Turbulent Days

Well Gang.

I sat back today and watched events play out. Without a doubt we are living through one of the most fascinating periods in history.

Faithful readers know I consider the events of 2008 a massive financial earthquake, the depth and breadth of which many of us still do not fully understand nor appreciate.

Two years later the fallout is only just starting to be felt.

US Foreclosure Fraud Saga

This massive story took a couple of interesting twists today.

Early this morning Reuters had reported that a bill toughening foreclosure challenges had zoomed through the Senate last week.

The bill, named the Interstate Recognition of Notarizations Act, would require courts to accept document notarizations made out of state. Its sponsors intended to promote interstate commerce. But homeowner advocates warn the bill could allow lenders to cut even more corners as they seek to evict homeowners... not to mention make it easier for forged documents to be easily accepted.

The bill passed without public debate in a way that even surprised its main sponsor, Republican Representative Robert Aderholt. It requires courts to accept as valid document notarizations made out of state, making it harder to challenge the authenticity of foreclosure and other legal documents.

The timing raised eyebrows, coming as a rising furor over improper affidavits and other filings in foreclosure actions by large mortgage processors was making big news.

But by this afternoon the White House announced that President Obama will not sign the bill passed by Congress without public debate using a "pocket veto" on the bill, which will effectively kill it.

This story has a long ways to play out yet.

Fluctuating Gold/Silver

Meanwhile, overnight, gold soared into a new record high above $1365 US with silver following suit putting in a fresh 30 year high at $23.53 US as the US Dollar continued sinking further in the Asian and early European trading.

A number of analyst had predicted that the trend would come under assault when morning came to North America and it did. As the sun rose here it was not long before the Euro, the Swissie and the Pound began giving up their gains and out came the selling in the metals pits.

It will be interesting to watch the overnight battle on the gold/silver front. Europe and Asia are piling into gold like crazy.

In India there is a gold rush going on the likes of which that country has not witnessed in a decades. Fears of double dip recession in the US and the subsequent global fallout of such an event has caused high net-worth individuals in India to shift assets massively.

"The way this class (wealthy investors) responds to a fear situation is by buying bars and kilos of gold," said A L Adjaniawala, precious metals analyst at KJMC Capital, a Mumbai-based research firm. "Given the firming up of bank deposit rates in India, consumers in the world's biggest buyer of the precious metal are keen to increase the share of gold in their investment portfolio to 20%-25% over the following year, from the current 10%-12%."

Meanwhile Silver swung over a dollar over the course of the day.

We do live in interesting times.

Cost Push Inflation

All week I have been meaning to do an in depth post on this topic. A number of readers of this blog are staunch defenders of the looming deflation scenario.

We will have deflation... in some areas.

But we are also going to suffer a concurrent bout of inflation too, producing a paradox that many have difficulty reconciling.

The vicious cycle created by the Federal Reserve’s Quantitative Easing monetary policy is kicking in.

We are seeing a huge influx of speculative money flows into the commodity sector pushing up food prices across the board. At some point, sooner rather than later, the rising cost at the wholesale level as indicated by the CCI and the futures boards will translate into higher retail prices for consumers, who are already being pinched by stagnant wages and falling net worth.

The result – consumers are forced to retreat on spending with the next result – a slowing economy – with the next result – more Quantitative Easing – with the next result – more rising prices as currency induced inflation in essentials rises further will compound the problem exponentially as the cycle repeats itself.

As long as the market is convinced that the Federal Reserve is going to set off another round of QE, it will go after the US Dollar driving it lower forcing money into commodities making life miserable for a large swath of North American citizenry.

The decision by the Federal Reserve to deliberately sacrifice the Dollar is going to come back and haunt all of us for years to come.

When I can, I will expand on this.

Interesting times indeed.

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Rare post update: US Foreclosure Fraud Crisis

Following up our early morning post on this explosive issue is this afternoon update. If you haven't read the earlier post, I would suggest you read it first before reading this update.

If you read the earlier post from today, don't be fooled by the lack of coverage this issue is getting on the evening news or on Financial TV, it's a HUGE issue which is still in it's earliest stages.

It is getting coverage.

The New York Times has been on the story here.

• The uproar over bad conduct by mortgage lenders intensified Tuesday, as lawmakers in Washington requested a federal investigation and the attorney general in Texas joined a chorus of state law enforcement figures calling for freezes on all foreclosures...
  
  Texas Attorney General Greg Abbott, a Republican, sent letters to 30 lenders demanding they stop foreclosures, evictions and the sale of foreclosed properties until they could provide assurances that they were proceeding legally... scarcely two weeks after the country’s fourth-biggest lender, GMAC Mortgage, revealed that it was suspending all foreclosures in the 23 states where the process requires judicial approval, concerns about flawed foreclosures had mushroomed into a nationwide problem.
  
  Dubious notary practices used by banks to justify foreclosures have come under scrutiny in recent weeks as GMAC and other top lenders suspended homeowner evictions over possible improper procedures.

ABC News is also covering the story here;

• As millions of Americans struggle under an epidemic of foreclosures, evidence has surfaced suggesting that some of the biggest banks are barely paying attention before signing documents that will push people out of their homes.
  
  Officials at some big banks now admit that so-called "robo-signers" were signing off on thousands of foreclosures a day without actually looking at the details of any of the cases.
  
  ABC News obtained a copy of multiple signatures attributed to a Florida lawyer moonlighting as a robo-signer. She had a day job in the Florida Attorney General's office, she somehow managed to vet some 150,000 mortgages in three years. If she worked every day of every year, that would amount to over 130 mortgages a day.
  
  "It appears that most of the mortgage (companies) in fact did use robo-signers," said Mark Zandi, chief economist for Moody's Analytics. "It was a way to try to facilitate the process. They've been overwhelmed by the foreclosed properties, and this was their way of trying to get through those problems as fast as they could."
  

The Wall Street Journal is covering it here:

• For mortgage investors, the recent suspension of foreclosures could potentially cause further losses in the already-battered $2.8 trillion market for residential mortgage-backed securities...
  
  "It's symptomatic of sloppy servicing and a lack of adherence to contract and property law, which we've seen examples of over and over again in the last two years," said Scott Simon, a managing director at Pacific Investment Management Co., or Pimco, a unit of Allianz SE.

And Market Watch has posted this explosive tidbit:

• With some of the nations largest banks suspending their judicial foreclosures to figure out their next move now that there is a critical mass of people that have caught on to their fraud, the smoking gun has now been discovered.
  
  A company by the name of DOCX charged the banks $35.00 to "Create Missing Intervening Assignments". In other words, forge the assignments. A copy of this company's price list is now all over the internet. A link can be found here:
  
  http://mattweidnerlaw.com/blog/wp-content/uploads/2010/10/LPS-DOCX-Price-List.pdf

But it's the broader picture which is important.

King World News conducted an interview with Jim Sinclair and Dan Norcini on the unfolding events.

• Dan Norcini: The primary drivers in gold and silver today had to do with concerns over currency devaluation as well as securitized debt problems and the implications associated with it.
  
  Jim Sinclair: “Each time that happens an item of collateral on the securitized debt publicly dies. That is why this is dynamite that people will realize very soon. This is one reason gold is up hard today.”
  
  Norcini: “That collateralized debt obligation is now effectively worthless because the collateral behind the debt can no longer be collected. The banks cannot go and get it. Let’s say you have 10 mortgages at $1 million a piece, the sum total of those mortgages are $10 million.
  
  So, the banks took the 10 mortgages and bundled them together into a collateralized debt obligation or CDO with a face value of $10 million. They then sold that new entity that they created to an investment group of some sort, a pension fund, hedge fund, etc. promising them a yield of let’s say 7%. The sales pitch would emphasize the fact that this CDO was backed by real collateral.
  
  In the event of loan defaults by the borrowers, the banks would tell the buyer of the CDO that the collateral behind the loan could be sold to recapture any potential losses on the part of the purchaser. Everything seemed to work fine until the defaults began and the foreclosure process kicked into high gear. The foreclosure process has exposed fatal flaws in the system and the flaw is that the banks cannot prove clear ownership of the mortgage.
  
  Consequently, they are then barred from foreclosing on the property.
  Because they can no longer foreclose on the properties, the CDO is now effectively worthless.
  
  The hedge funds and the pension funds cannot now sell these CDO’s on the open market, so how are they going to recover their original investment? Perhaps you may say that won’t be a problem because these instruments were insured. The problem is now the credit default swap or the insurance policy that was purchased to protect against default assumes that the insurer has the financial wherewithal or resources to make good on the claim. If there were only a small number of these problem CDO’s this would not be an issue.
  
  But as the number of the foreclosures continue to skyrocket, and more and more banks are prohibited from seizing the collateral behind the property, the sheer magnitude of the number of claims presented to the insurer will overwhelm their balance sheet.
  
  In effect what you have is an insurance company which doesn’t have enough money to pay off the claims. Compounding the problem is the fact that the CDO’s and credit default swaps related to these claims form a mass network of interdependence. This then ripples through the entire system and creates a domino effect which can cause the failure of entities creating the next financial crisis.
  
  Ultimately the Federal Reserve will be asked to step in and buy up the now worthless CDO’s and put those on its balance sheet. In order to do this the Federal Reserve will have to engage in massive quantitative easing, taking onto its balance sheet the worthless CDO’s in exchange for newly issued treasuries. This of course will have a horrific effect on the US Dollar which is why gold and silver are heading much higher.

Watch this issue very closely gang.

I could be wrong, but this may well be the Black Swan event of the 2008 Financial Crisis.

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More on fraudulent US foreclosure documents.

A little more today on the allegations of foreclosure mortgage fraud by big banks in the United States.

I cannot stress how significant this issue is. I am reminded of July 2008, the subprime mortgage issue was brewing, the markets had started to fall, but the vast majority were oblivious to what was about to happen.

Is this a case of deja vu?

Let's go back to the subprime mortgages that almost destroyed the world banking system in 2008.

Securitizing mortgages was a way of taking the cost of a mortgages off of a banks books and improving their bottom line.

From 2005 onward the securitization chain ramped up and out of control.

Bundling and selling off securitized mortgages was a virtual licence to print money and Wall Street wanted as many mortgages to bundle as they could get their hands on as quickly as possible and as cheaply as possible.

In order to maximize the revenue stream in the securitizaton process, the subprime lenders, trusts and banks cut as many corners as possible to save money.

Included in this cost-cutting was the cost of record keeping.

Banks, trusts and subprime lenders didn't keep very good records in their pell mell rush to shove money to middle America and fuel the massive housing bubble.

They didn't keep good records and, in the process, they violated individual state laws mandating that they had to file records with the local state county clerk's on who owned what mortgage title.

This isn't to say records weren't kept.

What the banks/trusts/subprime lenders did was to digitize mortgage titles into a privatized system called the Mortgage Electronic Registry System, or MERS. And it did these transfers by trading excel spreadsheets among the banks and trusts rather than endorsing the mortgage notes as required by their own contracts, by state real estate law and by IRS rules.

Today MERS is the registered owner of a security interest in 60 million properties representing 60% of all the mortgages in the United States.

More importantly... since 2005 and through to 2008, 97% of the loans that originated in the United States are in the MERS system.

But it now appears that, on a wide spread and probably pervasive basis, they did not take the steps necessary to legally own the mortgage note on the properties they registered.

This means that in 45 out of 50 US states, the lending institutions who have mortgages registered in MERS lack the legal right to foreclosure on the properties they claim to own.

As bad as this sounds, it gets worse.

As the housing bubble began to collapse, banks/trusts and subprime lenders obviously did not want to grapple with the massive legalistic quagmire they had created for themselves with trillions of dollars of mortgages for which they had no legal standing to foreclose on.

(and this is where things really go sideways)

A trend started when the foreclosures started to ramp up in earnest in 2006. When some foreclosed homeowners (and some foreclosure courts) began demanding that the proper paperwork be produced in order for the foreclosure to be carried out, the banks/trusts didn't have it.

So the industry simply created a system where the foreclosure services would hire 'foreclosure mill law firms' whose business it was to simply forge documents showing - or we should say - purporting to show that they had a legal right to foreclose.

The document mill signatories have come to be called 'robosignors', people whose names appear of thousands of mortgage documents. Investigations from the likes of the New York Times have revealed that it is clear that, although the same name appears on thousands of mortgage transfer forms, the signatures are clearly different and forged throughout all those documents. When tracked down, these signatories admit that they really did not have any knowledge of what it was they were signing.

According to Florida Congressman Alan Grayson, the system is so organized that there is a company called Lender Processing Services (LPS) which has allegedly created the means to systematize this fraud.

Lawyers used the LPS system to request which affidavits and documents they need. LPS then has document mills where they can magically make an authorized 'Vice-President of whatever you need' and send you backdated signed documents saying that you have the right to foreclose on the property you are interested in.

Courts originally refused to believe that this level of rampant fraud even existed.

But recently US courts have begun sanctioning fraud charges against loan servicers as details of what has been going on becomes apparent.

As Florida Congressman Alan Grayson will outline for you below, there have been instances where homeowners have had to go to court to fight the foreclosure process. It turns out that in a couple of cases, the banks made a mistake in the address of the property they were foreclosing on. Turns out the house the foreclosed on NEVER had a mortgage to begin with... the owner having paid cash to buy the house.

Despite this, the banks produced mortgage documents that said they were legally entitled to foreclose on the property.

You can see how courts might have a slight problem with this disparity.

This week two civil suits in Kentucky have filed under the RICO statutes. That's the US version of racketeering laws.

The civil suits say that in a significant number of cases, banks do not have proper title to the homes on which they are foreclosing. Worse, these lawsuits allege that the supporting documentation they are producing to support their claims has been fraudulently created and presented to the courts.

These lawsuits are about to open up a massive can of worms that speaks clearly and directly to the fact that securitized (collateralized) debt on a vast number of mortgages have no paperwork, lost paperwork or paperwork that has been duplicated many times in many collateral debt instruments.

The import of this cannot be understated.

Firms like Goldman Sachs are already being sued as in this lawsuit from LBBW Luxemburg.

Goldman is already battling claims that “Goldman Sachs knew at the highest levels of its organization that its representations to LBBW Luxemburg that the notes merited triple-A ratings and were high grade were blatantly false,” the Stuttgart-based bank said. “Goldman committed fraud and, or, was negligent in marketing and selling the notes to LBBW Luxemburg.”

Now there are the Kentucky lawsuits. The key element here is that the Kentucky suits are RICO actions and class action suits. That is why it is so important.

The RICO (organized crime) statute in a civil suit is usually used to force a settlement between parties. It is a very effective tactic because If the banks lose under RICO they sacrifice ALL their assets.

The key to RICO in a civil suit is to prove a PATTERN. Listen to the video posted below by Florida Congressman Alan Grayson. It outlines the facts I have just laid out for you and shows you some of the clearly forged mortgage documents.

The pattern screams at you.

The only logical settlement in the Kentucky cases will be to void the foreclosure.

And since this is a class action lawsuit, it could sign up 100,000 complaints if that is desired by the attorneys.

This suit, if successful, will be repeated all over the US.

That's why Bank of America, J.P Morgan and GMAC have halted all foreclosure proceedings in the affected states.

Do you remember the panic that gripped the markets when it became apparent that Bear Sterns and Lehman Brothers were going to go under because their securtized mortgages were deemed worthless?

It could be that all of the mortgage backed securities issued from 2005 onward could be completely worthless because they are not legally backed by any mortgages!

As I said yesterday, all of the big banks have legacy assets which are currently marked up in value to cost and above. Because of the mark-to-market nonsense, this now represents a large amount of capital for the Western world’s financial entities.

A number of Canada's big five banks also have large exposure to US mortgages.

Watch these developments very closely, because if they do play out I suspect you will see the markets - and financials in particular - make the September 2008 stock market crash look like a minor dip, forcing the US Federal Reserve to bailout the banks on a level that makes the 2008 bailouts look like chump change. As for Gold/Silver, it could well go hyperbolic.

Here is Florida Congressman Alan Grayson outlining the issue:

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Could the US foreclosure fraud situation cause another Banking Meltdown?

There is an evolving and fascinating story going on in the United States that could become a major, major issued for the economy.

As you know, the housing collapse in the US has lead to a massive number of foreclosures by the banks.

But the foreclosure bandwagon has hit a significant speed bump.

It seems the courts have put the brakes on a number of foreclosures because banks do not have the proper paperwork to execute foreclosure.

This foreclosure document 'problem' is rapidly evolving into a case of fraud on a massive scale, a situation that could affect 60 million properties in the U.S.

In a nutshell banks have lost track of promissory notes signed by homeowners when original mortgages were taken out. In 2008 some big banks could not produce the note that proved it had the right to take back a home. The problem has gotten much bigger as more homeowners discover the banks do not have the original documents.

The root of the problem, apparently, is that after physical paperwork was filled out and signed by the borrower, the banks electronically filed the paperwork into a computerized system called the 'Mortgage Electronic Registry System' (MERS).

According to Florida Congressman Alan Grayson, 60 million mortgages are in MERS.

It appears that after the electronic filing, the banks have lost track of the original paperwork - the note - signed by the borrower for virtually every mortgage filed in MERS.

This is crucial because that 'note' is what actually proves the bank owns the property.

Grayson says, “It appears that on a widespread and probably pervasive basis they (the banks) did not take the steps necessary to own the note... which means that in 45 out of the 50 states they lack the legal right to foreclose... So they have simply created a system where servicers hire foreclosure mill law firms whose business is to forge documents showing or purporting to show they have a legal right to foreclose."

The import of this cannot be understated. Take a moment and grasp the enormity of this problem for the banks.

There are 60 million homes which banks loaned money on, and now they might not be able to legally get the property back if the homeowner defaults!

Another colossal problem is the trillions of dollars in mortgages bundled into mortgage backed securities.

Remember, the banks were giving almost anyone a mortgage during the housing boom which allowed them to create and sell lucrative mortgage backed securities.

So, there are trillions of dollars in mortgage backed securities that now could have NO backing whatsoever!

That means they are worthless!

Would you like to be the pension fund manager who bought that security? Do you think this just might cause an accounting problem for the banks? Do you think this could push some of the big banks into bankruptcy? Will there be another financial meltdown and government rescue?

Do not underestimate the impact of these developments. This past weekend, Bank of America became the latest lender to delay all foreclosures in 23 states because of possible problems with the necessary documents needed to repossess a home. GMAC Mortgage and JP Morgan Chase have had similar problems recently with documents that prove the bank has the right to foreclose.

How long before all foreclosures executed within the past 2-3 years have to be retried? How many millions of existing home sales will be put in jeopardy, those homes which were foreclosed upon and then resold?

There are currently two civil suit proceeding that say the banks do not have proper title to the homes on which they are foreclosing.

All of the big banks have legacy assets which are currently marked up in value to cost and above. Because of the mark-to-market nonsense, this now represents a large amount of capital for the Western world’s financial entities.

And a number of Canada's big five banks also have large exposure to US mortgages.

The biggest question in the financial world today is could the foreclosure fraud situation cause another banking meltdown?

Gold and silver are spiking on the upcoming possibility of QE2.

QE3, anyone?

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First time buyers: "Save your money and wait" - Victoria area Mortgage Broker

As we reported earlier this month, Victoria real estate mid month sales were dramatically down and on track to be off 75% from this time last year.

Sales did pick up in the second half of the month, but as the final numbers are tallied,Victoria has hit a 20 year low with sales down 50% from last year.

That total, by the way, is the lowest in 20 years. Note that they only started keeping such records in 1990, so Victoria recorded it's lowest number of sales EVER last month.

As we enter the October/November period, historically the slowest time of the year, their is fear in the air... and it is palpable.

Check out this news story by CHEK-TV in Victoria (youtube video above).

From the intro: "Realtors say if you are selling your home you need to consider dropping your asking price or be prepared to wait a long time."

Even better is an excerpt where viewers are told that Frank Simon, a Langford mortgage specialist, is telling people that there is no demand for housing left and is openly predicting a price crash.

Simon is telling first time buyers to save their money and wait. To home owners, Simon is blunt saying "your home price is going down."

CHEK-TV attempted to contact Simon for a interview to expand on his comments, but he was muzzled by his employer, Dominion Lending.

Gee... I wonder why?

Meanwhile the first forecasts for Real Estate in Vancouver next year are coming out and there are calls for at least a 5-10% decline in values.

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Did you see the sales numbers for new R/E units?

Well gang, another month has come and gone.

Next week real estate sales statistics will be released for the month of September, 2010.

As expected sales will be down by over 40% for the fourth consecutive month, carrying on with record low sales.

The R/E propaganda machine, however, will pounce on a glaring anomaly from the stats: the average price of the single family house will have risen, eclipsing the one million-dollar mark once again.

Fewer houses have sold, but those that have sold have traded at very high prices - thus distorting the average. I do believe there was even a sale of a $9 million dollar property in Vancouver this month.

But when you look beyond the R/E spin that is sure to flow, the stats tell a story that cannot be denied.

Sales on all brand new real estate units (houses, condos, etc) in Vancouver are utterly abysmal and have plunged lower than anything seen in the month of September over the last 15 years.

Here are the numbers according to the contributor 'Inventory' over on Vancouver Condo Info:

Sept New unit sales
1994 = 364
1995 = 310
1996 = 422
1997 = 317
1998 = 286
1999 = 305
2000 = 235
2001 = 232
2002 = 218
2003 = 400
2004 = 421
2005 = 545
2006 = 300
2007 = 322
2008 = 242
2009 = 396
2010 = 170 (as of Sept 29)

The 2010 total will be well below even the dismal 2008 & 2002 totals.

Downtown there are a stunning number of new condo developments slated to come onto the market in the months ahead... and sales of new units are absolutely cratering. Headlined, of course, by the Olympic Wasteland.

Fall/Winter is shaping up to be wicked.

Will December be a time to deck the halls with desperation?

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The Bank of Canada repeats its warning to you: Curb your enthusiasm for debt!

You will recall the other day that I commented on the fact that the finances of most Canadian households are in abysmal shape.

It is one of the key factors that will contribute to Vancouver's status as ground zero in a monumental housing collapse.

Last Friday I said that numerous economic reports have cited that debt is out of control in this country. Canadians have saddled themselves with record mortgage debt as household liabilities are now equal to 145% of earned income. Six in ten Canadians now live paycheque to paycheque. 40% are not even trying to save money anymore because there is no money left over after daily expenses.

As faithful readers know, my number one recommendation over the past two years has been that, if you are in debt, get out of it... now!

And today Mark Carney, the Governor of the Bank of Canada - and the man who plays a large role in influencing interest rates, issued yet another warning to Canadians on just this subject.

Using particularly strong language (for the head of a Central Bank), Carney warned Canadians today to curb their enthusiasm for debt. In a midday speech to the Windsor-Essex Regional Chamber of Commerce, Carney echoed my warning about the perils of the fact that the ratio of household debt to disposable income hit 146% in the first quarter of the year, a record and a level that is closing in on that of the U.S.

"This cannot continue," the central bank chief warned, adding that while the net worth of Canadians is about six times the level of average disposable income, asset prices rise and fall but "debt endures."

Carney can see what I see.

We're in a tenuous position. Real Estate doesn't always go up. And many believe real estate is set to go down. How much it will go down depends on your particular slant. And as many of you know, my slant is 50 - 70%, minimum. And I lean heavily to the 70% minimum end.

Any kind of decline in asset prices will amplify and exacerbate this precarious Canadian debt position.

• "House prices matter principally because of the “financial-accelerator effect.” When the value of a house rises, the owner can typically borrow against this increased equity to fund home renovations, a second house, or other goods and services. These expenditures can “accelerate” a rise in house prices, reinforcing the increase in collateral values, access to additional borrowing, and, thus, an increase in household spending. Of course, this accelerator effect can also work in reverse: a decrease in house price tends to reduce household borrowing capacity and amplify the decline in spending."

Carney also noted that,

• "With Canadians working, but not as much as they would like, they have been borrowing. Real household credit expanded rapidly throughout the recession, in contrast to previous downturns, and has continued to grow through the recovery. Canadian households have now collectively run a net financial deficit for 37 consecutive quarters. That is, their investment in housing has outstripped their total savings for over nine straight years. In effect, households are demanding funds from the rest of the economy, rather than providing them, as had been the case through the 1960s, 1970s, 1980s and 1990s."

This focus on plunging all our eggs into home mortgages is important. With more and more of our disposable income going to monthly mortgage payments, Carney observed that household balance sheets are growing "increasingly stretched."

But what about our economy? Isn't it growing? Aren't we out of the recession with everything getting better and our paycheques growing?

Carney noted that while Canada’s recovery has been the envy of the Group of 7, but that recovery has relied on levels of consumer spending and investment in housing that are proving unsustainable.

Translation: The economy has relied on the fact we have been borrowing our asses off and plunging ourselves into record debt - courtesy of Carney's emergency level, record low, interest rates.

Carney's warning was simple and straightforward and he reduced it to 3 simple words:

"This cannot continue."

You would be wise to take heed, if you haven't already.

What's coming won't be pretty.

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More on the currency debate... (btw, Garth Turner sees Gold going to $3,000)

No real estate topics today... instead it's devaluing currencies of the world, gold and what will come as a surprise to many: Garth Turner sees Gold going to $3,000 an ounce.

All around the world there is a stunning drama unfolding. Country after country is devaluing their currency through massive quantitative easing in an attempt to make their exports more attractive because - via foreign exchange - their currency is worth less than other countries as those countries devalue. It's becoming a vicious cycle.

Brazil is warning of a currency war, the Bank of Israel buys $250 million in forex to weaken the shekel, Chile considers measures to combat strong peso, intervention in Taiwan dollar suspected of bringing value down, Korea considers moves to stabilze, Singapore intervenes to devalue currency, and Japan considers more moves to devalue currency.

There's more, but you get the picture.

All of this is in response to the United States and the rapid dropping of the US dollar index (it's one of the graphs on the right hand side of the blog).

Click here for a Reuters clip on the fears over a world currency battle.

This is one of the feared outcomes of the Quantitative Easing that was started last year. And the great fear is that the US Federal Reserve's actions to prop up the increasingly uncompetitive and defective U.S. economy with what amounts to unprecedented amounts of money printing over the past two years - with efforts still ongoing and slated to expand later this year - are going to lead to a crisis of confidence.

The US government as a whole has increasingly spent beyond its means, doubled down on debt and pushed the limits of inflation risks as it milks the outdated perception of the dollar as a "safe haven" for all it's worth.

The largest critics say the table is being set for the biggest currency crisis ever. Some say that all of the key ingredients are in place for a crisis of confidence that will threaten to overwhelm all efforts to contain it - something beyond the magnitude of currency crises that unraveled Mexico in 1994, Asia in 1997, Russia in 1998, and Argentina in 1999.

That's why I say there is an opportunity looming.

It's irrelevant whether you believe the crisis will lead to hyper-inflation or not. A crisis will play out. The only question is the depth and breadth of the magnitude.

Gold (and Silver) are the final refuge against universal currency debasement. And that debasement is starting to ramp up big time.

The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month. And the rest of the world is racing them to the bottom.

Premier Wen Jiabao confesses that China’s ability to maintain social order depends on a suppressed currency. A 20pc revaluation would be unbearable. “I can’t imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs,” he said.

Commodities analyst Dan Norcini notes, Gold put in another record high price in late Asian/early European trading last evening with silver also following closely behind as it too set another 30 year high during the same interval. As a matter of fact, all of the “precious” metals were higher today with platinum and palladium continuing to work higher on the charts. Palladium is probably the sleeper among the group as it has quietly managed to rally from $160 in late 2008 to nearly $570 as of today. That is a 250% increase in 2 years.

One of the things about the palladium rally is that it now leaves silver as the least expensive precious metal to own. Yes, I know that palladium and platinum are considered industrial metals but they too, as does silver, often act as precious metals. Gold is now over $1300, platinum is over $1650, and palladium is near $570. None of them could be considered especially cheap for the average citizen to buy. Silver however, even after its strong rally is shy of $22. Tell me that the average citizen who has a few hundred dollars laying around and is becoming increasingly worried about the future of the Dollar as they become informed about the woes of the current monetary system, will not look at these metals and feel very comfortable plopping down some cash on the counter for a few rounds of silver."

Which brings us to Garth Turner.

For those who follow Turner, they know he is adamant that Gold is a relic and not a place to put your money.

But Turner can see what is happening too. In this interview with Stirling Faux on Howestreet.com he begrudging admits that gold will still climb further...

(http://www.howestreet.com/goldradio/index.php/mediaplayer/1784).

Towards the end of the interview, at the 10:23 mark, Turner dismisses Gold rising up in price but stumbles and concedes that "yeah... it may go to $3,000. But not $5,000 or $10,000".

Hands up out there how many thought they would ever hear Turner predict Gold at $3,000 an ounce?

Such is the import of what is happening right now.

Does anyone remember how this all started?

And the world is dealing with it... taking it a 'little more seriously'.

They are moving out of the US dollar and into Gold/Silver. Do you see the opportunity?

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Do you see what I see?

As a child, everyone has seen the picture above which is the visual definition of "perception".

Some see the image of a young woman. Others can clearly see the image of an old woman.

Same image, two different perceptions.

And the same can be said of real estate in the Village on the Edge of the Rainforest. Yesterday the little red-headed girl told me she spends her weekends going to open houses, house lust working it's elusive magic.

Sigh.

Don't people see the picture I see?

Bouncing around the Internet today is like going from site to site with confirmation of so many of last year's blog insights playing themselves out in living colour.

Aren't they evident to all?

You've often see me refer to the Vancouver Real Estate Anecdote Archive, a blog which collects anecdotes found on various blogs or in mainstream media. Since most are anonymous, it is impossible to confirm the validity of the comments but they are interesting. What stands out are the number of comments being made by people who are starting to worry about their real estate purchases.

Some recent comments (click on first two words for link):

• “A buddy of mine on the Island put his home on the market in August…..not a sniff. He is freaking out as he had hoped to ‘move-up’ and is carrying a big monthly mortgage.”
  
  “I’m in the financial industry. People are one or two paycheques or missed mortgage payments away from real disaster. I think that bankruptcies will unfortunately become commonplace.”

These comments are reflective of events now unfolding as many of us in the blogosphere have predicted. Yesterday the chief economist of Gluskin Sheff + Associates, David Rosenberg, came out with a report that notes that housing starts, building permits and home prices have slipped.

Canada's recovery from the recession has been fuelled by the boom in the housing sector, a boom which was driven by the emergency level interest rates that sucked so many Canadians into the overpriced housing market over the past year. But that 'stimulus' has run it's course, the 'recovery' is now slowing, and "that goose is no longer laying any golden eggs."

Rosenberg foresees that same scenario we have been fearful of. He expects that a "rising number" of Canadian homeowners won't be able to meet their mortgage payments as interest rates rise and real estate values sink.

"Housing cycles, both up and down, tend to go further than anyone thinks, as we saw occur in the United States, which is still suffering from a post-bubble hangover three years after the initial turn down. Even if this correction in housing is a fraction as harsh as was the case south of the border, the economy, and the financial markets, are likely in for a rude awakening in coming quarters as lower home prices cut into household wealth, confidence and spending plans," said Rosenberg.

This comes out on the same day as a report from the Royal Bank of Canada that says home ownership costs in B.C. are quickly nearing record highs and that the result is that home ownership costs are testing the limits of household budgets. More importantly the report notes that “the Vancouver market is clearly vulnerable to a price correction."

“Generally, we have dismissed the case of housing market bubbles in Canada, but the situation in Vancouver is probably the closest to one in the country,” the report stated.

Interestingly the report calculates that the tenuous Vancouver market chews up more that 65% of pre-tax family income (the highest in the country). But this conclusion is based on buying a house at current prices with 25% down and a 25-year amortized mortgage.

Ummm... does anybody out there have a friend or acquaintance who has bought a house in Vancouver in the last five years who has paid a quarter of the purchase price in cash and has taken out a mortgage that was less than 35 years in length?

Royal's skewed analysis allows it to temper conclusions. Economist's like Rosenberg do not colour their outlook with such diversions.

The fact of the matter is that the finances of most Canadian households are in abysmal shape. As other economic reports have noted, debt is out of control in this country as Canadians have saddled themselves with record mortgage debt (household liabilities now equal 145% of earned income). Six in ten Canadians now live paycheque to paycheque. 40% are not even trying to save money anymore because there is no money left over after daily expenses.

The writing is on the wall for real estate in our little hamlet which sits on the Edge of the Rainforest. We will be ground zero for a massive real estate collapse.

Don't you see what I do?

Meanwhile... more on 'all that glitters'

Bloomberg reports that the U.S. Mint has suspended sales of its 1-ounce American Eagle gold coins after soaring commodity prices led collectors and investors to deplete supplies. It is the first time in two decades that the Mint halted sales of the coins.

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All that glitters

Interesting development in Gold today.

As I have said, I am firmly of the belief that Gold is not money, nor is it a hedge against inflation (it performs that role very poorly).

Gold is a hedge - a hedge against the mismanagement of the state, which at this time and place is the United States with it's world's reserve currency status.

And since it is almost a certainty that the United States will be forced to continue Quantative Easing on a massive scale, it seems clear to me a large segement of the world is going to the medium of Gold on a level they haven't for almost 100 years.

Last week I made note that central banks outside of the United States cut holdings of U.S. Agency Debt by 7%.

And today, in another sign that a worldwide paradigm shift is occurring, the central banks of Europe have all but halted their sales of Gold.

In the 1990s and 2000s, central banks swapped their non- yielding bullion for sovereign debt, which gives a steady annual return. But now, central banks and investors are seeking the security of gold.

All around the world, central banks are reassessing gold amid the financial crisis and both Europe and America's sovereign debt crisis.

This is important because central banks, with their heavy selling of Gold, have long suppressed Gold from rising in price. But now a significant source of supply has been withdrawn from the market. The move also gives powerful psychological support to the gold price.

Interesting times.

As I have said, I'm not a Gold bug... I'm a Gold/Silver opportunist. And there is a huge opportunity ahead, IMHO.

More on this in the coming weeks.

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Show me the money

Ultimately the great debate about real estate in the Village on the Edge of the Rainforest will come down to prices.

Will prices go up, stagnate or decline?

All these discussions about declining year over year monthly sales and building months of inventory, while indicators of what comes next, are moot until the 'what-comes-next' happens.

And it is the 'hard facts' which are now starting to appear.

What is fascinating is the depth of the declines we are seeing from the get-go with developers.

We've posted about prices being down 40-50% in the Okanagan. We've talked about Bob Rennie slashing 40% off new units at Invue in Kelowna and at Fairmont Estates in Vancouver. Up in Whistler we took a look at a condo which had been put up for court-ordered sale at 40% off the original 2002 sale price (it has now sold). Two days ago we profiled Watermark Developments discounting prices 35% below 2006 pre-sales prices.

Even to the casual observer, this is a steep and shocking start to this chapter in the real estate saga.

But as I have posted before, despite these examples, this will be a slow melt. The mainstream public is still oblivious to what is going on.

Those who don't have to sell, won't... at least for a little while yet.

They will pull listings or steadfastly refuse to budge on outrageous asking prices convinced that what we are experiencing is a temporary 'dip'... which is what most mainstream owners view the 2008/2009 pullback as. A temporary dip.

Only those who have to sell, will cut prices. Those going through divorce, settling estates because of a family member's death, or those displaced and forced to move elsewhere.

There is a another dynamic we will see though. And is it the looming wave of retiring boomers.

Boomers have never been great savers. Spending what they have and 'enjoying life', their plan has long been to use their massively appreciated real estate as their retirement fund.

Statistics show that 70% of boomers have not saved adequately for retirement if at all. Their retirement 'plan' lies in tapping the giant equity jackpot of the massive real estate bubble that has blown around us.

But as sales drop dramatically, as months of inventory build... a stagnating real estate market is fodder for the one demographic beyond the three D's (divorce, death, displacement) who will reduce their price to sell.

Faithful readers will recall one such example we cited in the middle of July.

Promoted as an outstanding Dunbar character home in immaculate, move-in condition, this 3,359 square foot 4 bedroom, 2 bathroom home which sits on a 6,700 square foot lot was offered for sale.

Originally listed for sale at $1.549,000 on June 7th, 2010, the price was reduced on June 12th, 2010 the asking price was reduced to $1.449,000 (a reduction of $100,000) a mere 5 days after the property was originally listed!

And with no one jumping in on that, the seller obviously received an offer from a buyer sensing the desperation and on July 6th, 2010 the home sold for $1,340,000 (another $109,000 shaved off the latest asking price).

That's a total drop of $209,000 (or 13.5%) off the original asking price with a property only on the market for a month.

More recently is this example at 3042 West 33rd Avenue in Dunbar from our friends over at VREAA.

This 2,489 sqft home on a 50×133 lot was listed on May 28th, 2010 for $1,638,000.

On June 22nd, 2010 the asking price was dropped to $1,580,000, then to $1,550,000 and then yanked from the market on Aug 31st, 2010.

Later that day the property was relisted with and asking price of $1,499,000.

It finally sold on September 19th, 2010 for $1,370,000... $268,000 less than the original asking price (just over 16%).

Both of these are a far cry from the 40-50% examples above, but provide evidence that there are desperate sellers who will move their price to see a sale.

If the market continues to stagnate, more and more boomers who have to sell will overcome resistance and cut prices.

That 'stubbornness' giving way to compromise can be seen in this Kelowna offering which a faithful reader has passed on to us.

Located at 740 Wilson Avenue, faithful reader advises that they have been watching this house for the past 6 months when it was listed in late April or early May.

Mortgage free, the now retired owner was hoping to reap the capital gains from a home which has appreciated rapidly these past 15 years.

The house was originally listed at $429,000 and quickly dropped to $399,000.

With no offers received whatsoever, the owner was no doubt shocked when a similar house across the street was listed for $340,000 - an asking almost $89,000 less that her original asking price. That lowball house sold within a month!

In July, the owner was offered $375,000... and promptly rejected.

Now, several months later, the asking price has been reduced to $344,000. Stubbornness is beginning to give way to desperation.

Faithful reader offers this observation on the Kelowna market:

• "I know other people in Kelowna who are also trying to sell their houses. Unfortunately many of them are mortgaged to the max and can't drop the price even a penny. And so they linger on the market for months and months. And there are many others, people in their 30s, who bought at the height of the boom (presales happened in Kelowna too), and are now sitting in negative equity territory, or pretty close. I know a few who are amateur landlords-and the rent doesn't even cover the mortgage! Everyone was convinced they would get rich by owning real estate. Why buy one place when you can buy 2 or 3? And I don't think it will get any better... there are lots of condos for sale, and according a realtor friend of mine, a huge inventory of condos that aren't listed-people waiting for the market to "recover" before they list.?"

MOI, declining year over year monthly sales totals... they are only symptoms.

It's all about results... about values.

The developers are slashing 40-50% and saying, "SHOW ME THE MONEY".

The boomers who are depending on their homes as retirement funds have to sell and are starting to say, "SHOW ME THE MONEY".

We will see what the result is in the coming months.

(What about you? Are there any properties you have been watching that have been dropping their asking price? If yes, drop me an email and tell me about it.)

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How can we be so blind?

Yesterday I mentioned that I had an encounter with James, a casual acquaintance of mine who happens to be Scottish (he's a tolerable guy though, so we overlook that).

I've known James for almost 20 years, but yesterday was the first time we had ever talked about real estate... and it was an intense 15 minute conversation in which he hit on just about every stereotypical defense for real estate.

'Real Estate never goes down, you can't ever go wrong buying and our solid Canadian banking system won't facilitate any sort of collapse here.'

It was almost a surreal encounter.

But it speaks volumes.

Mainstream Canada is still completely unaware. They have bought into the 'official' line that everything is alright.

And perhaps it is just as well. Can you imagine the panic to dump real estate were it any different?

The average Canadian is blissfully ignorant about what has happened... about what is happening... about what is about to happen.

They are completely unaware about how our Canadian banks barely escaped their own meltdown in 2008.

Few realize all five Canadian banks are levered at an average of 31:1 and that if tangible assets were to drop by 3% in value, tangible common equity would effectively be wiped out.

Nor do many realize that Canadian Banks were bailed out by receiving $65 billion in liquidity injections from the Insured Mortgage Purchase Program (IMPP) in 2008 - Canada's version of TARP - whereby the CMHC purchased insured mortgages from Canadian banks to provide additional liquidity on the asset side of their balance sheets.

No one seems to be aware that the Bank of Canada then gave our Canadian Banks an additional $45 billion in temporary liquidity facilities or that the Canada Pension Plan, through the purchase of $4 billion in mortgages prior to the IMPP program, raised the total government bailout to $114 billion.

And what about the CMHC being ordered by the Federal Government to approve as many high risk borrowers as possible to prop up the housing market (with entry level buyers) and keep credit flowing?

• In 2008 some 42% of all high risk applications were approved, a 33% increase over 2007.
• Between the beginning of 2007 and 2009 Canadian Banks increased their total mortgage credit outstanding listed on their books by only 0.01% - possibly the smallest amount of change in post WWII history - which was the only way we managed to keep credit flowing in our country while it dried up in the USA.

Canadians are oblivious.

They can't see how this all impacted the debt orgy. Aren't aware of how CMHC's obligation has grown from $100 Billion in 2006 to $776 Billion in 2010.

Last year the Conservative Government, after our nation spent 10 years digging ourselves out of a $45 Billion deficit with onerous taxes like the GST and years of cutbacks in government services, replunged us back into hock with a record breaking $50 Billion deficit.

If CMHC is forced to pay out on a mere 10% of that guaranteed $776 Billion, that amount would more that double that historic $50 Billion debt.

But the average Canadian is completely oblivious.

They sincerely believe that our secure, non-bailed out Canadian banks don't lend to 'risky borrowers'.

They are wilfully blinded to the ads all around them whereby someone with no money can go out and, courtesy of bank initiatives like this one that offers them 7% back, can get their 5% downpayment covered and actually get PAID 2% of the mortgage value to make that purchase.

Nothing down and get PAID to buy a house!!!

No... we don't see it.

We tell ourselves we aren't making the same mistakes the Americans did. And we do it with blatant ignorance.

But Americans can see it.

When I spoke to two tourists from Minnesota in August, they asked what the interest rate was on a 30 year mortgage here. When they found out virtually no Canadians have long term mortgages... that the vast majority have 5 year terms or less that reset at whatever the going interest rate is... they recoiled in shock. They instantly recognizing that all Canadian mortgages are set up exactly like American subprime mortgages: 2-5 year low teaser rates that reset higher once the teaser term is over.

But the average Canadian is oblivious.

We bailed out our Banks.

We allow people with no money to buy houses (which has driven up the price of our real estate exponentially).

We have a vastly higher percentage of Canadians juiced on teaser rate mortgages, mortgages they can afford now but for which the vast majority will not be able to afford when rates reset higher.

And when interest rates do climb higher, our real estate market will implode just as spectacularly as California, Phoenix or Florida.

That collapse has already started. As I have shown you in posts this month

• Okanagan Real Estate has stagnated and properties are down 50%,
• Victoria Real Estate, after three previous months of sales down by over 40% from the same month last year, are on target for a 75% decline this month,
• Vancouver is on track for a fourth consecutive month where sales are 40% down from the same month last year,
• Bob Rennie is selling luxury condos downtown at the Fairmont Estates for 40% off their March prices, and
• in Surrey developers are offering units for 35% off their 2006 pre-sale price.

We are like the people in South East Asia who, on Boxing Day 2004, witnessed the sea drain from their shores.

Not sensing the danger, they ventured out to check out the tidal flats in wide-eyed wonderment only to realize, too late, the danger as they tried to flee for their lives from the crushing Tsunami barreling down on them.

The only difference is that the South East Asians didn't witness a neighbour go through the same situation 3 years earlier and then make the same mistakes.

Canadians saw the Housing Tsunami strike America, the UK and Europe. We have no excuse for not seeing this coming.

Yesterday my friend James revelled in calling me a doomer.

I perfer the term 'rational realist', myself.

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Developer says consumers being misled about strength of housing market!

Stunning little news article in the Peach Arch News, a Surrey community newspaper.

In a statement issued by Watermark Developments, the South Surrey developer says consumers are being misled to believe the housing market is stronger than it really is.

Watermark Developments is currently in the midst of offloading unsold inventory at below-market prices. “In contrast to this situation, which is clearly indicative of a sagging market, realtors... are blogging about how ‘hot’ the market is,” reads a statement issued on Monday by Watermark's hired realtor Salome Sallehy.

“Some realtors are putting the wrong perception out there,” Sallehy explained. “Inventory is just not moving because the market isn’t willing to bear those prices. Developers aren’t really acknowledging that.”

Sallehy comments come a couple of days before Watermark starts offering 37 units for sale on Saturday at prices that are 35% below what the units were sold for during pre-sales in 2006.

Yes... you read that correctly - 35% BELOW 2006 pre-sale prices.

All this on a day when I stood out in the rain at UBC and listened to a Scottish acquaintance of mine (we'll call him James) laugh at me for predicting a bursting housing bubble in Vancouver.

"Real Estate never goes down," he guffawed at me.

I shrugged and told him I was adamant about my belief and was putting myself out there for ridicule if five years from now I was proven wrong.

"Out there? You're putting your head on the chopping block, you know that," James chortled.

Guess he won't be taking me up on my advice to sell at least one of the two homes he owns so that he can cash out on his equity while he can.

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Will the economy hit a sudden wall? And Flip and Dip, baby! Flip and Dip.

One of the tales of malarky you hear by those rationalizing that the economy is turning around, it that the US consumer is bearing down and paying down debt. This, the argument goes, augers well for the return of balance.

Well, not so fast.

As the Wall Street Journal notes, this isn't what is actually happening at all. The reality is that over the past two years, US consumers have not been deleveraging as a voluntary act of eliminating debt, but have been actually aggressively leveraging more and more until the bank providing them credit puts them into involuntary bankruptcy, cutting off the money flow.

This is a startling realization.

What it means is that the average American is actually hyperleveraging to the point where all available credit is forcefully eliminated by a lender institution in one fell swoop!

The data outlined by the WSJ confirms that of the over $600 billion in deleveraging that has occurred, only $20 billion or so of it was voluntary. Irresponsible borrowing practices, in which US consumers spend, spend, spend themselves into oblivion, accounts for the balance.

Consumers aren't changing their habits at all. They are continuing to binge only to be cut off cold turkey.

Instead of entering a slow deleveraging rehabilitation, something far more insidious is going on.

Consumers are accelerating spending until the charge off threshold at the lender is breached, and all credit is cut off, which results in a collapse of a creditor's FICO score, cutting him or her off completely from future (at least near term) credit access.

What this means for consumption is that we are building to an abrupt collapse of the consumer economy whereby a massive number of consumers will be saying goodbye to credit for a very long time.

With American unemployment still at record highs, and soon to take another leg higher, with paychecks continuing to decline, with excess capacity at record highs, with unemployment claims reaching their ceiling 2 year anniversary from the Lehman collapse, and with the general economy double dipping; the implications of this will be dire, as there will be no gradual decline.

Instead we are staring at a looming abrupt collapse.

The implications here for the economy, and the stock market, are profound.

Meanwhile in local real estate...

On the slow melt front, faithful reader, R.D., has been keeping tabs on 2699 Cambridge Street, MLS V850651 which is located just west of the PNE in Vancouver's eastside neighbourhood of Hastings/Sunrise.

Purchased in early September, 2009 for $838,000 the property was listed just last month (August, 2010) for $926,000. Presumably no additions, alterations nor upgrades were done to the property.

You've got to love optomism, don't you?

But rather than flip for a profit, it appears the buyer is headed to flip for a dip - a dip in equity.

The asking price was first reduced to $859,000 which means the buyer would be only breaking even after realtor fees, transfer fees and any lost/paid out interest - not to mention what could have been gained by investing elsewhere.

But that's not the end of this tale of woe. Now the asking price has been dropped to $826,000.

R.D. tells me he thinks $750,000 is reasonable level for this to drop to.

Seems even some Bears don't fully appreciate what's about to happen.

What about you? Are there any properties you have been watching that have been dropping their asking price? If yes, drop me an email and tell me about it.

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More on the Hyperinflation Debate

If you are not aware, this week the United States is pumping a massive amount of money into the markets (POMO) in an attempt to stimulate inflation. This is the number one reason why Gold/Silver have been taking off in value lately.

The Bank of International Settlements (BIS) has come out with a report comparing Japan with the United States as both embark on the same solution to the economic crisis (QE).

As Zero Hedge notes, the report show us that "Japan, even during its two-decade long deflationary process is far better equipped to handle the economic collapse that is unravelling for an entire generation of Japanese consumers. Which is why the Fed is now actively pumping $5 billion in the market every other day to stimulate inflation, and the stock market, as this is now the Keynesian system's Maginot line. The Fed can not allow mass perception of the the double dip to become entrenched as that would be the proverbial game over. What has worked in Japan for 20 years will fail miserably when applied in the US, simply because US consumers are in a far, far worse shape than their Japanese counterparts."

Coincidentally our friend, Gonzalo Lira has also come out with a post examining the Japan/US comparison. I'll summarize it here but I know some of you will want to read the full post so I invite you to click the link and go to Lira's blog.

Japan went through an equities and real estate boom during the 1980’s — a boom that was really a bubble. And like all bubbles, it eventually burst in 1990. Since then, Japan has been lost and the Japanese government has spent a fabulous amount of money for domestic stimulus that hasn’t helped at all. Japan is in full-on deflation—in every sense of the word.

Now a lot of people believe America is set to begin its own version of Japan’s Lost Decades and Lira argues it will be something completely different.

Lira notes the rationale for a similar path is simple and superficially persuasive:

• Just like Japan in 1990, the United States went through a bubble in equities and real estate, which eventually popped in 2007–‘08. Since then — just like Japan — the U.S. has been experiencing deflation. Just like Japan, the U.S. now has zombie banks, the so-called “Too Big To Fail”. Just like the Japanese government, the U.S. government is spending - spending - spending, so as to prop up aggregate demand. The Federal Reserve — just like the Bank of Japan — is issuing enormous sums of money in order to prop up aggregate asset price levels — the Fed’s policies are so reminiscent of the BoJ’s money printing that Bernanke & Co. have borrowed the term outright: Quantitative easing.
  
  Everything screams Just Like Japan—right? So according to the “Japan Is Us” camp, 2010 through at least 2015 will be just like Japan between 1990 and 2010: Sluggish growth, stagnation — and most important of all, deflation, deflation, deflation.
  
  But there is one key difference that the Japan Is Us crowd conveniently ignore. They ignore it out of blindness, or incompetence, or—occasionally—out of malice. They ignore this key issue like the elephant in the room that’s gone and got drunk, and is now making a fool of himself: Balance of payments. Balance of payments (BOP) is the measure of a country’s total exchange with the rest of the world.

Lira notes that this 'current account' is the key metric, it's all about the trade surplus or deficit.

The U.S. current account has been negative for a long, long time (since 1973). Japan, on the other hand, has a current account surplus.

To finance this massive current account deficit, the U.S. has sold assets to the rest of the world, which are Treasury bonds. And as everyone knows, Treasuries might be called “assets” by the sophisticates, but they are really nothing more complicated than a loan. In other words, Americans and their government have gone into massive debt with the rest of the world, in order to finance all this spending.

Japan, meanwhile, has been carrying a current account surplus. Therefore, the Japanese government has been borrowing money not from overseas, but from its own citizen’s savings. All of the Japanese government’s stimulus spending has been paid for by the Japanese people.

This is the main difference between the United States and Japan and Lira argues it should be obvious — and ominous — what this difference means.

• The U.S.— unlike Japan—cannot pay back its loans: Because the United States is broke. The Federal government is running deficits of around 10% of GDP. America as a whole has racked up $7.5 trillion in current account deficits over the last 25 years — over 50% of total GDP — with no end in sight.
  
  So the United States — unlike Japan — has been spending what it does not have. The U.S. — unlike Japan — depends on the rest of the world to lend it money to continue on this spending spree. Americans — unlike Japan — do not produce enough to self-finance its government’s stimulus programs.
  
  Therefore — unlike Japan — the United States will eventually be unable to pay the Treasury bonds it has issued. Therefore... there will be a collapse in the Treasury bond market (triggering) a panic in Treasuries (that) will mean a run up of commodities — which will bring about the death of the dollar, and hyperinflation in America.
  
  But even if you don’t subscribe to my hyperinflationary scenario — even if you think I’m full of shit on this issue (and plenty of sensible people think I’m full of it to the brim) — it’s obvious that Japan is not like the United States—it’s obvious to anyone who looks at the situation evenhandedly: The contrast in the two countries’ balance of payments is enough to show definitively and unequivocally that they are not the same.
  
  The source of the two countries’ funding is key: One produces its own stimulus from its current account surplus, while the other borrows it from abroad, adding more debt on top of its already existing debt. Therefore, one country’s spending and stimulus programs — Japan’s — are sustainable, while the other’s — America’s — is not. Which means that the mechanisms for this fiscal debt—sovereign bonds—are rock solid in Japan, but lethal in America.

Lira argues that you are seeing a promotion of the 'Japan Is Us' point of view and that is leading money managers to do the hard sell and lead their clients into Treasury bonds — because if you were in Japan in 1990, their sovereign bonds turned out to be the smartest investments in the long run.

But the U.S. is not Japan and US Treasuries have been under performing.

Lira suggests

• "That’s why so many people keep insisting that Japan Is Us! - Japan Is Us! - Japan Is Us! They are selling their clients on something, or else trying to explain away their underperformance, by sheer force of personality — while ignoring the blindingly obvious fact that the U.S. is not Japan.

Which, of course, brings Lira to his foil in this debate, Mish Shedlock:

• One prominent blogger in particular has been going insane, insisting day after day that Japan Is Us, to the point of psychosis — evidence to the contrary be damned. Every day, this blogger — Michael “Mish” Shedlock — bangs on the same old tired drum. Mr. Shedlock is affiliated with Sitka Pacific, whose performance leaves something to be desired. There are, apparently, a number of Sitka Pacific clients quite nervous about the direction of their investments. So it is reasonable to question whether Mr. Shedlock is ranting and raving how the U.S. is following the deflationary spiral that Japan did because he genuinely believes what he is saying, or because he is trying to convince someone — maybe his clients, maybe himself — of something that he knows in his bones might not be true.
  
  What is true is that anyone who has made bets that Japan Is Us will soon find out if they were wise bets, or foolish ones. The Treasury bubble is soon to burst — so we’ll know the fate of the American economy soon enough.

Back to you, Mish Shedlock.

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Video clip on Bubbles

I promised a colleague I would repost these video clips from Chris Martenson on asset bubbles, the pattern they follow and past historical bubbles. It comes in two parts...

And finally, for what it's worth...

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