Counterfeit Silver Coins surfacing in Seattle

Saw this story on KOMO-TV out of Seattle and thought it was worth passing on.

As the banking cabal's determined raid on silver is rebuffed today and Silver climbs higher, take note of this story if you are thinking about buying Silver.

• PORT ANGELES, Wash. - Counterfeit coins by the thousands are turning up in Washington state, and authorities are warning coin collectors to be on the lookout for them.
  
  All or most of the counterfeits appear to be from China.
  
  "Stacks of ingots, bars, all kinds of stuff - they make everything from pennies all the way up to silver dollars," says Port Angeles police officer Duane Benedict. "China is making these things by the thousands."
  
  Several of the fake coins were recently sold to a Port Angeles business, EZ Pawn, for $400. They would have been worth more than $1,500 had they been real, Benedict said.
  
  Officer Benedict got a call from EZ Pawn.
  
  "They brought me in there to look at something they thought was fake. So I was pre-warned. But I picked it up and said, 'What's fake about it?'"
  
  The 20 counterfeit U.S. Morgan silver dollars were supposedly from a century ago. Brian Winters of EZ Pawn has bought coins for years - and even he was fooled.
  
  Unlike most counterfeits, the coins did not all have the same dates. One was a super rare 1893S, worth thousands and thousands.
  
  It was at that time Brian pulled out a loupe and looked at a real coin and a suspect one. He found the "T" and the "I" too thick. All the coins were fake.
  
  The real coin weighed in at 26.7 grams. The fake was two grams lighter.
  
  For those of us without a gram scale - there are other tests for detecting the counterfeit coins.
  
  The real ones have a high-pitched ring when they're dropped. The counterfeits land with a thud.
  
  Also - a strong magnet will detect small amounts of iron in counterfeit U.S. coins. If a supposedly "silver" coin has even a little bit of attraction to the magnet, then it is a fake, Benedict says.
  
  The counterfeits aren't just limited to silver dollars. Other coins - including Indian head pennies - also have turned out to be fakes.
  
  And EZ Pawn says they're continuing to see fake coins brought in by other customers.
  
  And Benedict warns businesses to be suspicious if someone uses only coins to pay for merchandise.
  
  "Use caution if someone brings in a lot of coins to buy something, and look them over carefully," Benedict said.

If you want to know how to test Morgan US dollars to see if they are fake, above is a youtube video showing how they are tested. The technique can be applied to other coins as well.

Hope to post Part 3 of the Silver series later today as well.

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No post today

Been busy so my apologies, no post tonight.

For the silver fans, the open interest is still huge for March delivery so the consensus is you should see silver get hit hard tonight in a desperate attempt to shake those standing for delivery.

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Silver, the Opportunity of the Decade - Part 2: The Comex, what is it?

Last December, when President Obama announced a tentative deal with Congressional Republicans to extend the Bush-era tax cuts at all income levels for two years, you could clearly see the writing on the wall.

Extending those tax cuts will cost $900 Billion - equal to QE2. In essence we had QE3.

And as the political realities of the mounting debt issues of the US Federal Goverment met head on with the burgeoning debts of the individual US States and cities, there is no practical way out of the debt problem – none.

QE4, 5 and 6 are all but assured.

And it's not just America.

China has been printing money too...

The UK has been printing money...

Japan has been printing money...

India has been printing money...

And so has the EU...

As I wrote last May, the story of the coming decade is one of soverign debt and how nation's respond to it.

I wrote then that this is already creating a mini-panic and rush on precious metals, a trend which will only intensify. Almost a year later, that demand has most definately intensified.

For large scale buyers of precious metals, the primary source to acquire Silver is via the COMEX.

So before talking about what is happening in Silver, we must first understand the COMEX and how it works.

What is the Comex?

There used to be two exchanges in New York. The New York Mercantile Exchange and the Commodity Exchange, Inc (COMEX). In 2006 these two exchanged merged and became one. It is now the New York Mercantile Exchange (NYMEX) but is divided into two parts, the NYMEX Division upon which is traded such commodities as oil, gas, palladium and platinum and so forth, and the COMEX Division on which gold, silver copper and aluminum is traded. On this exchange are traded 'Future Contracts' of gold and silver.

Futures Trading

Futures trading is the basic action of entering into a legal contractual agreement with another (known or usually not known) individual to exchange money or assets of some value at some time in the future and with the pre-determined price (called a futures price) based on the underlying asset. Such an asset could be stock, an interest rate even or, in this case gold or silver.

So traders agree to exchange gold/silver (or equivalent cash flows) at a future date.

When you enter into these contracts you are betting that the value or price of that asset or stock or gold is going to be at a certain value at a predetermined time in the future. At that time, when the contact is completed and 'settlement date' arrives, you or the other party cough up with the difference between what was originally paid and what the settlement price is.

One of the perceived advantages of futures trading is that you do not have to put up all the money needed for the contract but usually only a percentage. Usually around 10%. This means that people can trade with a smaller amount. It is rather like going to the races and placing a bet for 1000 dollars but only putting 100 dollars down. If you lose you have to come up with the 1000 dollars of course but if you win you have only needed 100 dollars to play the game. There are some other factors, of course, but that's the primary gist.

Both parties of a futures contract must fulfill the contract on the settlement date. The seller then delivers the commodity to the buyer, or, more often than not, it is a cash-settled future, and cash is transferred from the futures trader who sustained a loss to the one who made a profit.

Incidentally, you can bet both ways of course, that the price will go up or down.

To take actual phyical delivery of the silver in a contract, you will need to wait until the term of the contract expires and you can take delivery. This is called taking a long term. Various entities, such as banks for example, take a short term. They have no intention of taking delivery and so, with the ten percent leverage mentioned earlier, they can take enormous amounts of contracts and sell them short, keeping the price down and, in effect, manipulating the gold and silver price.

But if you intend to take possession you will have to ante up the whole amount required to complete that contract and you would have to wait until the contract expires before you can organise and take delivery.

For example, if a contract was bought today, and the price on the gold contract was between $695 - $735 per ounce, the full value of the contract you bought would be $69,500 - $73,500 per 100-troy ounce. Likewise if the price on the silver contract was between $9.74 - $9.16 per ounce, then it would be $48,700 - $45,800 per 5,000 troy-ounce contract.

These figures would not include any commission charges incurred going through a broker of course and are just an example to illustrate how it works.

Of course, if you did not want to take possession of the metal you could simply enter a position without posting the full contract value, but instead post around 10 percent (The actual percentage may vary depending on your broker and other factors). This is the "margin" which is posted "in good faith". Price can go through some dramatic changes in the any futures market and if the price of gold drops significantly you might be called upon to add funds to your account to maintain your position. (called a maintenance margin) or you might find your position is liquidated. There is usually a risk maintenance level and if your account falls below that level then you would need to top up your account with the requisite funds.

Now, when the time comes to take delivery you will get a Notice of Delivery and the full amount will be debited from your account. So you would be required to have the full contract value deposited in your account with your broker at the price the contract was originally purchased. There would be a few days of processing at the end of the contract but then you would be able to take possession, usually a couple of weeks later.

You can do this in three ways.

You will receive a receipt, which in effect is like a stock certificate, and you could store that. The gold would be in storage in a vault and you would be up for some storage charges, This premium, compared to the gold price, will be minuscule. The gold is kept in storage for you and you can take physical delivery anytime you want of course. This is the first method.

The second is that you could have the gold bullion shipped to a warehouse. You can be put in touch with the vault that contains your gold (generally in or around New York, US) and have brinks or an Armored car transfer your gold to a warehouse or bank of your choosing. There would be more costs involved with this but, again, the charges would not be very much compared to the value of the gold bullion.

Of course you can avoid doing any of this by simply depositing the full value of the contract when you establish the position. Note, you can decide not to take delivery of course at any time and close out your metals position and take a profit or loss depending on the price movement.

However, IF you want to take it out of the Comex warehouse and have it stored elsewhere then it would be your responsibility to organise this. This would be typically done through a security shipping service and arranged storage at a bank vault.

If your intent is to actually receive the physical metal, it is held in storage at specific "delivery points." It is your responsibility to make the arrangements to do this. There are fees associated with removal from the storage facility. In addition, if the metal is taken out of storage, it cannot be sold for delivery on the exchange without being re-assayed.

Tomorrow we'll talk about the banking cabal manipulation of the Comex, something you will see on a massive scale in overnight trading of silver tonight in a desperate attempt to bring the price of silver down.

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First R/E, then Silver: The Opportunity of the Decade - Part 1: Shrinking Supply and Rising Demand

I have been meaning to do a couple of indepth posts on the subject of silver and what's happening at the Comex and I am going to start with part 1 today.

But first real estate.

The endless pumping goes on.

First up is John Geha, President of Coldwell Banker Canada. He's telling Canadians that you shouldn't expect housing prices to drop anytime soon and that "it is a healthy market for the first-time buyer."

Of course... when does the chief salesman of a product ever tell you that it's a bad time to buy his wares?

The problem, of course, is that he's presented as an 'expert' instead of the salesman he is promoting his own product.

Speaking of promoting your own product, In its latest report the CMHC says Canadian housing prices will move in line with inflation for the next two years.

Again... do you think you will ever hear them tell you that prices are going to tank and not to buy a house right now?

Now for Silver.

If you look to the right hand side, overnight silver is continuing it's dramatic climb. As I write this, Silver is up $0.30 and sits poised to crack the $33 mark (it's at $32.96 right now).

Something dramatic is playing out in Silver right now. Understanding what is going on and the dynamics behind it you will, hopefully, come to appreciate why I believe Silver could explode exponentially in value and why it represents one of the greatest investment opportunities of the decade.

Silver: The Opportunity of the Decade - Part 1: Shrinking Supply and Rising Demand

For years, the data contained in the weekly Commitment of Traders Report (COT), issued by the CFTC, have indicated that several large COMEX traders have manipulated the price of silver and gold.

However two significant developments have evolved which have put a giant squeeze on the manipulations, a development which cold drive up the price of silver dramatically and break the cycle of price manipulation.

Over the past two years, the United States have ramped up debt levels. Leaning on their status as world reserve currency to use Quantitative Easing as a solution, confidence is being lost in the US dollar.

In response, China is starting to divest themselves of their massive holdings in US Treasuries and have become huge buyers of both Gold and Silver. Other nations are following their lead.

Recognising the same concerns, individual investors are also starting to load up on Silver.

Meanwhile, unlike Gold, the world supply of Silver is shrinking not rising.

This youtube clip outlines the facts (albeit in a sensationalized manner) and I invite you to check it out:

Given these conditions, the price of Silver should be much higher than it is today.

For years Silver traded in a range of 15:1 to Gold down to 10:1 to the price of Gold (which should put the price at $90 - $140 an ounce).

But Silver has been trading instead from 65: to 45:1 to the price of Gold.

Some analysts have argued that, based on mainstream estimates of total above and below ground Silver (17Boz) and Gold (8Boz), the Silver/Gold Ratio should be 2.1-1. With Gold trading at $1,300/oz Silver should really be trading at $619/oz.

If you were to consider the estimates of total above ground Silver (5Boz) and Gold (5Boz), then the Silver/Gold Ratio should be actually be 1-1. With Gold trading at $1,300/oz then Silver should really be trading at $1,300/oz.

Finally if you were to look at it based on estimates of total monetary bullion above ground Silver (1Boz) and Gold (3Boz), the Silver/Gold Ratio should then be 1-3. With Gold trading at $1,300/oz Silver should be trading at $3,900/oz.

But it isn't. And critics have argued that the reason is that a banking cabal is severely manipulation the price of silver to supress it's rise.

Evidence about that manipulation has lead the Commodities and Futures Trading Commission (CFTC) to conduct an investigation that is being conducted by the CFTC "Enforcement Division".

Although the final conclusions have been delayed by the CFTC, there is clear evidence to support the allegations of manipulation.

Now, with new CFTC position limits about to be imposed combined with (a) increased consumer demand, (b) increased investment demand and (c) decreasing supplies; a situation has been created whereby the banking cabal manipulating the Silver market have been put in a giant short squeeze.

This happened during the December delivery period on the Comex (which saw silver shoot up 70% in value from August to December) and appears to be occurring again for the March delivery period.

It's possible that the short squeeze in the silver markets could lead to the a busting of the banking cabals manipulations and turn silver loose to float to market valuations.

Tomorrow we will talk about the COMEX. Later we will cover the short squeeze now occuring on the COMEX and the rumours of a co-ordinated attempt to execute a short squeeze by some hedge funds.

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Resignation

The Vancouver Sun had an interesting article this past week titled "Buying a house in Vancouver? Welcome to the money pit".

The article states what we all know; that there is no such thing as an affordable Vancouver house any more.

More strikingly, the article notes another truism. "Even if you manage to come up with a down payment, you'll likely be a single-digit interest rate hike away from bankruptcy, and someone you don't know will be renting the basement suite you had to build in order to quality for the mortgage in the first place."

Wow.

It's not that we don't already know this.

What is compelling is that, despite these conditions, there exists such a widespread sense of resignation and acceptance to this condition.

The article goes on to describe how attempting to cope by buying homes - which in another time would have been nothing more than teardowns - and turning them into reclamation projects as their only hope of owning in the city.

"Many are found on the edges of Vancouver, to the east and south, small postwar stucco bungalows and turn-of-the-century wood-frame piles that are short on bathrooms and bedrooms and need insulation and sometimes foundations because they've been long listing to starboard."

The article concludes by saying, "if you have just sold your soul for a local patch of dirt and fir floorboards, you'll soon discover that the only sure thing about real estate in the Vancouver area these days is that, like death and taxes, you're now the proud owner of a money pit."

So what do we have here? In a desperate attempt to own a home of their own, families are plunging themselves into massive debt to buy homes that require huge upgrades. Since they were so overextended to the home to begin with, odds are that they can't afford to do the proper renovations that are required.

The result... paying to the max for a home that doesn't even come close to being that 'dream' home you wanted to begin with.

But what of the other option?

Rather than capitulate and becoming a debt serf, why not take the sane option and stay the hell out of an irrational market?

Why is it that this option is simply not on the radar screen of so many people I know?

Like they say, common sense... is not all that common.

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Onni: 3 reasons to buy in 30 Days Campaign

If you click on the above image to enlarge it, you will see the latest attempt by the R/E industry to prey on your fears/desires to plunge yourself into irrational debt through the remaining 30 day window left open by Finance Minister Flaherty.

Today's entry is courtesy of Onni Group.

Note the disclaimer at the bottom of the ad: "These figures are based on a three year fixed term of 3.20%."

Curiously there's no corresponding chart showing you how f*cked you will be when you renew with a 30 year amortization at 5-8% (or higher).

Gee... I wonder why?

Meanwhile, the best way to summarize what today will bring in Silver...

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Marketing? Or Manipulation?

A couple of years ago a friend, who was renting the house he lived in, was informed that the out-of-town owner had decided to sell.

What ensued was a very acrimonious relationship between the chosen realtor, the property management company and my friend, the tenant.

After several months there was finally an interested prospective buyer, a young Philippine family. A second showing was arranged and I was at the house when it took place. What happened next was one of the most sleaziest manipulations I had seen by a realtor.

The realtor arrived at the house with a work colleague and the property management representative (my friend knew about the showing).

Shortly afterward, the Philippine family showed up for their second viewing.

Five minutes later, the doorbell rang and the realtor stated that there was another interested party to see the house and that was them at the door. The property management rep, the Philippine family and my friend all knew nothing about this 'second interested party'.

A single male came into the house the realtor brought him upstairs to the kitchen (where I was). They stood there talking to each other in their native language. What struck me was that the man, supposedly there to view the house, wasn't the least bit interested in looking around.

As the Philippine family moved through the house, this man would move elsewhere. During the entire time he wasn't the least bit interested in the house.

Finally everyone went outside and the Philippine family and the property management rep left.

After talking for five minutes more, the realtor took out $50 and gave it to the man.

That night the Philippine family made an offer on the house and it was accepted.

Clearly it was a blatant attempt to create a false impression with the Philippine family that there was other interest in the house. No doubt the stereotypical R/E pressure tactic of 'buy now or miss out' was utilized.

It is the type of story that slanders and tars the entire industry with a bad name.

I was reminded of this as I watched another blatant manipulation play out over the past couple of days.

On Sunday Garth Turner altered his readers to a craigslist ad that had appeared in Vancouver.

The craigslist ad said:

• PEOPLE NEEDED TO LINE UP FOR NEW CONDO PROJECT
  
  Just as the title says, we need people to hold spots and line up for a new condo project located in Burnaby (Kingsway/Willingdon Ave). Line up may start as early as weds/thurs night. Grand opening is Saturday February 19, 2011.
  
  Warm beverages and washrooms will be provided by the developer.
  
  Shifts are determined on how long you would like to stay. (preferably 8hours+)
  
  Get paid cash quickly for sitting in a line up!
  
  E-mail me your phone number + e-mail for more details. job-syk6p-2212992997@craigslist.org

You don't need to be a rocket scientist to figure out the purpose of the ad. A condo developer was going to create the false impression of a frenzy for a pre-sale offering.

In addition to craigslist, ads in asian publications started popping up too. As noted over at VREAA there was this one which, when translated, says "“need help to line up, tonight, urgent, contact Shirley 778-863-3870″

Then there was this one, “urgently required, night shift persons, 7, 8pm – 6am contact 604-715-9389″

And finally this one“Builders Assoc CNY Meetup, Feb 19, Bonsor Community Centre, 6550 Bonsor Ave, 27:30-22:00 hours, 604-888-8888″

And sure enough, last night on Global TV's evening news came this glowing story about the return of condo lineups and a frenzy to get a piece of the pre-sale action at a new condo project located in Burnaby at Kingsway and Willingdon Ave.

Industry defenders will tell you this is all shrewd marketing techniques designed to 'stimulate' sales in competitive market. They will rationalize other "explanations" for these ads. But can the rationale person conclude that it's anything but blatant manipulation?; a sham, designed to deceive and pressure prospective buyers?

And do you really want to do business with anyone employing these tactics?

Just make sure you're aware of what's going on and don't get sucked into to making a decision you will regret for the rest of your life.

And, for Gawd sakes, don't think you have to 'buy now or be priced out forever'.

Finally I bring all of this to you on a day when the Wall Street Journal reports that the average debt held by Canadian households has hit $100,000 and the crucial debt-to-income ratio is now at 150%.

The $100,000 figure represents a 78% increase over the past two decades. In 1990, average family debt stood at $56,800, with a debt-to-income ratio of 93%.

Meanwhile, Canada's savings rate has fallen to 4.2% of income, or about $2,500 per household. That is down from 13% or C$8,000 in 1990.

More significantly the number of households which have fallen behind in their mortgage payments by three or more months climbed to 17,400 in the fall of 2010, up nearly 50% since the 2008 recession began.

Average mortgage debt held by Canadians stood at $63,126 at the end of the third quarter of 2010 and 32,300 Canadians became insolvent in the third quarter of 2010, 12% higher than pre-recession levels.

The average level of assets held by Canadian households rose by 62.8% over the past 20 years, including a 73.2% increase in real estate, total debt rose by 77.7% which was led by a 87.9% increase in consumer credit and loans.

This is all going to end very badly.

Prepare yourselves accordingly.

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Silver Soaring

After fighting an intense battle all week, silver has just broken out and established it's highest intra-day price since March 7, 1980. As this was written, silver hit $31.30.

There are rumours of a fascinating battle playing out between hedge funds, the banking cartel who short and supresses the price with paper shorts and the Comex. I will try and post something on this before too long.

The last time silver was at this price level, the 10 Year bond interest rate was at 12.45% and gold was $600/ounce. In other words, by comparison, silver could still shoot much, much higher.

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Presto-Chango

I had to laugh this morning.

As many of you know I have been warning about cost-push inflation since Quantitative Easing began.

The flood of liquidity would find it's way into the markets, commodities would surge, and the cost of doing business would spike for business translating into higher prices. All while jobs numbers - and wages - stagnated.

NONE of this, however, would show up in our Consumer Price Index because in 1999/2000 government changed the way the CPI was calculated and gutted all the factors like food and energy from the calculations.

Thus we have a situation where inflation, when calculated like it was in the 1970s, 1980s and 1990s, is surging along at about 8% while 'official' government statistics peg it at 1-2%.

Yesterday our friends over at Financial Insights commented how inflation is raging in China and retail margins over here are facing a coming squeeze.

(A squeeze which isn't just coming, it's already here. We're finally seeing it translate into higher prices but make no mistake, that squeeze has been going on for months)

I commented on the post at FI and jokingly said that China would just have to change the way they calculate inflation like we did in 1999/2000 and... presto-chango... no inflation.

Turns out is wasn't all that much of a joke as China is about to do just that.

The old saying goes that there are lies, damn lies and then there are government statistics.

Remember that the next time you're wallet is bare and the government (and some bloggers) tell you there is no inflation.

As I said last Friday, combine this squeeze on basics with rising interest rates and new mortgage rules... and life for home owners with a mortgage here in the Village on the Edge of the Rainforest is going to get very, very difficult.

Once this process kicks into high gear, and the serious price inflation comes, I think we will all look back and be shocked that there were people who actually worried about deflation in 2008-2010.

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Entire MERS process ruled illegal

It's been a while since we talked about the US Foreclosure Crisis. And while there hasn't been much news, the issue hasn't gone away.

A detailed overview of the issue is outlined in this post.

As you may recall, serious questions were raised last year about MERS, the electronic clearing house for mortgage titles established by the real estate industry in the US.

The Mortgage Electronic Registration Systems (MERS) digitized the land title process to make thing 'simpler' for banks. By 'simpler', I mean 'cheaper' because it allowed big banks and to by-pass local state real estate laws, process and fees for title transfer.

Critics chared that MERS illegally broke the 'chain of title' process for mortgages in the US.

When a homebuyer signs a mortgage, the key document is the note, the actual IOU of the mortgage. In order for the mortgage note to be sold or transferred to someone else (and therefore turned into a mortgage-backed security), this document has to be physically endorsed to the next person. All of these signatures on the note are called the ‘chain of title.’

You can endorse the note as many times as you please... but you have to have a clear chain of title right on the actual note: I sold the note to Moe, who sold it to Larry, who sold it to Curly, and all our notarized signatures are actually, physically, on the note, one after the other.

If for whatever reason any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay.

To repeat: if the chain of title of the note is broken, then the borrower no longer owes any money on the loan.

MERS has argued that, under it's membership rules, that it can act as a ‘common agent’ for undisclosed principals and make the tranfers though it's database.

As reported by Bloomberg, U.S. Bankruptcy Judge Robert E. Grossman in Central Islip, New York, in a decision he said he knew would have a “significant impact,” wrote that the membership rules of the company’s Mortgage Electronic Registration Systems, or MERS, don’t make it an agent of the banks that own the mortgages.

In short, MERS lacks the rights to transfer mortgages.

The key to all of this, of course, is that as mortgages were slice, diced and bundled into mortgage backed securities... the transfer of ownership was never done (legally) and now banks lack the legal standing to foreclose on these properties.

As posted last year, this is a major, significant story.

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Your Life According to the Government

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Inflation

As faithful readers know, I have written a number of times about inflation.

Back on October 7, 2010 I wrote that while we would have deflation in some areas, we were 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.

Look at this chart which shows gains over the past year (click on image to enlarge):

Fed money is flowing pell mell into commodities which are now setting new records almost daily.

Look at that chart. In the past year everything, from metals to stocks to bonds to grains to energy, has experienced profound price increases.

Despite this, we are being told - on a daily basis - that inflation is too low.

This is, of course, because the way we calculate inflation has changed.

If you are a boomer in Canada, you remember gasoline priced in gallons. It was the 'unit of measure' we grew up with.

The recalculation of the Consumer Price Index is almost like saying in 1979 gas was $1.00 (per gallon) and today gas is only $1.21 (per litre). Therefore gasoline, as per it's 'unit of measure', hasn't really risen in price.

Riiight.

$1.21 a litre is almost $5.00 a gallon. It's not the same in any way, shape or form.

This nonsense that inflation is only running at 1-2% is only valid if you compare it to the 1970s by measuring inflation the same way then. If you do that, inflation in the 1970s was only running 1-2% then as well.

Calculate the inflation the way it was measured prior to the year 2000 and inflation is running at over 8%.

We simply changed the way we measure the price, and somehow rationalize the 'unit of measure' is the same.

Bottom line... inflation is trending now exactly like it was in the mid 1970s.

Inflation is raging across the globe.

The unrest and riots we are seeing are symptoms of that inflation.

History tells us inflation is best tamed early, but the US Federal Reserve is already late and demonstrating a remarkable callousness by doing the exact opposite of fighting inflation.

By the time action is taken to fight it, Inflation will have the momentum and it will take a vast overreaction on the part of the Federal Reserve to restrain it.

They'll have to drain enormous amounts of liquidity and tolerate vastly higher interest rates to be able to do that.

And you know that the Fed will hesitate, equivocate, and ultimately be late with their actions.

People are finally starting to notice, as this CNBC story notes.

Unfortunately the fact is all this commodity inflation hasn't really begun to work it's way to consumers here in North America yet. It has started, to be sure, but what we have seen is nothing compared to what is coming.

It's called currency induced cost-push inflation, inflation is caused by producers and merchants being forced to pass along through higher prices the rising cost of inputs to their products.

Your income isn't rising to keep pace with rising expenses and you get squeezed. Hard. And its not luxury items that are going up in price, its the staples. Bread, milk, gasoline, clothes, eggs, meat... the basics that no one can realistically live without.

Combine the squeeze on basics with rising interest rates and new mortgage rules... and life for mortgage holders in the Village on the Edge of the Rainforest is going to get very, very difficult.

Once this process kicks into high gear, and the serious price inflation comes, I think we will all look back and be shocked that people were worried about deflation in 2008-2010.

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We are much closer to total destruction than you think!

Did that headline catch your attention?

They aren't my words. That was how CNBC summarized someone who has far more intimate knowledge of the financial system than any blogger.

But we'll come back to that.

First off let's focus on interest rates here at home.

As you know, Canadian banks hiked interest rates this week. On the heels of those rate hikes comes Finance Minister Jim Flaherty with a warning that there are even more rate hikes coming.

• "The recent increase by a couple of the banks is exactly what we expected. And more increases should be coming. We're likely to see higher interest rates as we go forward because interest rates are still very low."

Almost makes quote of the day: "Interest rates are still very low."

That's 'very' low as in, rates are going to go way higher.

The big news story though was occurring south of the border.

As I have said over and over again, we still do not understand - nor do we appreciate - the full depth and breadth of the financial earthquate that hit us in September of 2008.

Yesterday US Federal Reserve Chairman reinforced that point in testimony before the US Congress.

And for all you out there who think the crisis is over and has past, Bernanke's comments are stunning.

Warning that America's fiscal health has deteriorated appreciably since the onset of the financial crisis and the recession, Bernanke told Congress that the US is much closer to total destruction than you think.

CNBC reported the story here.

Said Bernanke:

• "The unsustainable trajectories of deficits and debt that the Congressional Budget Office outlines cannot actually happen, because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit. One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will come as a rapid and painful response to a looming or actual fiscal crisis."

Bernanke is telling Congress what Greenspan was telling us last year.

At some point the Bond market is going to force the issue on America and when it happens, the US Federal Reserve won't be able to stop it.

So for all of you who continue to believe that the government will never let interest rates go up like they did in the 1970s, not only are you ignoring the blogosphere... now it's Flaherty and Bernanke telling you what's coming.

Still not convinced?

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Schiff on Bernanke and debt ceiling warning

Peter Schiff discussing Ben Bernanke's warning to Republicans to raise the debt ceiling.

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On the topic of Interest Rates

In last Friday's post, Enthusiasm and Euphoria, I talked about our real estate market conforming to the classic bubble pattern and that it will be rising interest rates that finally prick the bubble.

Dennison's of the Village on the Edge of the Rainforest simply cannot comprehend the looming implosion that will devastate our hamlet on the wet coast.

Many will concede the devastating impact that double digit interest rates will have... but almost to a mortgage holder, they are adamant that interest rates will never climb that high.

For three decades now capital has become progressively cheaper and more easily available. Many people have come to believe that low interest rates now are the norm as they have gone their entire adult lives knowing nothing else.

For those innocent souls the current shifting sands will be nothing short of a paradigm shift. Even those old enough to have watched how the Internet transformed society (a paradigm shift on a scale not seen since the printing press transformed civilization), oblivion reigns supreme.

As noted in a report by the McKinsey Global Institute since 1980, differences in the cost of capital in most countries have converged as financial markets globalized and risk premiums in developing countries fell.

• Capital became plentiful, and long-term interest rates declined too — primarily as a result of falling investment in assets such as infrastructure and machinery. Global investment fell dramatically, creating a decline in the demand for capital substantially larger than the growth in supply created by Asian current-account surpluses.
  
  In other words, the “saving glut” so often cited as a cause for low interest rates really resulted from a decline in global investment.
  
  Today, however, this trend is reversing. Across Africa, Asia, and Latin America, rapid urbanization is increasing the demand for roads, water, power, housing, and factories. Global investment demand will now rise considerably up to 2030, reaching levels not seen since the postwar reconstruction of Europe and Japan.
  
  The global appetite to save, however, is unlikely to rise in step, for several reasons. China plans to encourage more domestic consumption. Spending will rise as populations age. Even increased expenditure to address or adapt to climate change will play a part. As a result, the world will soon enter a new era of scarce capital and rising real long-term interest rates. Such rates will in turn constrain investment and could ultimately slow global economic growth by as much as 1 percent a year.

Interest rates will be going up.

And while government has gone out of it's way, particularly since the early 1990s, to supress those rates artificially as a means to stimulate the economy, those days are coming to an end.

Our problem is coming to grips with that fact.

It is expected, nay... considered a right of entitlement, that government will be able to continue forever with that rate suppression.

Does the prophet see the future or does he see a line of weakness, a fault or cleavage that will be shattered as easily predicted events unfold?

As posted here we have read how Mark Carney, the Governor of the Bank of Canada, has warned us about what is coming.

Likewise has Alan Greenspan, former Chairman of the US Federal Reserve.

Even most well known Canadian blogs are detailing rising interest rate warnings this week.

The harmonics inherent in this particular act of prophecy are not all that hard to discern.

Ignoring them is nothing less than an act of defiance in the face of overwhelming logic and evidence to the contrary.

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Is Gold money? And what's going on with Silver?

Some fascinating developments in both Gold and Silver this weekend that are worth noting.

Many of you are aware of the turning tide with Central Banks around the world dramatically increasing their Gold reserves, but we often hear precious metals dismissed as the preserve of Gold and Silver 'bugs'.

Faithful readers know that I speak about the topic because I believe the fortunes of these metals are changing dramatically, a trend the represents a tremendous opportunity.

And in a sign of Gold’s further remonetisation in the global financial and monetary system comes word this morning that JP Morgan will now accept physical gold bullion as collateral.

Speculation is that JP Morgan is having difficulty in securing gold bullion in volume. JP Morgan is the custodian for many of the gold and silver exchange traded funds. It is important to note that they will not accept ETF trust gold as collateral. But real gold... for JP Morgan gold is money.

Don't they know you can't eat it or heat your home with it?

Morgan is not the first, either. In October, the clearing house of global exchange CME Group – CME Clearing – announced it will now accept gold as collateral for trades on the exchange. Gold bullion can be used for margins for CME trades, ranging from crude oil, gold, grains, equity indexes and Treasury bonds.

Given the current monetary, macroeconomic and geopolitical risk gold is an attractive alternative to debt, equities or other paper assets as collateral.

JP Morgans’s move shows how gold bullion’s fungiblity and tangibility as an asset makes it attractive and shows gold’s increasing importance in the financial system.

Meanwhile on the Silver front, there was a very important development this weekend.

Over the past few months, Silver has been showing sings of significant shortage. There has been a shrinking inventory on the Comex in the face of rising prices where the registered inventory now stands at a lowly 43 million ozs.

Anecdotal evidence suggests tight supplies everywhere and there are reports of refineries refusing to take new orders due to insufficient silver feedstock.

News out of China recently showed that China's net imports of silver quadrupled in 2010 to 3,500 tonnes (112 Million ozs). China has traditionally been a silver exporter. For example, in 2005 China made net exports of 3,000 tonnes of silver.

Then there were US mint silver eagle sales last month which set a record of 6.4 million ozs sold. If this torrid pace were to continue all year, the United States would have to import silver for the first time to meet the legal requirement to supply silver eagles.

But by far the most significant piece of news was that Silver entered a zero contango and on Friday closed in complete backwardation on the Comex, possibly the first time in history that this has happened.

In January Silver traded in backwardation between the spot price and futures contract up to one year out. But now the entire futures structure is in backwardation.

In plain English, this is a definite sign that there are shortages of silver.

Contango is where the spot price of a commodity is lower than the following futures contracts. That is the normal condition in the precious metals futures markets.

Contango is a sign that a commodity is in ample or adequate supply.

Backwardation means that the cash or spot price is higher than the futures price for the same commodity. Backwardation occurs when demand for immediate delivery outstrips the market’s ability to deliver the commodity. Backwardation occurs when there are too few sellers of the physical commodity to accommodate all of the actual buyers, so a near-premium develops to compensate the sellers willing to part with metal in return for taking delivery later.

When there is zero contango, it means that there is not even one futures contract that is higher than the current spot or cash price. Zero contango and structural backwardation (where each succeeding futures contract is lower for most or the entire strip) is also known as an “inverse carry” market because the futures no longer compensate holders for the cost of carry, capital, storage and insurance relative to the spot price.

It cannot be overemphasize how unusual and rare it is to have zero contango in the silver futures.

That means that there is heavy demand for immediate delivery silver. It means that silver players are earning a premium to sell physical for delivery now and to wait for the return of their metal until the March contract, the near active contract, which is trading at 1.6-cents lower than spot.

Full-blown backwardation has arrived in the COMEX silver futures market. Backwardation suggests that competition for whatever metal is available is heavy and most analysts consider silver backwardation to be a decidedly bullish condition.

These are significant developments and worth keeping an eye on.

Finally there is this latest offering from the Royal Canadian Mint:

The Mint is offering a new $20 face value coin that is being sold for $20 with free shipping. The coin is pure silver. A $20 silver coin for $20?

This return to silver currency is an interesting development to be sure. But take note, there are only 200,000 coins being minted and there is a limit of 3 coins per person (available only to Canadians, sorry). From the Mint website description:

• Strictly limited new edition. Authorized by the Government of Canada. Only 1 in every 175 Canadians can own one. This new Canadian silver commemorative coin is legal tender with a value of $20. It is available for the official price of only $20. You simply exchange $20 from your wallet for a $20 coin of pure 99.99% silver.

It also means when you want to get rid of it, you simply take it to the bank and get $20 in fiat currency.

If you are interested you can get them from the Mint at this link.

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Enthusiasm and Euphoria

If you click on the above image, you can enlarge it.

The chart is Vancouver's average real estate sale prices. The upper line represents detached houses and is significant this month because the Village on the Edge of the Rainforest has hit a new high for average detached house price: $1,144,537.

It's a stunning number to be sure.

Back in the fall of 2009, when prices had started to climb again after a temporary adjustment in response to the 2008 financial crisis, there was considerable dismay in the Bear camp because it appeared that the 'Stages of a Bubble' pattern appeared to be wrong this time.

All asset 'Bubbles' follow a very predictable pattern as exemplified by this graph (also click to enlarge):

Many believed the drop in 2009 was a case of our market passing the 'New Paradigm' stage, moving through the 'Denial' stage and into the 'Return to Normal' stage.

Bear despair began to mount when prices continued to climb and new highs once again established.

On various blogs I commented that the Asset Bubble pattern had not been dis-proven... Bears were simply mistaken believing we had reached the 'New Paradigm' stage.

Mortgage rule changes and a stalling economy may produce a slow melt, but it will be rising interest rates that finally prick the bubble.

And that hasn't happened yet.

And as one watches the market lately, it's hard not to find the developments of late to be significant.

The failure of a crash to fully materialize in summer of 2009 has almost emboldened and cemented the belief that it 'truly is different here'.

There is, once again, mania in the industry.

Our friends over at VREAA were moved to comment on this today.

The recent rise in average prices looks almost "vicious". Taking a snapshot of the current condition VREAA notes a milieu of heady prices, breathless media reportage, a disregard for debt by some economists, and nothing less than full on Bull exuberance:

• In pockets of Vancouver, a fair number of over ask sales; Westside, Richmond, and Eastside, too.
  
  Global BC runs a breathless piece on spiking prices, bidding wars, and over ask sales; with the obligatory mention of “increased Asian investment”. [3 Feb 2011, archived by fellow archivist Greenhorn HERE.]
  
  The Vancouver Sun runs an article ‘How much has the value of your Metro Vancouver home increased in five years?‘ [4 Feb 2011].
  
  In a G&M article [3 Feb 2011] Benjamin Tal, CIBC ‘specialist on household credit’, argues that we’re all richer than we think, and that the 148% debt to disposable income ratio is nothing to worry about. An unwise position, in our humble opinion, and one that is likely to haunt Tal in the fiasco that will follow.

I would humbly suggest that not only is the Asset Bubble pattern still fully at play but that we are only now moving fully into the Greed/Delusion/New Paradigm stage.

The Irving Housing Blog descibes this aptly:

• In the Greed stage, the bullish sentiment reaches a feverish pitch and prices rise very rapidly. Every owner in the market is making money and most believe it will go on forever. As prices continue to climb, buyers become very enthusiastic about owning the asset, and they tell all their friends about their great investment. The word-of-mouth awareness and increased media coverage bring even more buyers to the market. Egomania sets in as everyone thinks she is a financial genius. Any intellectual analysis at this stage is merely a cover for emotional buying and greed. During the Great Housing Bubble, there were many instances of properties receiving a dozen or more offers the day they were listed, with many in excess of the asking price.

As some Bears fretted in autumn 2009/Spring 2010, I suggested that we needed to sit back and allow events to play out.

The Asset Bubble pattern had not been disproven, it simply had not fully played out yet.

Watching events unfold these past two months, I remain fully convinced our real estate market is unfolding in classic Bubble format.

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It's all about interest rates

Pretty much since the first day this blog started, the fundamental theme has been that the one element that will prick the massive housing bubble being blown in our little hamlet in the Village on the Edge of the Rainforest is interest rates.

Interest rates have been artificially suppressed by the powers that be since the dot com crash after 1999.

All around the world this factor has contributed to a real estate boom.

Here in Canada, cheaper access to mortgage funds combined with an easing of mortgage credit terms have created the liquidity that homebuyers have used to drive the price of real estate skyward.

When interest rates reset to the historic norm (8.25% over the past 20 years), the housing bubble will pop in spectacular fashion.

Today Capital Economics has come out with a bleak report suggesting that the Canadian housing market is likely to suffer the same sort of crash that has plagued countries such as the United States.

The catalyst?

Interest rates, of course.

In an article in today's Globe and Mail newspaper the headline screams, rate hikes could spark house price collapse

According to economist David Madani, “even small rises in official interest rates have been shown to have a big effect on homeowner confidence in other countries under similar circumstances as they can change perceptions towards the housing market very quickly. If the Bank of Canada does resume its monetary tightening this year, this could easily prove to be a tipping point for a house price collapse.”

This is no great surprise. The problem is NO ONE believes interest rates will ever return to those historic norms.

That's why we get ridiculous surveys like the one released by the Canadian Association of Mortgage Professionals last year showing that Canadians are confident they can shoulder higher mortgage payments without too much difficulty, with 84% saying a $300 monthly increase was no problem.

That's because no one evisions any sort of dramatic hike in rates.

Using the CMHC mortgage calculator for a $550,000 mortgage, the current monthly payment amortized over 35 years at 3.75% is $2,377.79.

Hike that rate to the historic 20 year norm of 8.25% and drop the amortization to 30 years (as per the new rule changes for mortgages) and the monthly payment on renewal jumps to $4,078.61.

How many households can handle a $1,700 jump in monthly payments?

Even if the rate only rises to 6%, the monthly payment jumps by almost $900... triple the $300 per month jump the survey says most Canadians can handle.

Capital Economics predicts that "as the central bank raises interest rates, mortgages will become more expensive for Canadians. Add inflation to the mix and prices could fall 25%-35% over the next few years."

The domino effect of a drop far smaller is what triggered the collapse in the United States. Combine this with the fact that our home prices are severely out of whack with elements such as incomes and the cost of renting and you have the recipe for a massive collapse here in Vancouver.

The elephant in the room is interest rates. And many Canadians are in denial that they will ever be allowed to rise above 5% again.

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The Great Housing Bubble eBook

Haven't had a chance to read it myself (yet), but for those who are interested here is the link to The Great Housing Bubble eBook.

Lawrence Roberts was a contributor to the Irving Housing Blog and his posts became the basic structure for this detailed look at the housing bubble.

Seems like it might be worth checking out. If anyone has already read yet, let us know what you thought.

Hope to have another post later this afternoon if plans work out today.

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Bwahahahaha!!!

Bonus post for the day is your chance to buy this sub-million dollar mansion... err, doll house... on Vancouver's bubblicious west side (click on images to enlarge).

Have you been wanting to buy on the multi-million dollar west side but felt you have been priced out forever?

You're in luck.

Located in Point Grey at 4369 W 15th Avenue, this gem of a mansion/doll house is available at the amazing asking price of only $978,000 ($1.4 million after the bidding war).

From the listing description:

• Freestanding detached home - the only one in Point Grey under $1m! A fantastic location & great design with high ceilings and wonderful natural light. French doors off kitchen / dining area to your own private back yard. Guest room / studio or work from home space, 2 bedrooms, renovated kitchen, OAK hardwood floors and wood burning fireplace. Newer roof, furnace & most appliances as well as a refurbished, gorgeous studio space. A few steps to Pacific Spirit Park and a short walk to 10th Avenue shops.

Presumably the second bedroom is located in the detached quarters at the rear of the property (see last picture below)... or do we call that a laneway house?

Will my grandchildren believe the stories I tell them?

For your entertainment, the view from the rear and some interior shots.

Check out the little detached portion at the rear of the property (would this be considered a laneway house?) I presume the bedroom pictured below it is in this structure.

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