

Yesterday European leaders committed to do “whatever it takes” to defend the single Euro currency.

This is a repeat of what US policymakers were forced into in the wake of the Lehman Brothers collapse. Not until the US Treasury and Federal Reserve promised (in effect) to bailout every bank and financial institution that looked like it was sinking did the hurricane begin to abate.

Europe will be hope for a similar result from yesterday’s initiatives and the initial response of markets is encouraging, but this is not an entirely done deal and there is still much to come.

Euro nations have in effect taken another giant step down the road to fiscal and political union by agreeing to cross guarantee the loans of weaker nations. What is even more significant is that the European Central Bank has been dragged kicking and screaming into conducting a programme of quantitative easing – buying up public and private debt securities – similar to that already carried out in Britain and the US.

What is becoming increasingly clear is that all national debt is now going to be bailed out.

Next... all debt of individual US states will be bailed out.

Regardless of the first knee jerk market reaction, the fact of the matter is that we have taken the nuclear option of adding more debt to entities failing because of debt.

Steel yourself for more unrest, in markets and in currencies.

The reaction you saw in the markets is being spun as a mystery... and there for it's branded an anomaly.

No one wants to admit that it was a selloff of significance... and therefore indicative of further problems.

The truth of the matter is that what you saw here was a combination of computer based flash trading, below the horizon computer based exchanges, and algorithms gone wild.

It's proof that computer markets lack specialists and are ticking time bombs of illiquidity. This condition remains and you can be sure we will be looking for more repeat performances.

With the $350 billion the US Federal Reserve threw in to support the EU, we had about One trillion in Quantitative Easing initiated today.

And when you consider how much more will have to be thrown at currency markets to sustain the Euro at $1.29 (at which it must be sustained to declare any market success), and it's clear we are inescapably down the road to Quantitative Easing to Infinity.

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Mr. Toad's Wild Ride

An evening post for you.

Mr. Toad's Wild Ride. How else to describe this crazy day in the stock markets?

At one point the DOW had fallen 1,000 points - a drop more precipitous than any day in 2008. By the close that market had recovered - somewhat - and closed down only 430 points.

Only.

Perhaps the most stunning development of the day occurred on the NASDAQ. From Bloomberg:

"Nasdaq OMX Group Inc. said it will cancel all trades of stocks at prices that were 60 percent above or below the last price at 2:40 p.m. or immediately prior. The exchange operator said in a statement it will cancel all trades greater than or less than 60 percent away from the consolidated last print in that security at 14:40:00 or immediately prior. Nasdaq said it coordinated the decision with all other exchanges."

Cancel all trades? Ummm... so the market was crashing big time at the end of the day and the Exchange intervened to say... "never mind, your trades which pummelled stock prices at the end of the day are... cancelled????"

Will tomorrow be Black Friday, 2010?

As I have said all year, the magical rally of the past year is a false recovery.

The bounce off the February lows has resembled a low volume Ponzi scheme. It has been driven by technically oriented buying from the Banks and the hedge funds.

Stunningly the anchors on financial television are trying to blame the sell off on a 'fat finger' order that caused Procter and Gamble to drop 20 points in 45 seconds. Are we to believe a typist inputting an order to sell 16 million shares typed "B" for Billion instead of "M" for Million?

"Oops. Crashed the free world. Sorry about that - my bad."

Bullsh*t.

The market plummetted because of its highly unstable and artificial technical underpinnings. Wall Street right now is nothing more than a casino, dominated by a few big Banks and hedge funds.

I invite you to watch this 7 minute interview with Gerald Celente which echos a lot of what has been said here all year:



Meanwhile we now learn that the US Federal Reserve is printing up another $105 billion to send to Greece to help with its debt problem.

Huh?

Why?

Is it being done to bail out more US Banks?

You know, the ones we were told had little exposure to sour European debt? Last week Bloomberg reported that JPMorgan Chase & Co., the second- biggest U.S. bank by assets, has a larger exposure than any of its peers to Portugal, Italy, Ireland, Greece and Spain. JPMorgan’s exposure to the five so-called PIIGS countries is $36.3 billion, equating to 28% of the firm’s Tier-1 capital, a measure of financial strength, Meanwhile Morgan Stanley holds $32.4 billion of debt in the region, which equates to 69% of its Tier 1 capital.

Make no mistake. Bernanke isn't supplying Greece with $105 billion in bailout money to save Greece. He's actually bailing out U.S. Banks—again!

Quantitative Easing is plowing ahead full bore. And we are going to reach a point where nothing will be able to stop this money from eventually entering the money supply.

And when it does, inflation is going to hit with a vengence.

1981 is going to look like a cakewalk of cheap interest rates when all this finally plays out.

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First the PIGS, then the UK, then the United States

The biggest fear from the debt saga playing out in Greece right now is contagion.

Concern is rampant that next up will Portugal, Italy, and Spain. After that will come the UK. And finally the problems will spread to the United States.

Imagine if you could turn back time... back to, say, 2006/2007.

If you saw Goldman Sachs betting against their own mortgages, betting on a complete US mortgage meltdown, would you invest differently?

Knowing what you know now, would you take steps to prepare, perhaps even position yourself to take advantage if the big banks were making similar such bets?

Well, according to a wall street journal report, big banks like JP Morgan, Bank of America, and Citigroup are preparing for that contagion's spread to new world by buying financial instruments that essentially allow them to short sell (or bet against) U.S. cities and states.

These banks are trading in so-called municipal credit default swaps which can be used by investors to bet that insurance contracts protecting holders of municipal bonds will default.

Some states say the derivatives not only scare away potential buyers of municipal bonds by creating a perception of risk, but ultimately drive up states' borrowing costs.

The California treasurer is just one of a number of state treasurers that have launched a probe into the sale of these derivatives and the sale of municipal bonds by big Wall Street firms that might reveal "speculative abuse of CDS in the muni market," says one regulator.

Clearly these big US banks see a looming debt crisis in the United States and fully expect the Greek contagion to work it's way to North America.

Of course if individual US States or cities go bust, the US federal government will have to bail them out.

Which means printing more money, injecting more liquidity into the system, etc.

What was it that Bernanke said about the basic laws of arthmetic?

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Ple

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The Swirling Winds

Hi Gang.

Sorry for the lack of posts recently. Tax week combined with other matters have kept me busy.

Sovereign debt remains front and center on the world stage and the concern is gaining momentum.

As I have stated over and over again, we still do not fully understand the depth and breadth of the financial earthquake that rocked our financial system in 2008.

Even now, a year and a half later, we still do not realize it's significance.

It has been downplayed so much that the average person is completely oblivious in Canada to what is going on.

I note with keen interest that there were another 7 bank failure in the US on the most recent 'Bank Failure Friday'. And despite the almost complete lack of press coverage, last week's losses were extremely serious. They were the largest in any single week since the failure of IndyMac Bank on July 11, 2008.

IndyMac had assets of about $32 billion and deposits of $19 billion. Its failure cost the FDIC an estimated $8 billion.

The seven banks that failed this week had combined assets of about $25.8 billion and deposits of $19.6 billion. These failures cost the FDIC an estimated $7.33 billion.

Prior to this week, the FDIC’s estimated losses from 57 bank failures in 2010 stood at about $8.6 billion. This week’s failures practically doubled that figure, to $15.93 billion.

According to an AP article posted Friday, the FDIC’s deposit insurance fund “fell into the red last year, hitting a $20.9 billion deficit as of [Dec. 31, 2009].” With this year’s losses, the fund’s deficit has grown to at least $36.8 billion. In addition, the FDIC has a huge exposure for worse-than-expected losses on some $165 billion of assets taken over by acquiring banks.

That pretty much wipes out the $45 billion the FDIC announced it was going to raise by requiring banks to pre-pay premiums for the period, 2010 through 2012. Obligations of the FDIC will soon become obligations of the U.S. taxpayer, adding billions of dollars each year to already out-of-control federal deficits.

Speaking of out of control sovereign debt, I notice that Warren Buffett has finally broken his 'everything will be alright' facade and is now acknowledging what is coming.

From the article: "The financial crisis was stemmed by massive monetary and fiscal intervention in developed economies like the U.S. and the U.K. That's shifted a private-sector debt mountain on to governments, increasing concern about sovereign risks. One concern is that governments will print lots of new money to pay debts, undermining the value of currencies and triggering a damaging bout of inflation. 'Events in the world over the last few years make me more bearish on all currencies in terms of holding their value over time,' Buffett said."

Interest rates and inflation: the watch words of the next 10 - 15 years.

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